Dubai acts on property troubles

Authorities in Dubai are making it easier to buy - but more painful to default on payment plans - in a bid to prevent the slowing property market from slipping further. Emaar Properties, the largest developer, announced yesterday a range of easier payment procedures that it hoped would increase sales. Simultaneously, the Dubai Land Department announced new penalties for those who default on payments to encourage buyers to work out more favourable plans. The Central Bank also indicated it was looking at ways to keep property loans flowing.

The moves were the most powerful yet by a major developer and authorities in the face of tightened lending and a slowdown of property sales. Emaar shares have been hit hard this year. It is the second-worst performing stock on the Dubai Financial Market, after Tamweel, with 77.38 per cent of its value lost since Jan 1. Its shares shed another Dh0.37, or 9.89 per cent, yesterday to close at Dh3.37. Tamweel, Union Properties and Deyaar Development also lost nearly 10 per cent yesterday.

Issam Galadari, chief executive of Emaar Properties, said the new payment plans were "aimed at further strengthening the property sector by facilitating easier purchases and making property more affordable for our customers". The Emaar plan includes two new options to counteract slowing sales, especially in areas such as Emaar's Burj Dubai Downtown, where prices have dropped an average of 22 per cent in a matter of months, according to property brokers.

Under the "plan to own" scheme, Emaar will let buyers in some developments pay only 5 per cent down and make the initial 25 per cent payment over five annual instalments after handover to help them obtain financing. The remaining amount would be financed by a loan from a bank or other provider. "The last thing Emaar wants is everybody to walk away from these properties," said Chris Dommett, chief executive of the Dubai office of mortgage advisory firm John Charcol. "They have to find an alternative solution."

Under Emaar's other plan, called "rent to own", buyers would be able to contribute 100 per cent of their rental payments for a year toward buying the property if they decide to buy within 10 months of living in the home. Analysts had mixed reactions to the programmes. Robert McKinnon, the managing director of equity research at Al Mal Capital, said Emaar was making a move that would have greater benefits for the wider property market than to shareholders of the company. Emaar was owed about Dh17bn by buyers who were paying off their purchases in stages, he said. By lengthening payment plans and easing requirements for new ones, it is likely to increase the amount it is owed.

"It will bring some confidence to the market, but it's a big risk if those payments start to default," Mr McKinnon said. "On the positive side, if the environment changes and there is a bit of liquidity again in six months, you will have prevented people from having to forcefully sell their units. If it isn't correct, you are just delaying price discovery in the real estate market and potential write-downs."

On the government side, the authorities said yesterday they would heavily penalise buyers who defaulted, to deter speculators from abandoning deals. Under a document clarifying existing legislation, the Dubai Land Department said anyone who failed to fulfil their obligations to the developer would be given a 30-day warning period. If the deadline was missed, the developer would have the right to cancel the sale, keep 30 per cent of the contract value and a further 30 per cent of extra payments. The buyer would receive the remaining money only after the developer had resold the unit and construction was complete.

According to a senior official, the harsh rule was designed to stop speculators purposefully defaulting on payments and being reimbursed, rather than selling at a potential loss on the open market. The completion of housing developments would be put in serious danger if investors backed out in their droves, he said. "It is protection for the market," said Marwan bin Ghalita, the chief executive of Dubai's Real Estate Regulatory Authority. "In the long term, this is a good law. It is protecting the sector from panicked and fearful speculators. The complaint I'm getting from developers is that people are cancelling for no reason. If everybody cancels, no one will develop in Dubai."

Mr Ghalita said he was sure the move would hit "speculators only". In cases where property buyers already have a sales-and-purchase agreement with the developer, the terms of that contract will take precedence over the legislation. These terms typically state that a purchaser who defaults on a payment plan will lose the initial 10 per cent deposit. [e-mail] [e-mail]