Warehousing is just a sales strategy

(AP)   

Holding back inventory, or “warehousing”, by property developers and releasing it in phases will not lead to any forced price increase, but allows early investors to enjoy the upside on completion of the project, property experts said.

Developers worldwide tend to sell 30 to 40 per cent of a new project to ascertain market perception and brand recognition. They tend to hold back the remaining 60 to 70 per cent and sell parts of that during various construction phases to cover rising costs.

Warehousing is a term used to describe the practice of making only a few units available for sale in a new building project to create a sense of urgency among buyers. In developed markets, warehousing is generally used on large residential projects where releasing all the units at once would create a mini-glut.

However, the practice of intentionally constraining supply is neither untoward nor suspicious, the analysts said. The offering plan for new developments generally specifies that a developer can reserve the right not to put all units on the market at the same time.

In the past year, Dubai developers have followed the global practice of not selling 100 per cent of their projects during the pre-launch period. The move, in fact, benefits “early birds”, the initial investors in a project, who stand to make substantial gains on their investments, thus converting them into frequent buyers.

Experts who spoke to Emirates Business said warehousing is not a move designed by developers to artificially create a shortage in market supply, or to inflate property prices in the neighbourhood, as prices depend on their own reputation, the location, and the finish of the product.

“If the developers announce their final price, it will certainly inflate market prices. However, lower prices during the pre-launch days tend to encourage people to enter the property market,” said Asteco Managing Director Andrew Chambers.

Holding back stock for future appreciation is a well-accepted norm, but it does not tend to increase prices, he stressed.

Blair Hagkull, Jones Lang LaSalle’s Mena Managing Director, said pre-selling is quite common in Asia, North America and Europe as it enables developers to reduce their dependence on internal finances.

At the time of pre-selling, a developer receives an upfront payment, which he uses for his construction activity.

In many cases, the seller retains part of the property and, as its value appreciates, he constructs on the retained property and enjoys the upside.

The formation of the Real Estate Regulatory Authority for Dubai and the setting up of escrow accounts, Hagkull said, is a positive move to build confidence in the market.

“Just as the real estate sector is becoming mature, so are the business practices of real estate developers. Pre-selling helps raise initial funds, and selling on completion enables developers to make up for their previous costs,” he said.

As for the developers, freezing sales and reviewing prices are normal practices, and not an arbitrary move to increase property prices. “This practice is not new to Union Properties or any other developer for that matter,” said Lesley Sayle, Chief Property Officer, Union Properties.

“This is a normal sales strategy and one we have followed on all our developments since we started selling many years ago. We have the right as developers to halt sales to re-adjust our pricing if the market has driven them higher. At the end of the day, it’s a matter of supply and demand.

“This obviously is because the projects are prestigious and this is what the people are buying into. Buyers who bought units in these developments a long time ago have already seen a substantial improvement on their investment. Why would we not want to see their investment grow even further? The prices are set in accordance with the project itself, the location and the market demand,” said Sayle.

Abid A Junaid, Executive Director, ETA Star Properties, echoed the view. “We do not sell 100 per cent inventory during our launch phase. A portion of it is sold in the phases that lead to the completion of the project.”

It is a norm followed by developers globally and principally allows initial investors to benefit, he added.