Pros and Cons of Buying Off-Plan in Abu Dhabi
This article was first featured in Abu Dhabi week, the text can be found here, and you can visit our website here.
Abu Dhabi Cityscape 2015 saw the return of the off-plan sale to Abu Dhabi. Several projects were launched around this event from Reem Island, to Saadiyat and even Yas Island. A few of these schemes were sold out after a few days but they went mostly to private placements, wealthy investors getting preferential rates. Retail investor were slow to come to the market, but they came. The floodgates didn’t exactly open, but they are creaking.
This was the first time really since 2009 that new off-plan projects have made it to market, as for many investors who lost their shirts in the 2008, those painful memories are still fresh in their minds. 2007-2008 saw billions of dirhams spent on off-plan sales which, particularly on Reem Island, either never got built or only now, eight years later, are being handed over.
So what are the pros and cons of buying off-plan in this newer more confident market and what do you need to look out for?
Price: Now because you are paying for something you can’t take possession of yet, developers will incentivise buyers to put their money down by offering a discount on price. This price incentive is good for buyers who can’t afford to purchase in the “built market” and a big draw for investors looking for bulk stock at great rates.
When you buy off-plan you are taking a risk that your unit, upon completion, will be worth what the developer said it would be worth. Inflation in Q2 of 2015 is running at around 5% so that gives you a 15% rise over three years even with no actual market appreciation, which is some buffer, but real estate in the UAE is a fickle mistress.
Financing: Most banks will only finance 50% of an off-plan unit so developers are having to offer very generous incentives to get retail (non-investor) buyers to part with their money. A current example is a “30-70” payment plan on a Reem Island development, in which customers pay a 10 per cent deposit, followed by four installments of 5 per cent each in the run-up to handover, when the final 70 per cent has to be paid. Some projects in Dubai are even financing the units after completion as well i.e. you don’t have to pay the full balance upon handover, some payments are due even after completion.
Attractive financing is very good for retail investors who can’t afford the 25% deposit needed to get financing. Note that not all banks finance all projects, make sure you don’t buy on a project that no banks are financing.
Make sure you are clued up about the timeline of the project so you can plan your finances. You will need to make staged payments through the life of the project and be able to get a mortgage at the end of it. Talk to your bank about your eligibility for a mortgage, if you can’t get one when the property is handed over you could lose your deposit for non-completion.
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. The downside is that you can’t see the finished article, what you end up with might look very different to what you thought and, with no mis-representation law in place in the UAE, redress will be very difficult to obtain.
Development: Buyers should ensure the developer is reputable (some may have insurance so that if they go bust you will get back your deposit). If your property is going to be part of a wider development find out when the other towers will be finished/built, otherwise you risk living in a building site for the first few years.
Financing Now v Saving for the Future: An interesting question that off-plan buyers need to ask themselves is:
- Should I buy off-plan, put money down now and slowly add to it finally getting bank finance on handover? or
- Should I save for a deposit for three years and buy something completed?
In the end this will be a very personal decision for the buyer and will come down to several factors. The safer option is certainly to save and buy completed, the off-plan purchase is riskier but with a bigger upside.
Completion Risk: When you buy off-plan you are taking a risk that your unit it will not be completed. Several projects sold off-plan in 2007-2008 were never built and investors still struggle to get their money back. The larger government back developers however largely delivered on their units and that is why they are still able to sell off-plan now. Check the penalty clauses if the project doesn’t complete on time.
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