In today’s real estate market, the topic between off-plan or ready as better investment, is an age-old discussion. We at Indus have been dealing with off-plan and ready properties since 2004, and have witnessed market trends swing in favor of both.
A real estate investor often struggles with deciding between primary (off-plan) investments versus secondary (resale) investments. This difficult choice becomes compounded in growing markets where primary sales are a significant portion of the volumes, as opposed to economies where the majority of the volumes are in the secondary space due to few new developments. For example, a market like Dubai has significantly geared towards primary sales in the last three years.
A larger number of primary transactions is usually a sign of vibrant economic activity as it indicates new developments required for the demand of a growing city, which could be led by either better job prospects – as is the case with Dubai (shown in the chart below) – or increasing urbanization in a country such as India.
Similarly, a healthy secondary market is also required as it is a sign of a balanced supply and demand market.
Apart from the greater share of primary transactions, the current Dubai market can also be characterized along the following parameters:
· Stable rental yields
· Significant new launches
· New areas being developed for future growth
· Post-possession payment plans
· Aggressive offers in price by developers
· DLD waivers, free property management services
· Secondary market prices trading at a discount to primary market
In a healthy property market, there should be a minimal price difference between the primary and secondary segments; however, aggressive offers available in the primary market indicates a weaker demand as compared to supply, making the current Dubai scenario a buyers’ market. The following are the key characteristics of both primary and secondary investments:
· Equity outflow is staggered in the primary market, making it relatively easy on affordability and budgets
· The secondary market, however, adds the component of rental yields to the overall returns, and rental yields in Dubai are equal to or exceed mortgage rates (cost of capital)
· Since equity outflow is staggered in the primary market, capital appreciation may give a much higher ROE (Return on Equity) as compared to the secondary market
· Multiple developer offers can make primary transactions cheaper than the secondary counterparts (i.e. DLD waivers)
Primary market purchases are easier to research due to significant data available on similar transactions in the same catchment area (as it’s a homogeneous product), while secondary market transaction research needs significantly more data-points in a particular hyper local market.
A buyer does not pay brokerage fees on primary market purchases, whilst in secondary market transactions the buyer does.
Both primary and secondary investments have their pros and cons, and the decision should be a function of multiple factors such as: the state of the market, available liquidity, investment versus end use, pricing differential, developer and mortgage offers, etc.
We believe that in the current scenario, investing in the primary market in Dubai is far more lucrative due to factors such as staggered payment plans, and discounts, which should result in much higher returns for the investor.
(This article was previously published on Property Finder)