4 December 2018

Dubai: The Rise of Post-Handover Payment Plans

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A look into transactional activity of off-plan and ready units reveals that the market was fairly balanced between off plan and ready transactions in 2015; this changed dramatically by 2017 when the ratio of off plan to ready transactions doubled to 2:1. In 2018, we have begun to see a reversal of this trend as the ready market has largely began to replicate the incentives that were being offered in the off plan space. This has occurred against the backdrop of overall transactions having fallen in 2018 as the real estate market has remained sluggish.

In 2015 UAE Companies started the process of adopting IFRS 15, which dramatically altered the process of revenue recognition. Under the old framework, companies could recognize revenue at the time the buyer is entitled to take possession of the property, whereas in the new policy it is at the point the entity has an enforceable right to payment. Many companies adopted the new policy at the start of 2015. A closer look into Emaar’s 2015 financial report highlights the one-time jump in revenue (37% vs 3%) between the old and new policy. This implied that as revenue recognition (and therefore profit realization) became front ended, there was a clear incentive for developers to provide post-handover payment plans that became stretched to the point where only larger players could compete.

IFRS 15 has been directly responsible for the proliferation of post-handover payment plans. These plans are unlikely to recede in the near term and will continue to be offered in the ready space as well.

Investors will do well to look at the difference in prices that open between units that are being offered on a “cash basis” from those with the staggered payment plans. It is this difference that will be “arbitraged away” as smart money looks for opportunistic trades. It is this trend that will likely determine the state and strength of the market rebound.

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