21 April 2016

Dubai: The Psychology of Off-Plan

Typically, developers price off-plan units at a discount to their ready counterparts, to compensate for the loss of rent till the completion of the project and build-risk. As the property gets closer to completion, the discount factor diminishes. It is against this construct that off plan launches must be evaluated for their relative attractiveness.

Upswings in real-estate markets, typically spark a construction frenzy causing developers to launch a series of new projects in order to try and capitalize on the surge in demand, as seen in 2002 and 2012. In order for developers to attract buyers they typically release off-plan properties at a discount to the ready market. This is to compensate for the risks involved in buying off-plan (i.e. delays, build risk), and the loss of rental income over the duration on the project. However, the flexibility of the payment-plans coupled with the developer track record can either increase or decrease the discount.

In a bull-cycle it is typical for off-plan properties to trade at a significant premium instantly after the launch. This is caused by speculators entering the market to try and ‘flip’ properties on the deposit amount to make supernormal profits. However, as “irrational exuberance” fades away and the market recalibrates, speculators who could not resell the property go through a liquidity crunch as they try to meet their next payment forcing the premiums to fall. This fall is further amplified when the market turns bearish, and transactional activity dips.

For the long term investor, the rationale for investing in off plan, factoring into account for locational differences, is the discount factor that is being offered, which is itself a function of the payment plan; both variables are embedded in the launch price.

To download the full report click here: http://blog.reidin.com/PublicReports/UAE160422.pdf