Luxury segment for investors in Dubai; dearth of affordable housing options

Dubai has always been an exciting destination for employment – for Indians as well as the rest of the world. The petro-dollar ensured that the country grew in leaps and bounds, and provided excellent employment and living conditions.

This explains the swanky high-rises, glittering malls and commercial cen tres sprawling all over the country. Investors with deep pockets have shown market preference to invest in resi dential projects catering to the luxury segment, thus prompting developers to come up with projects that cater to affluent.

This resulted in a short- age of affordable housing for the service class which is living on rent and can not afford to buy homes in Dubai. The average house hold income of service class citizens is between 10,000 and 30,000 UAE Dirham ($2,720- $8,170). At this income, given the cost of living, they can afford to pay annual rent als of Dh72,000 ($19,600) and maybe to buy a property costing around Dh800,000.

However, as per the UAE mortgage regulations, a prospective buyer needs to deposit 25% of the property’s cost in advance. If a property costs Dh800,000, the buyer needs to deposit Dh200,000, which is not an easy amount for a normal citizen to raise immediately. In the case of off-plan sales, the loan-to-val ue is 50% maximum, which means that a borrower has to pay 50% using his or her own resources in savings, equities or other sources.

In areas like Dubai Marina and Dubai Downtown, a two- bedroom apartment sells for approximately Dh4 million.
Even though Dubai’s prop erty prices and rentals have stabilised in the past year or areas like Dubai Marina and Dubai Downtown, a two-bed- room apartment sells for approximately Dh4 million so, they are still higher than two years ago and look set to rise again by 2017, owing to Expo 2020 being hosted by Dubai. Also, developers are currently not investing in building projects catering to the middle-income segment.  As per the records till the 3rd quarter of 2015, out of the 19,500 projects launched in the country, a mere 22% meet affordable to middle-income housing criteria, despite the substantial demand in this segment.

The primary reason is the low margins in this segment, compared to the very high margins in high-end properties. Some big developers in Dubai have as much as 50% gross margins in their projects, thanks to govern- ment-provided land banks and other tax benefits.

The so-called surge in affordable housing projects development in the past year- and-a half is not making much of a difference, as these are being sold on freehold title and mainly to investors in bulk. This way, the prices of such properties are subject to market influences and do not necessarily reach the tar geted middle income group.

This has resulted in more and more people moving away from the centre of the city for more the more affordable homes on the fringes. However, it has also led to an increase in rentals in these . As per the UAE mortgage regulations, a home buyer wanting to invest in the Emirates needs to deposit 25% of the property’s cost in advance areas, as well as a longer com mute for employees.

The factor that has led to a higher demand and lower supply of affordable housing in Dubai is non-compliance with the government’s regu lations, one of which categor ically states that developers building high-end luxury projects should reserve a certain percentage of the property for mid-housing seg ment. This rule has largely remained on paper only.

That said, regulators and developers alike realise that the demand for affordable housing in Dubai is escalat ing. This has resulted in a flexible payment plan, which has met with some success. Under this plan, developers either provide finance to buy ers themselves or ensure that buyers pay a fixed monthly amount instead of a huge initial lump sum.

Authored By: Ashwinder Raj Singh, CEO – Residential Services, JLL India


The right approach to negotiation while buying your dream home

The dictionary definition of negotiation is ‘a dialogue between two or more people or parties with the intention of reaching a beneficial outcome’. When applied to real estate, it would be ‘a dialogue between a buyer and a seller with regards to a property intended to benefit both when a deal is struck’. The buyer should be able to buy his house within his budget or at the best possible price, while the seller / builder should be able to earn a decent profit on selling his product even after giving discounts and other benefits to the buyer.

Rational negotiation or senseless haggling?

There is serious negotiation, and there is senseless haggling. Bargaining with a grocer for a discount of few rupees is very different from negotiating for a property. The latter involves a large investment-grade asset and requires a carefully thought-out strategy which accounts for the abilities of a seasoned veteran negotiator on the other side of the table. There also needs to be sufficient acceptance room for alternate results to the discussion.

There are differences of scale and stakes between gully cricket and a test match between the national team and the best of the international players, and both need to be approached in that light.

When to negotiate, and when not to

Before embarking on the course of serious negotiation with a real estate seller, a buyer needs to do thorough homework. This would include: a background check of the builder / seller, the prevailing market conditions, the pros and cons of one’s own budget and the qualities and condition of the property one intends to buy. If it is a new project, the builder is likely to be comfortable with his prospects of striking a good deal on the units, as there are many potential buyers in the fray. In such a case, one can negotiate but not by much, and the price reduction may not completely be to one’s expectations.

The potential for strong negotiation increases in the case of an older project with several remnant units not getting sold, or if the builder is in a tough financial situation and needs to liquidate his investment. The bottom line is – before negotiating, do your groundwork about the project, its developer, his overall credibility and track record of previous projects, the location and property prices in the vicinity, and the overall trends in the property market.

Can negotiation really get you the best deal?

Negotiation has definite merits, but a lot depends on the external factors. Primarily, the most defining factor is whether it is a buyer’s or a seller’s market. In a seller’s market, there are fewer sellers and more buyers, so the chances of getting hefty discounts are minimal. In a buyers’ market, there are a lot of properties and fewer buyers, so the probability of extracting major discounts and attractive deals from the developer is high.

How to negotiate

There is a science behind the art of negotiation, which can only be perfected after practicing it a few times. Let’s have a look at the basic procedure of negotiation:

• Research: Do diligent research about the project. The launch price, current market price of the property along with prices of contemporary properties in the market should be looked into. The project’s strengths and weaknesses, along with those of the builder, should be studied.

• Opening gambit: It is important to know that no developer will react favourably if one starts negotiating by quoting an unrealistically low price compared to the offered price. An average acceptable figure is 15% lower than the quoted selling price. One can go up a little from there, but whether to do so and by how much should be strongly influenced by the findings of one’s initial research. The opening gambit should clearly convey that one is genuinely interested in closing the deal. One must position oneself as a serious buyer and discuss the execution of the deal, rather than contemplating options in front of the developer. In short, it is important to convey that one has already evaluated the options and is looking to close the deal provided the pricing is right.

• What To avoid: Never put down the property or point out its flaws while negotiating. Rather than focussing on any negative news or shortcomings of the project, focus on the positive aspects and how you can be a serious customer for the builder

• When to stop negotiating: Once a price which is close to one’s budget is arrived at, one should stop bargaining. Even if the final price arrived at is not the one which one has in mind, the builder may offer additional benefits not available in the public offer which can add very good value to the deal. The ‘stretchability’ of every negotiation has a breaking point, and one should never go as far as to breach that point.

How to gauge developer’s willingness to negotiate

Before entering negotiation, study whether the builder / seller is willing to bargain at all. Get a clear picture of his financial situation with the help of informed consultants and brokers. Also inquire about the unsold inventories stuck with the builder. Study if the listed prices on the builder’s website and other real estate websites have decreased over time, and by how much. Such pre-knowledge will help in establishing beforehand if the builder is doing a distress sale or is ready to wait for the right buyer to pay the price that he expects.

Letting your broker do the negotiating

A brokers’ job is to get the best deal not only for the buyers or sellers, but for the sake of their own commissions and repeat business. Also, a broker is definitely better equipped than an individual buyer in terms of knowledge about prevailing market conditions and a particular developer / seller’s status. A broker makes a living by negotiation, and speaks the same language as sellers. Letting a broker be in the driver’s seat for negotiation can prove to be a game-changer, either at the very outset of the process or at a later stage if one’s own efforts have gone off-course and/or hit a dead-end.

Finally, it should be understood that negotiation while buying a property is expected and therefore an absolute must. The way to embark on and conclude a successful property negotiation is to be properly prepared with the requisite knowledge, ammunition and strategy.

Authored By: Ashwinder Raj Singh, CEO – Residential Services, JLL India