x Abu Dhabi, UAEFriday 19 January 2018

Consigned to the dustbin of property sector history

Until recently, you might have been perplexed in Dubai by the word "premium" that was often applied to property.

Not long ago everyone was vying for a piece of Dubai's property action but now would-be speculators are being replaced by genuine home-owners.
Not long ago everyone was vying for a piece of Dubai's property action but now would-be speculators are being replaced by genuine home-owners.

Remember the first time you heard the word "BlackBerry"? A fruit, surely. And Wii? That's got to be something babies do. Until recently, you might have been similarly perplexed in Dubai by the word "premium". In my first encounter, I thought it was something to do with government bonds. Silly me. In this context, it is in fact the profit a speculator makes when he flips, or quickly buys and sells, real estate. Sometimes, this profit can be as high as three to four times the original down payment on the property.

Not too long ago, it seemed almost everyone was involved in the premium game. Smart-suited businessmen, housewives, college students - they were wheeler dealers all. And, like me, at one time or another you would surely have experienced the scene of sitting at a coffee shop, enjoying a latte as you watch the world swirl around you. Suddenly, your peace is rudely shattered by an annoying person at the next table with at least two mobile phones, "closing a deal" on a property. He would then walk around shouting prices and premiums. Everyone would breathe a sigh of relief once he finished.

You just don't see these men any more. Why? Because "premium" has dropped out of use, and the "premium guys" have melted away. Today, a new phrase has entered the lexicon: "What's the OP?" For the uninitiated, OP means "original price". Prospective buyers now are insisting on information about the price at which properties originally sold. No one wants to part with their cash unless they are comfortable they're buying at close to the OP.

An insatiable appetite to go faster or get bigger and stronger led to escalating premiums, with transacting in property resembling a night out at the casino. I remember a fist fight at the launch of an off-plan project. In just days, buyers - or speculators as we like to call them today - could make returns in the double-digit percentage range. Now that's easy money. For me, the danger point appeared when prices of off-plan properties at their launch soared above ready-to-move-in properties of equal quality and in similar locations. It simply made no sense. It is precisely the frenzied bidding up of premiums that has led us to the unhappy situation we are in today. Everywhere you look, you find people glum and down. No matter who you talk to, everyone is an oracle of doom.

But things really don't need to be this way. Let's look at the basic commercial facts. Conventional wisdom aside, the market presents some great opportunities for buyers looking to make a healthy, but not excessive, profit. Quality brokerages that have correctly priced completed properties offer options that represent excellent yields for cash buyers who want a buy-to-let arrangement. Equally, for those wishing to buy primary residences there hasn't been a better time than the present.

Yes, the off-plan market will struggle as potential buyers become a lot more discerning. In addition, speculators will continue to be weeded out. What we will be left with are end-users and sophisticated investors looking for reasonable returns. For developers this will be a much harder sales cycle, of course. But much depends on the credit market. Financing is the most important element in the property industry. A good deal now depends on how much financing is available to support mortgage applications as well as construction loans.

That said, the prognosis is that it is likely that bank lending will return to healthier levels soon. Many projects to which banks had committed, but had not extended actual credit, may now be cancelled. Thus, by the end of this year it is likely that banks will be scrambling to participate in new developments that promise prudent and viable returns. This should make life a lot easier for buyers, as well as developers.

Until then, we are in for interesting times. But at least the annoying person with too many mobile phones that you used to see in coffee shops has been assigned to the dustbin of real estate history. What new situations emerge will depend on how well we all work together in shaping the future. Rehan Khan is the chief operating officer at Cirrus Developments.