The Million Dirham Question – By Ben Crompton

When is the right time to invest in off-plan versus ready built? Overall 2018 off-plan residential transactions in Dubai were down 27% when compared to 2017.

THE MILLION DIRHAM QUESTION

On the ready property side, sales in 2018 held up well, with an increase of 14% year-on-year.

Does this mark the end of off-plan sales and a switch back to ready units? Time will tell. But what’s worth talking about is at what point in this change in the real estate cycle should the savvy investor give up off-plan and move into the secondary market?

Let us compare the two asset classes (as I really believe they are two separate classes within real estate). What are the pros and cons of buying off-plan compared to built, and what do you need to look out for?

Risk

Off-plan is a risky asset, that is one of the reasons you get a price discount (see below). In Abu Dhabi the 2015 Sales Law stated that each off-plan offering should come with a full prospectus, similar to those shown when investors buy riskier assets, to make sure they have all the facts.

There is a chance your property may not be built, may be built late, or not to the specifications you expect, so be aware of your risk. The better known developers will offer you less of a discount on market price because they are less risky-you pay more for less risk. Buying a built property has its own risks but the unit is there for you to see and touch.

Down Payments

The off-plan market is very attractive to those expat investors who don’t have the 25% deposit needed (or 20% for UAE Nationals). It is a way of paying for your property in installments. Beware, however, if you are using the off-plan purchase solely as a savings plan – developers don’t often pay you interest on your payments.

Look into saving the money in a savings plan and then buying the property once it’s built, particularly if the payment plan requires a lot before completion or there is not much of a price discount given. It might be cheaper

Sales Price

Price for off-plan is king. As mentioned above, this is a risky asset class so to take the risk you need to be paid for it. You will also expect a discount due to the opportunity cost of your funds (see ‘opportunity cost’ below). The developer pays you by offering you a much better price for off-plan than you can get in the market for built. If there isn’t a discount then don’t buy off-plan.

Price Appreciation

Again, a huge draw with off-plan is not only that you are buying at a discount to current market value but also that when the property is delivered it will be worth even more, and here is where the timing matters.

Off-plan properties usually take three to four years from initial launch to handover, so it is a good investment closer to the bottom of the market (but doesn’t have to be at the bottom), because if you buy near the bottom of the market the project should be delivered in a market that is already recovering. Off- plan property is not a great investment in a booming property market because these are typically near the peak, so when the project is delivered prices are on a downward trend.

You can’t easily sell off-plan property these days (they are an illiquid asset) so you have little opportunity to exit at the top, you need to hold it through to completion. So it is better to invest in off-plan where the market is bad but you can see an end in sight as opposed to when it is roaring.

Built property is better to buy at, or near the bottom, of the market as well – but because it is quite liquid you can keep investing in it as the recovery gets older without being too worried you will get stuck with it when the market starts to fall.

Unit

One of the great things about off-plan sales is that you get to choose your unit from a wide range. You can select the type, view and floor – some developers will even let you customise it as you like. The downside is that you can’t see the finished article, what you end up with might look very different to what you thought. With built property you may not be able to get the exact unit you want, but you do know the general quality of what you are buying.

Opportunity Cost

Opportunity cost is something not enough real estate investors understand or take into account when investing. The opportunity cost of money is basically what would this money be earning if you weren’t investing it into real estate. Chartered surveyors often use a 5% return as a benchmark, as though you were putting your money in a high interest account.

We discussed above that when you make a payment on off-plan property the developer doesn’t pay you interest on that cash. Now, you might think it isn’t costing you anything handing that cash over, but it does – it’s an opportunity cost. You are losing the opportunity to make 5% per year on that money. That is a cost a professional investor takes into account when deciding where to allocate funds, and over three years it is 15% (uncompounded). Make sure the final expected value of your investment takes into account opportunity cost, and risk (read above for ‘Risk’ before taking it).

“Opportunity cost” is where built product kicks off-plan out of the park. If you buy tenanted property then your money is “put to work” realising its earning potential and generating you a return from day one.

BEN CROMPTON
Managing Partner Crompton Partners

How many years’ experience do you have in real estate & market speciality?

6 years.

Why did you write about ‘off-plan versus ready built’?

I think it’s an important topic that most people don’t have a clear understanding of, especially around the opportunity cost.

In just a few words, describe the UAE real estate market in 2019

In 2019 I hope we will reap the rewards of the UAE government investment decisions taken this year.

This article was originally published in Property Finder Trends Vol. 5

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