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Property market speculation: good or bad?

Property market speculation: good or bad?

Good, says RERA chief, but adds that there is no harm in subjective restrictions by developers.

September 15, 2008 10:17 by

CL Jose

As Dubai continues to revel in its property boom, developers have begun to impose several restrictions on the resale of properties, which some believe could prove counter-productive.

Some developers restrict resale by insisting that a certain percentage of payment has to be made towards the property price before one can resell a property to a third party. This percentage varies from developer to developer and can be as high as 40 percent.

Others have introduced a minimum holding period before investors can resell the property. For example, in its recent report on the UAE property market, Merrill Lynch mentions that Trump Towers requires buyers to hold the property for at least one year before they can sell it to another buyer.

Talking to The Business Weekly, Marwan Bin Ghalaita, CEO of the Real Estate Regulatory Agency (RERA), says that there is no harm in adding this restrictive clause in the contract between the developer and investor, as it will curb unnecessary speculation in the market.

“But this should not extend to all properties. Developments in far-off locations may need support from even speculators and this may, to a good extent, support the property market growth in such areas,” he says. “One should remember that speculation is always good for a market, especially in its initial stage and hence, restrictions need to be applied discriminately.”

But thanks to increasing speculation, many investors book property units by paying just five percent of the asking price, and later sell the units for a large margin. “This margin sometimes works out to a three-digit rate of return as the investor is able to leverage his investment enormously. This sort of flipping will certainly damage the reputation of the property market in the UAE which is still in its emerging stage,” says a property developer who has developments in Dubai and Ajman.

Many also blame the excessive ‘flipping’ on the lack of a solid regulatory framework, although the Merrill Lynch report says that authorities in the region have become more proactive in their approach to the real estate market.

In August, for example, a new law was introduced in Dubai requiring all mortgage contracts (including off-plan) to be registered with the Land Department, a move which should help to introduce more transparency to the market.

First seen on The Business Weekly.

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