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To buy or not to buy

To buy or not to buy

Amid corruption scandals and theever-looming property bust, potential home buyers are stuck in a quandry.

August 21, 2008 9:30 by

Sharmila Dhal

First it was Tamweel, followed quickly by Nakheel. Allegations of bribery and wrongdoing have recently been hitting property developers in Dubai, even driving the government to say that it will take strict action against those found guilty.

And all this only adds on to the existing dilemma which possible property buyers in the region are facing. On the one side – and in the majority – are the eternal optimists who predict that the boom is here to stay. On the other are the more skeptical voices, like those from Morgan Stanley, who recently projected that the market would see a 10 per cent decline by 2010.

The result of this divided opinion has been a perceived collage of confusion, leaving potential buyers at a loss as to what the true picture is.

The lingering reluctance to buy stems from many factors. In what is an evolving market, questions are being raised over erratic pricing levels, with the lack of any benchmarking. To make matters worse, misleading and often outdated advertisements continue to make their way into the press, leaving prospective buyers completely confounded.

“A thorough study of the market is necessary before making a purchase,” says Pramod Gill, an expat in Dubai who has been putting off his decision to buy property despite having lived in the city for 30 years. “The information that is available simply lacks accuracy and transparency,” he laments.

Misleading ads

The Business Weekly spoke to a few brokers and developers, and the exercise confirmed some apprehensions. For example, one dealer who was contacted with regard to a three-bedroom apartment that had been advertised in a well-known daily in South Ridge 1 at Burj Downtown quoted a price of Dh5m for the 1,804 square feet property that boasted a ‘full Burj view’ on the 13th floor.

Another advertisement in the same paper on the same day in the first week of August by another dealer quoted a price ‘from’ Dh6m for a three-bedroom apartment, also affording a “full Burj view” on “a high floor” of the same building The agency was unable to give further details when contacted.

A third advertisement in the August 2008 issue of a supplement brought out by the same publication, meanwhile, cited a price of Dh1.07m to Dh1.4m for “1-, 2- and 3-bedroom apartments” on the same premises.

The third ad, it turns out, was a “mistake.” Enquiries with the advertiser, this time the developer itself, revealed that the range for one to three-bedroom apartments that were available now varied from Dh3.4m to Dh13m.
Of the three-bedroom apartments left with the developer, one on the 39th floor measuring 3,621 sq ft was going for more than Dh13m, while another three-bedroom apartment measuring 1,974 square feet on the second floor was going for Dh6.2m.

But back to the resale market: The industry grapevine has it that a two-bedroom apartment on the 36th floor of the same building had apparently been bought by its present owner at Dh3.2m just two months ago but is now commanding a price of Dh4m. This means a 25 per cent appreciation within a span of 60 days. The Business Weekly has not yet been able to ascertain the information so far.

Free market

The skyrocketing market prices and arbitrary levels of the premiums that properties command are perhaps a given. As analysts point out, it is a free market and a cap on these premiums is unthinkable.

Billy Rautenbach, operations director at Better Homes, says “Property prices are reflective of what a willing buyer is prepared to pay a seller. If premiums are capped, it affects the entire market and it is manipulative.”

While an official body to monitor and record property prices in Dubai remains elusive, Rautenbach says Better Homes has an in-house system that records all sales and leases done for the past three years.

Fear of the unknown

Some other brokers whom The Business Weekly tried to contact, however, preferred not to comment on the issue of premiums.

With the prices moving only northwards, many investors face a fear of the unknown too; the ramifications of the much talked about correction, when it happens. “It is a happy story so far, but one never knows just how bad that inevitable fall will be,” says one industry observer.

Citing “excessive” speculation as the culprit behind the rising prices, Standard Chartered Bank recently pointed out that an introduction of a 50 percent capital gains tax on properties bought and sold within 12 months could be a possible solution. The bank showed a premium of Dh1,950 per square feet for villas and apartments, with price increases of around Dh70 per square foot as the floors go up.
Premiums apart, investors have also been exercising caution on other counts. With many potential clients coming from salaried classes, home loans are the only route through which they can buy property. But things are becoming difficult with fears of bad loans and a possible mortgage crisis mounting.

Delayed delivery

Moreover, many of these investors, who currently stay in leased accommodation, look at property purchase as a logical option through which they can channel the huge rentals they pay into monthly towards payment of home loans. This way, they get to own the property at the end of the day.

While prices may be most competitive at the launch of the properties, to buy from the developer at the drawing board stage would invariably mean a long wait of at least a year or two. Even given that the investor has factored in this waiting period, the possibility of his calculations going awry is very high as delivery is almost always delayed.

Buyers have little control over the timeframe of construction, as indefinite delays due to a shortage of building materials or labor has become the norm in the industry today.
Also, with many developers announcing complete sell-outs at the pre-launch and launch stages, other potential buyers are left with no option but to buy later.

The confusion over property-linked visas, too, has been adding to the woes of the fence-sitters, although Marwan Bin Galita, chief executive of the Dubai Real Estate Regulatory Agency, has categorically stated that there is no direct link between property ownership and residence visas and that developers should not falsely lure investors.

Meanwhile, the government is trying to put some order into the industry, and has just introduced a new mortgage law. According to the law, mortgage contracts should be registered with the Land Department of Dubai, specifying the size of the loan, the repayment period and the value of the property to which the loan is linked. It also requires that mortgages taken out on properties in Dubai should be sold by registered financial institutions, and should be insured. In addition, the law requires borrower and lender to present full financial documents when the mortgage is registered. The idea is to give more confidence to the lender and gives more security for banks.

First seen in The Business Weekly.

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