The off-plan property model that has fuelled record prices in the UAE is set to disappear as financing dries up.
Property slowdown hits Ajman's frontier
Ajman could justifiably lay claim to being the frontier of the country's property industry. It is where the market for unbuilt dwellings, sold off-plan to home seekers and speculators, has been tested beyond anywhere else in the country. It is also where some analysts see the demise of the off-plan model, which was conceived as a convenient way to finance construction but has in some cases become prey to questionable business practices as well as the economic downturn.
Concerns over the lack of regulation and infrastructure, including electricity supply, have been compounded by the global credit crisis, which has choked the supply of finance to developers, investors and home buyers. "The [off-plan] market will die because developers will be unable to secure financing for the foreseeable future," says Ali al Shihabi, the founder and chief executive of Rasmala Investments.
According to agents in the emirate, more than 90 per cent of projects launched in Ajman, mostly along the Emirates Road, have been sold off-plan. Many have yet to start construction. Zaid Siddik, from the brokerage firm Aqua Properties, says only one development, Emirates City, is near 50 per cent completed. Like most property markets in the UAE, off-plan sales in Ajman have declined despite the past allure of low prices, guarantees of a residence visa and a freehold law that allowed non-GCC citizens to buy.
While the average sale price in Dubai is near Dh1,800 (US$490) per square foot for flats, and topping Dh3,000 in certain projects, Ajman's prices range between Dh530 and Dh570 per sq ft, by far the lowest in the Emirates. Even at those levels, prices in Ajman have also surged in the past year, making it highly attractive for speculators planning on flipping, or reselling, their units after a few months. In December last year, properties were selling for about Dh450 per sq ft.
"Work in Dubai and live in Ajman" has been a line often used to attract middle-income expatriates struggling with Dubai's soaring prices. "Ajman is a very promising market," says Dirk Sassen, a shareholder of the German investment fund ICT, which is developing three towers in Ajman. "About 80 per cent of expatriates who are coming belong to the middle class and earn Dh10,000 to Dh25,000 - teachers, employers, bankers, accountants, nurses, et cetera. They need accommodation and Ajman is as far from Dubai's centre as International City, and much less expensive."
Ajman may appear to lag behind Dubai and Abu Dhabi in infrastructure, shopping malls and tourist attractions, but property agents point out that Dubai did not look much different 10 years ago. However, those low prices in Ajman are both a strength and a weakness of the market. Saqib bin Tariq, the sales and marketing manager at Goldcrest, sees potential for trouble in some of the offers. "The market is becoming dangerous now. Some people are selling at Dh250 to Dh450 per sq ft. Certain developments will never exist," he says.
Developers estimate construction costs of about Dh350 per sq ft, in addition to Dh75 per sq ft on average for a plot of land in Ajman. "When I see that people [at the last Ajman property exhibition] have sold towers at Dh390, then I know they can't build it," Mr Sassen says. Dubai has introduced escrow accounts and tighter regulations to avoid unscrupulous developers. In Ajman, a new property law introduced in June now requires similar escrow accounts, although some developers say they are not aware the law had taken effect.
"The Law on escrow accounts is effective and has been translated into English. All developers will have to abide by it," Harib al Aryani, the general manager of the Ajman Land Department said. "The law organises and protects the rights of investors in the emirate. It completes the former law." ICT has scheduled construction on its Ajman towers to start this month, but has sold only 10 per cent of the project so far, at prices ranging from Dh465 a few months ago to Dh550 today. "The problem is not only the selling price, but also how much I have sold," Mr Sassen says. "A good developer will need 30 months to build a tower, while the level of inflation is above 10 per cent per year. So if someone has sold 80 per cent of a tower for Dh450 [per sq ft], he just can't proceed."
During the Local Property Show - a trade fair - last month in Ajman, some developers were selling at prices below the cost of construction, according to industry analysts. A sales consultant at Bhakti Real Estate says his agency bought a whole building - Wings Tower in Humaid City - in April when the market was at between Dh350 and Dh370 per sq ft. The agent has already resold most of the units at Dh450 and higher, but the developer - Abu Dhabi Estate Investment Center - has not even started building, the broker says. Completion of the project is due in mid-2011.
Inside Track Real Estate Brokers, the marketing arm of Al Barakah, offered flats at Dh441 per sq ft. "If you buy five apartments, you get one free," the company's agents said during a recent property fair. Ajman officials said they are confident that master developers, with the government's backing, will keep the projects on track. "Most of the projects are supervised by big master developers that are backed by the government. The master developers are responsible for their projects. If a sub-developer fails, they are responsible for the completion of the project," Mr Aryani said. "But we haven't seen so far any developers not being able to build because of inflation. Should this happen, they would need to give the money back. And if they can't they will face legal consequences."
Another risky practice widespread in Ajman is buyback offers, in which small developers attract investors by promising to buy back a property after six months and issue a post-dated cheque with a "guaranteed" profit. Investors say cheques from some developers have already begun to bounce. While government-backed master developers control most of the projects, they have sold off some plots to little-known sub-developers with limited track records.
"Just count the people who already have built a tower in Ajman," Mr Sassen says. "Most of them have only experience in four-floor to seven-floor buildings. They have only a vague idea of what building actually costs." Larger waterfront projects such as Al Zorah, a city set to accommodate 200,000 people and widely advertised by its developer, Solidere International, are at an early phase and have sold plots to potential developers.
Last month, Solidere International issued a statement expressing satisfaction with progress at the $60 billion city, which is a joint development between the Ajman Government and Solidere. The chairman of Solidere International, Nasser Chammaa, said he was pleased with progress on infrastructure, including roads and marine works, adding these could be financed without debt. Imad Dana, the chief executive of Al Zorah Development, the joint-venture company, earlier in the month hinted at a slowdown in construction. But Solidere International says infrastructure works commenced in September and are on schedule. Sales of $2.7bn show strong international investor interest in the 12 square kilometre project, the company says.
Other issues hang over the future of the market. "Three to four months ago, business was very good. Investors were interested in two things - residence visas and low prices," says Rajvinder Singh, from JCA Real Estate. But pressure from the Government has stopped developers providing residence visas to buyers. "The visa issue is a big problem," says Reza Safari from Al Kawthar, another broker. "Before, developers in Ajman and Dubai would advertise the fact that they would provide buyers with a residence visa. Now they are saying that they have frozen it."
The Government has recently clarified the rules on visas for property owners, saying that visas will not be automatically granted but that home ownership will be taken into account in any application. Concerns about electricity supply remain, even for completed properties. The government of Ajman signed an agreement in July with Malaysian Mining to build a 1,000-megawatt power plant at a cost of $2bn, but it will not begin providing power until 2012. Ajman officials say power will be provided to developments. "There is no power issue," Mr Aryani said. "The government will provide the infrastructure, of course."
Many uncertainties also hang over financing of the developments, as banks are reluctant to cover projects. So far, developers have scraped through by offering attractive payment plans, but as buyers struggle to raise finance there are many facing tough times. "The current situation we are experiencing is like a storm. People are frightened even when there is no reason for this. But we have not seen any investors defaulting so far," Mr Aryani said.
Diversified companies such as Goldcrest have more flexibility. "We are also involved in other sectors - construction, gold. So we are not in a hurry," says Mr Tariq. "Completing our project is not only about the reputation of our brand, it is also about the reputation of the whole country." Doubts about the ability of some developers to complete projects are making investors nervous due to the lack of an effective escrow law. The new law is expected to address the issue. email@example.com
Dh250 The price per sq ft some Ajman properties are sold for. Dh450 The profit threshold developers must meet in Ajman Dh350 Ajman's average cost per sq ft for construction Dh75 The average cost per sq ft for land in Ajman