Regulatory authorities in Dubai are now tightening the screws on developers to ensure on-time delivery of projects.
Industry sources claim the regulator has proposed that developers can only launch sales on off-plan projects once construction reaches the 50 per cent mark. This will also help reduce the risk of market oversupply and result in consolidation among smaller private developers.
As it stands, the law stipulates that 20 per cent of construction funds be provided by the developer as a form of bank guarantee in addition to a 10 per cent guarantee performance bond by the contractor. This ensures that 30 per cent of the funds are in place. Or else, the percentage of construction to achieve was 20 per cent.
“Any move higher exerts obligatory pressure on the developers to ensure that financial close is that much more secure. This is the norm in developed markets but also where banks are sufficiently comfortable in extending this form of finance to developers,” says Hussain Alladin, head of IR and research at Global Capital Partners.
However, larger state-backed developers are reported to be exempt from this move, considering their track record of execution and delivery, while few of the smaller developers sometimes do not deliver as per design and scheduled timelines.
This decision comes in the wake of a record year for off-plan launches in Dubai in 2017. “Off-plan sales have been burgeoning over the last 12 to 18 months. We have been cautioning the market of this trend, particularly given its detrimental effect on ready sales, and the systemic risk building up if occupier [tenant] demand is not able meet the deliveries in new supply in the affordable segment in the mid term,” observes David Godchaux, CEO of Core Savills.
This proposal is likely to slow down the pace of off-plan launches in the short term. It will also reduce the risk that is currently building up on the back of a few developers flooding the market with sometimes lower quality product at heavily discounted prices and lucrative payment plans.
“The initiative will further help in filtering developers who have the ability to complete projects. It will also increase buyers’ confidence in off-plan projects. At the same time, authorities must consider developers who have performed and delivered over the years. Based on their performance, they can keep the same rule of selling after completion of 20 to 30 per cent,” explains Sailesh Israni, director at Sun & Sand Developers.
Other market stakeholders are calling for a more comprehensive control of the supply, specifically in outer areas and lower price segments.
“This will help property developers to become more responsible and careful before planning new projects – and discourage business houses and developers with limited financial resources. It might eliminate certain developers who are struggling with finance,” remarks Atif Rahman, director and partner of Danube Properties.
This move is expected to raise the barriers to entry into Dubai’s real estate market. The proposal may also divert customers from off-plan to ready-to-move-in properties and help fill up growing inventories.
“It is a timely intervention and a step in the right direction. This also means that property developers will have to become more responsible towards their customers and all stakeholders,” suggests Sailesh Jatania, CEO of Gemini Property Developers.