Text size:

  • Small
  • Normal
  • Large
Construction financing for residential projects may need to be reworked as the market finds its way out of the recession, experts say.
Ryan Carter Staff
Construction financing for residential projects may need to be reworked as the market finds its way out of the recession, experts say.

New construction finance models needed

The economics of residential projects should to be reworked as the market finds its way out of the recession.

Construction financing for residential projects may need to be reworked as the market finds its way out of the recession, experts say. While the escrow account model, which links payments from buyers to construction and so instills confidence among investors, it does not guarantee a project will be built. Developers therefore need to be less dependent on their customers for money and find ways of securing the full construction costs before work begins.

Current market uncertainty is also encouraging investors to default if they are not confident their homes will be built, according to Andrew Charlesworth, head of corporate finance advisory, Jones Lang LaSalle. "The whole financing model needs to be looked at again," he said. "There's a reliance on off-plan sales and we need to look at how to be less reliant on consumers going forward." Mr Charlesworth said developers may need to look towards the project financing schemes used in mature property markets like the UK, whereby construction is usually financed by banks or other financial institutions.

"The developer may also have an agreement with the banks that they will provide mortgage financing to its qualified buyers, which would take away a lot of the uncertainty that the buyer won't have the cash available," he said. "The developer can then get on and build the building without worrying about the financing, while the contractor knows it will get paid because everything is kind of pre-built around it."

Mr Charlesworth added that the escrow system could still play a role in such a model. "It could possibly be the deposit that's made, but then the buyer would have a bullet-proof mortgage in place before they finally complete on their purchase," he said. "A lot of banks might be quite hesitant about it right now but I think that's a target we should aim for as and when the market starts to stabilise. Now is a great opportunity for everyone to take a step back and start looking to see what we could do better for the next cycle."

While Dubai has had an escrow law in place for almost two years, it is still in the pipeline for Abu Dhabi. Still, because of the flaws in the system that have been exposed due to the slowdown, experts question whether it would be the right option for Abu Dhabi. "I think we need to think about whether escrow will be the best way," said Scott Aitken, a legal consultant at Clyde and Co, a law firm.

However, the escrow system needs to be implemented in the capital as soon as possible to give greater confidence buyers, said Gurjit Singh, chief property development officer at Sorouh Real Estate. "What a consumer wants from a product now is to pay as they see progress," he said. "And that may need to be dove-tailed very accurately with how banks are going to package their loans to individuals. So banks would release payments based on construction progress."


Back to the top

More articles

Editor's Picks

 The Greens, villas: Q1 no change. 3BR - Dh210-250,000. 4BR - Dh210-260,000. 5BR - Dh220-300,000. Q1 2013-Q1 2014 5% rise. Pawan Singh / The National

In pictures: Where Dubai rents have risen and fallen, Q1 2014

Find out how rental prices in the prime locations in Dubai have altered during the first three months of the year and the current rates you will pay according to data provided by Asteco.

 Above, the private pool of Ocean Heights' five-bedroom penthouse flat. Courtesy Christie’s International Real Estate

In pictures: Penthouse flat is height of Dubai luxury living

A five-bedroom penthouse in Ocean Heights in Dubai Marina is on sale for Dh25 million and comes with a private pool and an unparalleled view of Dubai.

 The cooling towers of the Temelin nuclear power plant near the Tyn nad Vltavou in Czech Republic. The country wants to continue expanding nuclear energy capacity despite cancelling a tender to build two new units. David W Cerny / Reuters

In pictures: Best business images for the week to April 17, 2014

Here are some of the best business images for the week to April 17, 2014.

 Three generations of the Hakimi family tend to their stall Crawford Market in Mumbai. Subhash Sharma for The National

In pictures: Shopper’s delight at Crawford Market in Mumbai

Crawford Market is an old British-style covered market dealing in just about every kind of fresh food and domestic animal imaginable. Later on renamed Mahatma Jotirao Phule, the market remains popular among locals and visitors by its old name, taken from Arthur Crawford who was the first municipal commissioner of the city.

 The Wind, Energy, Technology and Environment Exhibition takes place from April 14 to April 16. Above, the Dewa showroom during last year’s Wetex. Jaime Puebla / The National

April corporate and economic calendar for the UAE and overseas

From Cityscape to Wetex to stock-market holidays to nations reporting first-quarter GDP figures, here is our helpful calendar of April's business events in the UAE and internationally.

 Get the latest information on credit cards, bank accounts and loan products in the UAE. Mark Lennihan / AP Photo

Rates report: Latest on UAE loans, accounts and credit cards

Souqamal.com brings you the latest interest rates on banking products in the UAE.


To add your event to The National listings, click here

Get the most from The National