x Abu Dhabi, UAETuesday 16 January 2018

Developers promise property buybacks

Some developers caught in a stagnant market have been attempting to lure customers with promises they will buy back property at a higher price a few months after a sale.

Companies hope the buyback plans will help invigorate flagging markets.
Companies hope the buyback plans will help invigorate flagging markets.

Some developers caught in a stagnant market have been attempting to lure customers with promises they will buy back property at a higher price a few months after a sale, guaranteeing the deal with postdated cheques. While that may seem an attractive offer, industry insiders warn the practice is potentially highly risky for all involved.

Despite signs these sorts of deals are growing increasingly common, few developers were prepared to admit they have offered them, partly because in some places the deals could be legally questionable. Although the arrangement terms vary, potential buyers are generally offered to pay all or part of the price of a property. In return, the developer pledges to buy it back after a set term at a higher price.

"Basically we are trying to give confidence to the buyer because prices are going up," Mohammed Noorul Haq, chairman of Dubai-based developer Sanali Group, said. "We just started using this. We are giving a choice. You can sell the property at a higher price or we can resell it for you at a higher price in six months' time. If we can't do that, then we will buy it from you at a fixed price." The deals carry several risks for both sides. In at least one jurisdiction, Dubai, they may be legally questionable, since property brokers are not allowed to offer structured investments, only property.

"This sounds like an investment," said Marwan bin Ghalita, the chief executive of Dubai's Real Estate Regulatory Agency. "Developers are not supposed to do investment business. Their licence is to develop land and sell it, period. End-users should be cautious." Still, as completing sales gets more difficult amid a stressed market, some companies say the practice is a legitimate invigorating tool. An agent at JCA Real Estate, a Dubai-based broker which also operates in Ajman, said: "We are asking for the total amount in cash and give the client a postdated cheque on behalf of our developer, with 10 per cent profit after one year. But the client has to pay everything immediately."

One investor said he had received a different offer at an Ajman property exhibition last week. "I was offered to pay 10 per cent in exchange for a contract, saying that after six months I would get 40 per cent returns and a postdated cheque," Steven Zhang, a Chinese businessman, said. Vincent Easton, head of sales at Sherwoods Independent Property Consultants, said: "This is not a new concept, a guaranteed buyback with an option to keep the property. It's effectively an interest-free loan and a number of developers are doing this. But if the prices drop, why would a developer buy back? I don't want to touch these things at all. I don't know many financial models at the moment where you get a guaranteed return of your investment of 20 per cent over six months."

Experts say the buyback deals could simply be postponing existing problems of developers, or amount to an act of desperation to raise cash needed to continue operating in the short term. "It is known in the market," said Benoît Demeulemeester, managing partner at Dubai Strategic Partners Middle East, which specialises in financial strategy. "But developers who are doing this when the market is going down will be put in an even more difficult position than they already were."

He said the rate of return promised, 20 to 40 per cent, makes no sense in terms of risks and compliance. "We could compare this with derivatives or options," said Mr Demeulemeester. "The returns are beyond any financial model." In reality, developers hope nobody will use the buyback option. "It is very risky financially. We would lose money if property prices go down but we are confident that they will stabilise in January," Mr Haq said. "We are pretty sure that the Dubai and UAE market is going to go up. We are confident in the leadership of this country. But we have to give this confidence to the buyer."

A broker at Bhakti Real Estate has offered such deals on a case-by-case basis. "People have the cheque and the MOU [memorandum of understanding] in their hands and feel safe. Generally we give between 40 per cent to 60 per cent return on investment." Legal sources questioned how investors could have any confidence that their basic investment would be returned. "People think they are safe and they are not," said David Nunn, a partner at the legal firm Simmons and Simmons. "It is one thing to have a right and it is another thing entirely to be able enforce it."

According to lawyers, issuing postdated cheques and signing MOUs is legal. Failing to honour a cheque is a criminal offence. "The risk a sub-developer runs in allowing a cheque to go unpaid is that the company and the person who wrote the cheque will be criminally liable. But criminal liability is a bit of a blunt instrument. You have to be [physically] present in the country in order for this to be a meaningful deterrent," Mr Nunn said. "If the sub-developer defaults, is insolvent and the managing director who wrote the cheque has left the country and doesn't intend to come back, what is the real recourse that you have? Zero."

Mr Easton, of Sherwoods, said a payment held in an escrow account would be protected. "If it is in an escrow account it is protected. If it is outside, then that is scary," he said. Officials said the problem for developers was that putting the money into an escrow account meant it could not be accessed, which defeated the purpose of the exercise - to raise operational cash. Also, Dubai is the only emirate with an effective escrow law.