Pace of off-plan property launches will continue to taper in UAE
The flurry of incentives that developers have given has been exhausted
As the Dubai housing market continues to grow and options for buyers widen, a closer look into the data is necessary to navigate investment decisions over the next 12 to 18 months. Over the years, there has been an explosion in the off-plan market driven by higher money flows as investors gravitate towards the plethora of incentives that have been offered by developers.
In 2015, ready sales accounted for nearly half of the total sales in the market, whereas in mid-2017, it hit new lows accounting for only 25 per cent. The growth in the off-plan market can be attributed towards a cornucopia of factors that include (i) accessibility into emerging areas (ala Dubai South, Meydan and Creek Harbor) (ii) cheaper pricing of units (iii) payment plans and rental guarantee.
Off-plan properties are typically priced below their ready counterparts as developers try to entice investors into buying a property that is not built, consequently taking on a higher risk. A break-down into various communities such as Business Bay and Jumeirah Village Circle reveals that initially off-plan sales were cheaper than the ready index, causing the money flow to switch from one to the other.
However, in the last 18 months, there has been a reversal in this trend as the bulk of launches were higher than the ready index. Developers have justified these higher prices with post hand-over payment plans and rental guarantees. However, as the gap continues to widen, we can expect a greater money flow in the ready market, consequently narrowing the gap between the primary and the ready space. Evidence from the first quarter of 2018 shows that this is already starting to transpire.
In other communities such as Dubai Marina and Jumeirah Lakes Towers, where the volume of launches has been far lower compared to that of Business Bay, but the trend of off-plan prices being systematically higher than that of the ready space remains in place. This pattern in these communities is partly as a result of the "gentrification" that has taken place, but as the slope of the price curve demonstrates, it is likely that in 2018, the gap between off-plan and ready prices will narrow.
A dissection of the off-plan launches reveals a drastic fall in Q4 of 2017, followed by a slow start in 2018. We expect the pace of launches to continue to taper over the next few quarters especially as the flurry of incentives that developers have given has been exhausted; consequently, it is likely that focus will now start to shift on deliveries and that the pace of launches will slow down.
Given the outperformance of the off-plan market in most observed communities in 2017, the amount of monies that were allocated to the ready space was less than 1/4th of the overall monies invested. Predictably, this led to a widening of the gap between off-plan and ready prices (phenomena witnessed globally). We opine that mean reversion will occur as investible monies start to rotate into the ready space, to a point where the price gap reaches mean historical levels. This implies an upward trend in the secondary market.
The writer is head of IR and research at Global Capital Partners. Views expressed are his own and do not reflect the newspaper's policy.
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