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Unitas Consultancy (A GLOBAL CAPITAL PARTNERS GROUP COMPANY) Q2 2016
STRICTLY CONFIDENTIAL
Office No. 1706, Indigo Icon, Plot No. F, Jumeriah Lake Towers, Dubai, UAE 1
Dubai: The Psychology of Off-Plan
This document is provided by Unitas Consultancy solely for the use by its clients. No part of it may be circulated, quoted, or reproduced for distribution outside the organization without prior written approval.
Executive Summary
• 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.
• Ceterus Paribus, off-plan properties are an attractive purchase if the price discount is greater than the loss of rental income during the duration of the project. The evolution of the price curve typically clusters into “investor neutrality” zone, as the market adjusts to reflect prices that are factoring into account the discount rate that is the opportunity cost of rent. This has been reflected in the price curve trajectory of launches in Arabian Ranches as well as Downtown.
• 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.
• A price analysis off-plan properties reveals that the closer it gets to completion, the more it mimics the ready-price index. Using Casa as an example discount at the launch, but soon out-performed ready-villa segment as speculators entered the market. However, as it came closer to completion the discount receded, eventually trading at parity with the ready-stock.
• For the long term investor, apart from locational benefits, the raison d’etre for investments in off plan real estate is the extent of
discount that is being offered relative to the ready market.
1 Ready Prices and Launches
1 When to buy and sell off-plan properties?
2 Dynamics and Trends of Off-plan Units
4 Conclusions
Contents
4
“History is a relentless master. It has no present, only the past rushing into the future. To try to hold fast is to be swept aside” - John F. Kennedy
Ready Price and Launches
0
200
400
600
800
1000
1200
1400
1600
10.000
20.000
30.000
40.000
50.000
60.000
70.000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Number of Units (Launched) Prices
Ready Prices are a Leading Indicator of Off-plan Launch Activity +0.76 correlation
Ready prices are the leading indicator of off-plan launches with a strong correlation of +0.76. As prices begin to trend upwards, profit margins in construction projects expand, causing developers to release new projects to try and capitalize on the surge in demand. This trend has been witnessed since the inception of freehold in 2002. In mid-2014, as prices began to dip, developers slowed the announcement of new projects, which can be witnessed in 2015. In the first quarter of 2016, 2513 units have been launched, being somewhat below that of 2015, although the rise in transactional activity and a “base effect” in prices augur for an acceleration of off plan launches later on in the year.
REIDIN
Ready Prices and Number of Units Launched
6
“I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said” - Alan Greenspan
When to Buy and Sell Off-plan Units
At Launch
When to Buy and Sell Off-Plan Properties
Ready Prices 0%
-20%
Lila -9%
Azalea -15%
Dis
cou
nt
/ P
rem
ium
to
Rea
dy
Att
ract
ive
Ind
iffe
ren
t
Completion Date
Un
attr
acti
ve
Att
ract
ive
Ind
iffe
ren
t
Un
attr
acti
ve
Lila -1%
Completion Timeline
The above graphs explains the price dynamics of the off-plan properties. Usually developers release off-plan properties at a discount to the ready market. The reason for the discount is 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.
Completed Property
Off-Plan Property
NEUTRAL
BUY Trading Discount to Ready by more
than the loss of rental
SELL
Unitas
Ready Prices
Att
ract
ive
Ind
iffe
ren
t
Un
attr
acti
ve
Att
ract
ive
Ind
iffe
ren
t
Un
attr
acti
ve
Opportunity Cost of Rent
At Launch
Arabian Ranches: To Buy or Not to Buy Off-Plan
0%
-15%
Lila -9%
Yasmeen -7%
Azalea -15%
Dis
cou
nt
/ P
rem
ium
to
Rea
dy
Current Prices (Mar ‘16)
Lila -1%
Yasmeen 4%
Azalea -2%
SELL
BUY
NEUTAL
Jan 2014
Sept 2014
Feb 2015 Unitas & REDIN
In Arabian Ranches, the launch of off plan projects in 2014 and 2015 were within the zone of what the expected price was to be, relative to ready projects. Since then, the three communities have been priced by the market within the narrow zone of “investor neutrality”, with the discount factor diminishing as each of the communities gets closer to handover.
Completion Timeline
Ready Prices
Att
ract
ive
Ind
iffe
ren
t
Un
attr
acti
ve
Att
ract
ive
Ind
iffe
ren
t
Un
attr
acti
ve
Opportunity Cost of Rent
At Launch
Downtown: To Buy or Not to Buy Off-Plan
0%
-15%
Burj Vista 12%
Dis
cou
nt
/ P
rem
ium
to
Rea
dy
Current Prices
SELL
BUY
NEUTRAL BLVD Point
-13%
BLVD Heights -26%
Forte -15%
Burj Vista 6%
BLVD Point 1%
BLVD Heights -16%
Forte -8%
Unitas & REDIN
Completion Timeline
A similar dynamic has played out within Downtown Dubai, where units that were launched in the buy and sell zone have now clustered around the neutral area, as market forces corrected for the discounts and premiums. What is important to note is that in all instances, the prices have converged to that of ready prices as the project moves closer to completion.
Apr 2013
Jan 2014
Jun 2015
Sep 2014
1.000.000
1.050.000
1.100.000
1.150.000
1.200.000
1.250.000
1.300.000
1.350.000
OP Premium
The Hills (Low OP)
The Hills (High OP)
Be Wary of Different Launch Prices … A Look at the Hills
A major factor buyers should consider when purchasing off-plan properties is the launch price. Since developers launch units in different phases, the opening price will differ in each launch. The above example shows in the Hills, the same units are trading at different premiums. Over time the gap narrows between the launch prices as the units get closer to completion.
Unitas
The Relationship between launch Prices and Premiums
Unit Details
Community Hills
Type One Bedroom
Size 873 sqft
View JLT
Developer Emaar
AED
Payment Plans embedded in the price off plan
0%
5%
10%
15%
20%
25%
100% Now - 0% Completion
80% Now - 20% Completion
60% Now - 40% Completion
40% Now - 60% Completion
20% Now - 80% Completion
0% Now - 100% Completion
Unitas
The above graphs explains the effect of payment plans on the pricing of off-plan properties. As the investor is always evaluating the opportunity cost of money, this embeds itself in the form of payments plans. At an extreme, (100% payable on ready), there should be no discount offered to the prevailing launch prices, which implies that on the margin, the price trajectory will be entirely influenced by the animal spirits of speculative forces. Ceterus paribus, the discount offered to ready prices are a function of the payment plans that are offered at launch (whereby the discount rate is the opportunity cost of rent).
The Relationship between Payment Plans and prices compared to ready
Dis
cou
nt
to R
ead
y
12
“Our irrational behaviors are neither random nor senseless- they are systematic and predictable. We all make the same types of mistakes over and over, because of he basic wiring of our brains” – Dan Ariely
Dynamics and Trends of Off-plan Units
900,00
950,00
1.000,00
1.050,00
1.100,00
1.150,00
1.200,00
1.250,00
1.300,00
15% Down-Payment
15% Installment
10% Installment
15% Installment
15% Installment
15% Installment
15% Completion
Off-Plan Market Cycles: Casa (Arabian Ranches II)
Market enters a bear market
Market enters a Bull Run
REIDIN
The above graph illustrates the market cycle of a typical off-plan unit. Using Casa as an example, we witness that in a bull market there is a sudden rush of speculators, trying to ‘flip’ the units in order to make super-normal returns. 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.
Casa Off-Plan Price Cycle
Price
Per Sq
uare Fo
ot
600
650
700
750
800
850
Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016
Off-Plan Market Cycles: Reem (Mira Community)
Liquidity Crunch
15% Down-
Payment
15% Installment
10% Installment
10% Installment
15% Installment
15% Installment
10% Installment
10% Handover Market enters
a bear market
Market enters a Bull Run
UNITAS*
*Data used from market sources
A similar trend can witnessed in the Mira community off plan price trajectory cycle, from launch to current. It is imperative to note here, that price volatility is the highest when the payments made are low, thereby allowing speculative forces to dominate price action. As the payments made increase, speculative forces recede, allowing for a stable path of prices and an eventual convergence to the ready product.
Reem Off-Plan Price Cycle
Pri
ce P
er S
qu
are
Foo
t
Following Off Plan from Launch to Completion
1000
1050
1100
1150
1200
1250
1300
1350
1400
1.000,00
1.050,00
1.100,00
1.150,00
1.200,00
1.250,00
1.300,00
1.350,00
1.400,00
Casa Arabian Ranches
Prices: Casa and Arabian Ranches
REIDIN
The above graph illustrates the price performance of two off-plan project over the last three years. We witness that Casa traded at a discount at the launch, but soon out-performed ready-villa segment as speculators entered the market. However, as it came closer to completion the discount receded, eventually trading at parity with the ready-stock.
600
650
700
750
800
850
1000
1050
1100
1150
1200
1250
1300
1350
1400
1450
1500
Q2 2013
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Q1 2016
Dubai Villa Mira
Prices: City Wide Villas and Mira
REIDIN/Unitas*
*Data used from market sources
Conclusions Ready Price and Launches When to Buy and Sell Off-Plan Units
Dynamics and Trends of Off-Plan Conclusion
Ceterus Paribus, off-plan properties are an attractive purchase if the price discount is more than the loss of rental income during the duration of the project
Usually developers release off-plan properties at a discount to the ready market. The reason for this is to compensate for the loss of rent till the completion of the project and build-risk.
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. It is imperative to note that early on in the off plan cycle, there is amplified volatility due to the animal spirits influenced by speculative activity. As the project nears to completion, volatility recedes as it converges with the ready market price levels.
Ready prices are a leading indicator of off-plan launches, as witnessed during the 2002 and 2012 bull-run. As prices begin to escalate developers enter the market to try and capitalize on the surge in demand. In mid-2014, as prices began to dip, developers slowed the announcement of new projects, which can be witnessed in 2015.
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. In Arabian Ranches and Downtown, the launch of off plan projects that started in either the buy or sell zone have clustered around the zone of “neutrality”, as market forces diminished the premiums or discounts relative to ready market.
In a bull-market, off-plan releases usually trade at a premium instantly after the launch due to the sudden surge of demand driven by speculators trying to capitalize on super-normal 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. A comparison of price movements between off-plan and ready units converge, as the former comes closer to completion.
REIDIN.com is the leading real estate information company focusing on emerging markets. REIDIN.com offers intelligent and user-friendly online information solutions helping professionals access relevant data and information in a timely and cost effective basis. Reidin is the data provider for these research reports
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GCP believes in in-depth planning and discipline as a mechanism to identify and exploit market discrepancy and capitalize on diversified revenue streams. Our purpose is to manage, direct, and create wealth for our clients. GCP is the author for these research reports
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