Worse was to come in the aftermath. Wannabe flippers couldn’t find buyers but didn’t have funds to keep up instalment payments they never planned to cover. In the face of widespread default, developers couldn’t meet their commitments to contractors, on the one hand, and banks, on the other. With the prospect of custodial sentences for dishonoured cheques looming large, many developers simply upped and left.
And so, in short, we all fell out of love with off plan. It was a messy divorce and we vowed never to go back. But the statistics tell us that this is exactly what we are now doing. More and more sales of off plan properties are being finalised and this sector is firmly back up there as one of our preferred routes into the Dubai real estate market. So what’s changed?
Well, let’s start with what hasn’t changed. Many of the economic and practical factors that made off plan popular back then apply equally today. Prices are lower, payment plans offer affordability, buyers get the pick of the crop, and there is the option of selling before completion. All good so far.
What has changed is the law. In response to the crash, lessons were learned. The Land Department promulgated laws and regulations, while developers crafted policies to control the sale and on-sale of their own portfolios.
The aim was to prevent what had gone before. The measures include:
Full Payment – The Land Department, through its regulatory arm RERA, has stipulated that developers must now have paid in full for the land on which any development is launched off plan. Coupled with that, RERA has also introduced the 20% rule. Simply put, the developer must now either (i) complete 20% of the project, or (ii) put 20% of the project cost into the escrow account, or (iii) provide a bank guarantee for that amount, before launching off plan sales.
Escrow – The escrow law, although introduced in 2007, was subsequently bolstered to provide greater protection for investors by requiring developers to open an independently controlled escrow account for each project, into which all off plan purchaser payments must now be deposited. The funds can only be applied against certified invoices connected to that project.
Construction linked payments – The Land Department has insisted that developers now link instalment payments to construction milestones, rather than dates, to ensure that investors are protected to some extent in the case of delayed projects.
On-sales – Many developers have introduced policies to prevent a repeat of the practice of flipping, restricting off plan buyers from selling their units before they have paid a certain % of the purchase price (commonly 30%-40%).
In conclusion, in the absence of regulation many investors and developers had their fingers burned in the heat of the off plan crash. For several years it dissuaded many from investing in anything but finished product, and rightly so. But we have moved on, lessons have been learned and action has been taken, including at the highest levels. Robust protections have been put in place, as a result of which we are seeing investors return to the off plan market. These are not millennials, too young to remember the bad times, but cautious buyers dipping their toes back into the water, safe in the knowledge that the sharks have all gone. Or at least been regulated.
Article image: Off plan project Palace Residences by Emaar