Remember the first time you heard the word Blackberry? A fruit, surely. And Wii? That's something babies do. Until recently, you might have been similarly perplexed by the word premium as it's used in Dubai.
In my first encounter, I thought it was something to do with government bonds. Silly me. In this context, it's in fact the profit a speculator makes in flipping his property. Sometimes, this profit is as high as three to four times the original down-payment on the property.
Not too long ago, almost everyone seemed involved in the premium game. Smart-suited businessmen, housewives, college kids: Wheeler dealers all. And like me, you would surely have experienced the following scene: You're sitting at a coffee shop, enjoying a latte as you watch the world swirl around you. Suddenly, your peace is rudely shattered by an annoying person at the next table with at least two mobile phones, closing a deal on a property. He would then walk around shouting prices and premiums. Everyone would breathe a sigh of relief once he closed the deal.
You just don't see these guys anymore. Why? Because premium has dropped out of use, and with it the premium guys have melted away. Today, a new phrase has entered the lexicon: What's the OP?" For the uninitiated, OP means original price. Prospective buyers now are insisting on information about the price the property originally sold at. No one wants to part with their cash unless they're comfortable they're buying close to the OP.
An insatiable appetite to go faster or get bigger and stronger led to escalating premiums, with transacting in property resembling a night out at the casino. Winner takes all. I remember a fist fight at the launch of a new off-plan project. Buyers - or speculators as we like to call them today - could within days make returns in the double-digit percentage range. Now that's easy money. More than that, it was easy money and everyone was getting in on the act. For me, the danger point appeared when prices of off-plan properties at launch sky rocketed above ready-to-move-in properties of equal quality and in similar locations. It simply made no sense.
It is precisely the frenzied bidding up of premiums that has led us to the unhappy situation we are in today. Everywhere one looks, one finds people glum and down. No matter who you talk to, everyone is an oracle of doom. But things really don't need to be this way. Let's look at the basic commercial facts.
Conventional wisdom aside, the market presents some great opportunities for buyers looking to make a healthy, but not excessive, upside. Quality brokerages that have correctly priced completed real estate properties offer options that represent excellent yields for cash buyers who want a buy-to-let arrangement. Equally, for those wishing to buy primary residences there hasn't been a better time than the present. The off-plan market will struggle as potential buyers turn a lot more discerning. In addition, speculators will continue to be weeded out of the market and we will be left with end users and sophisticated investors looking for reasonable returns.
For developers this will be a much harder sales cycle, of course. But much depends on the credit market. Financing is the most important aspect to the property industry. A good deal now depends on how much financing is available to support mortgage applications as well as construction loans. That said, the prognosis is that it is likely that bank lending will return to healthy levels soon. Many projects that banks had committed to, but not yet actually extended actual credit, may now be cancelled. Thus, by the end of it is likely that banks will be scrambling to participate in new developments that promise prudent and viable returns. This should make life a lot easier for buyers, as well as developers.
But until then, we're in for interesting times. But at least the annoying guy with two phones has been assigned to the dustbin of real estate history. What emerges will depend on how well we all work together in shaping the future.
www.rehankhan.com
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