Dubai’s developers looking elsewhere for funds

Ali Tumbi, CEO of Aqua Properties posing for picture at Aqua Properties Office, Dubai.

Dubai: Off-plan sales and launches not going well? Don’t worry, developers in Dubai are actively working on their Plan B.

First, use whatever funds are available to them to get their current projects up to and past the 50 per cent construction mark. The new sentiment among most developers is that just touching the 20 per cent level will not cut much ice with potential buyers.

The Dubai Land Department (DLD) requirement is that developers need to have fully paid up the land and reached 20 per cent, to formally launch sales. But these days “the whole requirement of buyers have changed — they want to buy when the project is visible,” said Ali Tumbi, CEO of Aqua Properties, which started as a brokerage firm and now has a development portfolio as well.

“Since this year, they are not buying early in the project. What developers are doing is try and reach the halfway mark or thereabouts and then start seriously on getting in buyers and the liquidity they bring.

“The way to do it is capitalise the project better — this way, you get the additional funds needed from a new partner/bulk buyer or a bank to reach the project’s midpoint.”

Propping up projects

Debt, it is clear, is no longer a dirty word in real estate development circles here. Developers had been burnt by their debt exposures after the financial crisis of 2008-09, and it has taken a long time for them to again start being comfortable with debt exposures on their books. But it’s something that cannot be avoided.

Recent regulatory changes too will help banks get cosier to real estate projects — the central bank has removed the 20 per cent cap on banks’ exposure to real estate and construction.

“In the US or the UK, developers were never reliant on off-plan sales for cash,” said Sameer Lakhani, managing director at the property consultancy Global Capital Partners. “When a project is launched in Dubai now, developers are ensuring there’s financial closure with a mix of debt and equity. Projects need to be fully capitalised. Such credit will only be given to developers that meet a higher standard rather than the current norm of relying on “hot money” for off-plan sales.

“What happened in 2017 when off-plan was selling big will be the exception.”

And banks are willing to park their funds in projects or through other tie-ins with developers. “Banks’ earlier fixation with developers’ sales numbers is eroding,” said Tumbi. “They are more willing to start funding based on the viability of a project and not just the sales figures. They are looking at the balance sheet of the developer and cost of the land and releasing needed funds.”

Also, banks have better collateral — in the form of the land — if the project fails to deliver. And land values in Dubai have been holding up relatively well right through the ups and downs of the market in the last 10 years. By holding the rights to the land, banks have a chance to recoup a sizeable portion of their developer exposure if a project goes belly up.

‘Horses for courses’

Developers are also using the “horses for courses” strategy in deciding whether to tap debts or not. Signature Developers, which specialises in luxury projects, relied on its own funds to build its first project — the 118 residential tower at a prime spot in the Downtown and close to Burj Khalifa. The final cost came to around Dh400 million.

It could do because the land had been acquired in 2012, when Dubai’s property market was coming out of an extended lull. But for the second project, The Residences at JLT, the developer decided to tap some debt. The tower features a 200-room hotel component and 80 residences.

“Because of the hotel element, the project becomes a little more complicated,” said Raju Shroff, director at Signature, which is a joint venture between Regal and Lal’s Group. “And if there hadn’t been any external funding, the project viability drops and make it a bit more complicated.”

The Residences — expected to have a final bill totalling Dh375 million — is heading for a Q1-2019 completion date. The developer intends to get its sales campaign into higher gear in the coming days, synching it in step with the final days of construction.

“This and the 118 are “end user projects”, where the true value comes after it’s built or the first residents move in,” said Shroff. “The market has too many of the “investor-driven projects”, where there are longer payment periods, longer delivery schedules, and the apartment units are smaller. It fits the need of investors who are out to churn the product.

“We could have offered eight-year payment plans and sold the units … but that’s not how we want to do it. Not when we have 11,000 square feet penthouses.”

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