Payment plans: Time to tone it down

When the head of a major listed developer in Dubai sounds the alarm over extra generous post-handover payment plans which are a dime a dozen in the market today, it's time to sit up and pay heed. While the phenomenon of post-handover and back-ended payment plans was pioneered by smaller private sector developers in Dubai in 2016, the tactic clicked with buyers, mostly end-users who had limited access to mortgages for off-plan properties. Sensing a formula for success, the larger master developers too joined the fray and the concept has since gone mainstream.

But like they say, too much of anything is bad. Market commentators warn this could be the making of a bubble since smaller private developers run the risk of inadequate funds for construction, with the majority of money coming in well past handover. The practice could also attract flippers, who can commit to a project by paying just 5 or 10 per cent of the property's sales price, make double digit returns and exit the investment without staying the full course of the development cycle.

"Post-handover payment plans provide liquidity to the investor/end-user, and to that extent, developer liquidity levels need to be sufficient in order to extend this facility. For publicly listed developers, such liquidity levels can be measured; the opacity and, therefore, the concern arises when private sector developers offer the same and their financial health cannot be ascertained. It is likely that some of these offers have gotten out of hand. However, it is equally likely that such concerns are being rigorously monitored by the Real Estate Regulatory Agency [Rera]. Such offers have reached the outer limits of what is financially feasible, and it is probable that such offers will reduce both in frequency as well as generosity in 2018-19," warns Sameer Lakhani, managing director, Global Capital Partners.

The larger developers with ample capital reserves are unlikely to cause any systemic risk to the marketplace with such schemes. End-users contemplating such schemes should consider the credibility and track record of the developer.

"Make sure the payment plans are linked to construction milestones, not just to timeframes," says Mario Volpi, chief sales officer, Kensington Exclusive Properties.

Source: Khaleej Times