SPECIAL REPORT

Who’s buying?

UAE real estate is awash with cash buyers but hesitancy on visas and lending still irritates potential investors, writes Ryan Harrison.

Cash is still king in the UAE property market, as big- and small-time buyers struggle to secure financing for purchases, according to real estate experts.

Large institutional investors that sat on the fence in 2009 as the market bottomed out are now plowing cash into nearly finished projects, funding them until completion and making a quick buck from sales.

Alexis Waller, a partner in the Dubai office of law firm Clyde & Co, says these are huge cash-rich investors and consortiums that have been circling the market for a while and are now taking advantage.

“Large cash buyers are coming into the Dubai property market and snapping up distressed assets, whereas this time last year they were taking a wait-and-see approach.

“These players include foreign high-net worth individuals and consortiums mainly coming in and taking over nearly completed projects from sub-developers.”

Consortiums from Europe and India are targeting mainly residential or mixed-use projects that are 80 per cent completed, Waller says.

Developers that have been hit by a collapse in sales, typically the main source of funding for ongoing construction – cannot finish the project themselves and are unable to secure further financing while also facing claims and litigation from disgruntled buyers.

Offloading the projects gets developers out of this bind, Waller says.

And when selling to smaller end-users, developers are being more realistic about what they can actually finish. “Instead of building the five projects they had planned they might build one or two and offer the purchasers the option of consolidating down.

“For the big cash consortiums, they come in and buy and can get a good return on investment if all goes well once the project is complete and purchasers come forward,” she adds. Meanwhile, real-estate agents are reporting that smaller home buyers are returning to the market but only on an own-to-occupy basis. Most say growth in the buy-to-let business in a lot of areas in both Dubai and Abu Dhabi is dead in the water.

Rental yields reached about 20 per cent at the peak in 2008, but now, on average, are around six per cent, according to latest estimates. Six per cent return on rent is high by global standards and in other markets would be a certainty to attract buyers, but investor confidence, especially in Dubai, has struggled to recover since the crisis.

The Dubai World debt episode has crimped any return of faith in local property and has unnerved mortgage lenders recently.

Liz O’Connor, a director for residential sales and leasing at Betterhomes, says: “If mortgages were easier to get, more people in Dubai would be buying property. In 2009, 70 per cent of our transactions were cash transactions; this year, we’re seeing 80 per cent of cash deals return.”

Mortgage rates varied before the global economic Crisis – the average was approximately 8.5 per cent, O’Connor says. Today they’re averaging at about 7.5 per cent and being approved on a case-by-case basis, with lenders relaxing some of their criteria.

Gregory Antioch, from the residential team at Cluttons, says the firm is seeing mostly end-users dipping into the property market of late, people buying places to live in rather than as an investment. Places such as the Springs, Meadows and Downtown area, where the property is physically there and finished, are proving most popular.

“The market is filling with ‘I could see myself living there’ type people, not buy-to-renters.”

Antioch estimates that there is likely to be up to a 50 per cent jump in property transactions in Dubai in 2010 compared to last year.

“My last half a dozen clients have been families buying to upgrade from renting. There’s a certain amount of confidence returning to the market. Buyers are an absolute mix of Indians, English, Australians, Germans and Iranians,” he adds.

Legal experts say there are a number of hurdles that will stifle any potential momentum that could build in the market this year, notably whether buyers get a visa with their investment. The government is still yet to make up its mind, Antioch says.

“The visa-property law continues to be key and everyone’s waiting to see whether something happens this year. I have a big buyer waiting to purchase based on the visa he could get. The delay on this decision is a pain, but as soon as it’s resolved it will open the flood gates to investment,” he adds.

There are a number of laws and regulations expected to come online this summer. Perhaps the most important of these is Dubai’s Strata Law, a set of rules outlining the legal rights of homeowners living in mixed-use and multiple-owned buildings.

If a decision is made this year, it will provide a clear mechanism for owners to participate in the ongoing management of their buildings, something that law firms say is being called for in the market. The move might increase confidence and in turn boost the number of transactions.

Jesse Downs, director of research and advisory at Landmark Advisory, says the rest of 2010 will be most uncomfortable for homeowners sitting on properties worth less than their mortgage, usually referred to as negative equity.

“A common situation is that an owner with a mortgage acquired around the peak in 2008 now finds themselves in a difficult financial situation, but he or she cannot sell the property.

“The reason is that prices have fallen so much compared to their purchase price that the mortgage is in negative equity, which means they cannot afford to sell at current market prices,” Downs says.

Even worse, she says, is that some banks are not negotiating with these owners, which forces them into either finding a way to pay or defaulting. Yet banks are limited in their own ability to repossess the actual property. So a stalemate ensues, the buyer cannot offload the property and the bank cannot repossess.

Downs adds: “Ideally we would have a bankruptcy law that allows for these properties to efficiently work their way through the system and back onto the market. The quicker we get to the bottom, the better it is for the long-term recovery.”