Master developers in Dubai should reschedule any yet to be launched projects and defer land payments due from sub-developers by six to 12 months as sub-developers are bound to face cash flow problems in light of the current market and financial situation, said a recent report.
Further, if contracts between master developers and sub-developers require the latter to start construction according to a deadline, master developers should remove any such conditions or delay it by six to 12 months, said the report titled Dubai Real Estate Market The Rescue Plan-Update, which was e-mailed to Emirates Business.
The report said since the banks and local finance companies are unable to offer more property loans, measures should be taken to allow for the creation and regulation of Lending Special Purpose Companies , which can act quickly to provide liquidity to the market. These companies can either be in the form of Special Purpose Vehicles such as five-year mortgage funds or sukuk.
"The biggest problem today is that many properties have been re-sold several times with a premium and even while the customers' money is protected in escrow accounts, should a project be cancelled, many customers will lose the premiums they have paid and a huge legal activity will start," said Tariq Ramadan, Chairman of Tharaa Holding and the author of the report.
Property buyers in Dubai never had the intention or the capability to pay more than 20 per cent of the value of their properties and were relying on financing or re-selling these assets. Therefore, if developers put pressure on their customers to make extra payments, there will be significant defaults and distressed sales, which will affect the price and value of the project. The defaults will also result in cash flow issues for the developers and cause the project to be delayed or cancelled.
MORE MORTGAGE PROVIDERS
The priority for developers today is to try their best to arrange one or more mortgage providers for their projects and negotiate good financing terms for their customers. "We understand that this is not an easy task at this time, but eventually, good developers will be able to make these arrangements," the report said.
Ramadan said: "Eventually there will be liquidity flowing into the real estate sector, however, only developers who will show persistence in securing finance from banks will ultimately be able to achieve mortgages on their properties."
The report called for developers to provide assurances to investors that their money is safe and that these projects will be completed. "It is important for developers to talk to their customers and listen to their concerns. It is better to be able to reach mutual decisions as opposed to imposing solutions that can result in unnecessary problems for customers and probably lengthy legal battles," said Ramadan.
If developers have not launched a project yet, then they should not launch it for now and wait a few months to see how the market will perform. For developers who have not started construction on a project yet, they should, subject to approval from the Real Estate Regulatory Agency (Rera) delay the construction by six to 12 months, the report said.
For developers who have completed the piling work but have not started the construction of the project yet, they should (subject to approval from Rera) delay the construction by six months and then re-evaluate the situation after six months as well.
The report also suggested that for projects that have already been launched and construction started, developers would now face a collection problem from buyers due to the uncertainty in the market and the lack of cash and financing facilities.
"Therefore, we suggest that developers pro-actively provide incentives like discounts of up to five per cent for early payments. Also, more focus should be put on arranging financing facilities for customers with good terms," it said.
The report said developers should be more flexible in deferring upcoming payments, especially for bulk purchasers who have bought full floors in their properties, in order to avoid major payment defaults that might result in serious cash flow issues for the project.
"If that is not possible, then developers should allow their multi-unit or bulk buyers to merge the payments of two units into one unit and return the other to the developer. The developers can then re-sell or keep these returned properties for leasing purposes," said the report.
In future, when launching projects developers will need to arrange at least 30 per cent of the project construction cost in cash and also become more creative in their payment plans and special offers. "We suggest, however, for developers to not launch any new projects for the next six months," the report added.
Developers must explore all possible avenues in order to provide more lending facilities for property buyers and developers. They have to explore ways to reduce payment pressure on property buyers until the market stabilises, but most importantly, until financing is available.
END-USERS ARE THE BEST HOPE
Investors and end-buyers are the best hope for the real estate market since all the attention will now be on them to start a new wave of activity in the market, however, with some additional financing support from banks.
There will be a significant number of good opportunities available in the market including some off-plan cash units at almost half price as well as some distressed sales (in excellent properties).
Investors and end-buyers should take advantage of this low-risk and high-return opportunity and help in keeping the momentum going in the real estate sector in Dubai.
"We understand that there is no magic solution to the current situation in the real estate market and that local financial policies are very complex and have an international scope and considerations. However, while we understand the strategic plan is being finalised by the Dubai Government, the market needs a series of quick solutions to stop the bleeding in the market," said Ramadan.
"We know that the upcoming strategic rescue plan at the government and central bank levels requires a significant amount of analysis and effort, which usually takes time and requires patience," he added.
The report went on to say although the UAE central bank has pro-actively taken financial measures to support the banks and the economy in general, it has done very little to support the real estate industry in a "direct" way.
"We are not in a position to judge the financial policies of the government or the central bank, however, the measures taken by the central bank and consequently by the banks so far have not supported the real estate industry," said the report.
The central bank did not reduce interest rates when all Western countries reduced theirs. The central bank also put more pressure on the banks to adjust their loan-to-deposits ratios (which was already above the allowed limits).
And finally, the central bank maintained the minimum required security reserves of the banks kept at the central bank at 14 per cent of deposits when neighbouring countries dropped this percentage to as low as five per cent, which freed up more cash for loans.
Banks also made project construction finance and end-buyer financing almost impossible by significantly increasing interest rates, reducing their loan-to-value ratio to less than 70 per cent, making the terms for accepting loan applications very difficult.
"While we don't argue with the risk management measures taken by the central bank and the banks, we feel that they can still play an essential role in the rescue plan by following a targeted and segmented approach to providing financial facilities to the real estate industry," said Ramadan.
The central bank should allocate some of the cash provisions to directly support certain segments of the real estate market to keep the activity going and maintain (or regain) the confidence of investors in the market. It can also discuss with banks measures to provide more support to the real estate industry without, of course, exposing the banks to any additional financial risks.
ROLE OF BANKS
Banks should take the extra effort to classify developers and developments based on new criteria that take into consideration the new market dynamics.
"We believe that banks should focus their lending on 'qualified' end-buyers and investors since these buyers will become the majority of the market and at the same time, this financing will become an indirect way to fund construction of projects and will assist in supporting the cash flows of these projects," said Ramadan.
Banks and financing companies – supported by the central bank – should introduce special financing packages and incentives for first home buyers.
They should also reschedule loan payments for developers or property buyers who are impacted by the crisis.
"We are optimistic that the newly established Advisory Council will be able to turn things around for the real estate industry and will be able to take measures to ensure the stability of the market," said Ramadan.
The report called for the federal government and the central bank to provide more support for the real estate sector. This can include directing cash from sovereign funds into local banks (as term deposits) or the local real estate market, instead of investing in other countries.
While government and semi-government developers account for almost 70 per cent of the property market in Dubai, it is essential that enough support is also provided to private (non-government) developers and their customers.
One of the main drivers of property demand in the past was the provision of residency visa, which was recently cancelled (or clarified that the benefit never existed) by Dubai authorities. The issuance of residency visa should be re-instated.
Rera holds the key
Real Estate Regulatory Agency (Rera) is mostly focused on regulating and documenting real estate transactions. However, it should take a more active role and work with all the stakeholders to contribute to the stabilisation and quick recovery of the market.
"With the appointment of Rera's Chief Executive Marwan bin Ghalita as one of the members of the Advisory Council, we believe that the real estate industry will be well represented," said Tariq Ramadan, Chairman of Tharaa Holding.
He said Rera should protect and voice the concerns of property buyers and investors. It must come up with property buying incentives for investors and end-users. The regulatory body must be flexible and waive any penalties to allow developers to delay the start of construction of recently launched projects.
Rera needs to keep in mind that if these developers are "forced" to start construction now, they will face serious cash flow and financial difficulties due to lack of payments from buyers and unavailability of construction finance from banks.
To prevent the impact of rumours with respect to prices in the market, Rera must create a price index for properties in each area or master development. This index needs to be advanced enough to reflect the classification of properties and at the same time off-set the impact of one-off distressed sales on the average price.
In addition to having escrow accounts, Rera must create a mechanism that deals with troubled or bankrupt projects by creating special purpose companies and start preparing a list of receivership consultants. This will provide some comfort to buyers in troubled projects that their money is at least available as an asset that can be re-sold, or developed by some other developer, he said.