People buying completed properties as safe are not best investment

[PropGuy]

Everybody I speak to these days are saying they are buying completed properties because they less risky and gives immediate return on investment, but this just following the heard mentality like before when most people were buying off-plan in 2008 and got burned.

Of course this depends on the payment plan, price, and development; but my main point is some off plan investments are better yet people are ignoring them with following the heard mentality. Second, and most important it serves as a model to test against off-plan vs completed real estate investments.

Lets take 30/70 payment plan which is estimate to take 4 years to handover vs completed property (all else equal).

=====================
30/70 payment plan property:
=====================
Investment Strategy:
- 30% in installment.
- 70% invested with a bank for 4 years in sukuks, bonds, fixed deposit, etc. Max rate I come across is 7.5% pa and I believe people for 4 year investments can negotiate better return, but I'll use 7.5%.

Scenario 1 (market value of real estate rose by 20% in 4 years):
Return from real estate: 66.67% (20% to TV; total value changed to 50%)
Return from bank: 30% (21% to TV; TV increment 91%)

Total return/loss: 41%
Wealth appreciation/depreciation: 141%

Scenario 2 (market value of real estate dropped by 50% in 4 years):
Return from real estate: -100% (-30% to TV; total value changed to 0%)
Return from bank: 30% (21% to TV; TV increment 91%)

Total return/loss: -9%
Wealth appreciation/depreciation: 91%

=====================
Completed property:
=====================
Investment Strategy:
- 100% invested in real estate since it is completed property.
- 10% fixed rental for 4 years. Now rentals are not fixed for 4 years but for the sake of argument I'll assume fixed 4 year rental of 10%.

Scenario 1 (market value of real estate rose by 20% in 4 years):
Return from real estate value: 20% (20% to TV; total value changed to 120%)
Return from rental: 40%

Total return/loss: 60%
Wealth appreciation/depreciation: 160%

Scenario 2 (market value of real estate dropped by 50% in 4 years):
Return from real estate value: -50% (-50% to TV; total value changed to 50%)
Return from rental: 40%

Total return/loss: -10%
Wealth appreciation/depreciation: 90%

Conclusion:
In the above cases, 30/70 off plan property is less risky in downturn because investors maximum exposure to real estate drop is 30% (assuming investor just walks away with 50% drop in value) and returns from bank or financial institution is guaranteed. On the other hand, investor has full exposure to 50% drop with completed property; furthermore, example used 10% fixed rental, but in real world it is not guaranteed.

 

[Sixgun]

You forgot something ....

Scenario 3..... In 4 years your off-plan property still looks like a giant swimming pool, your developer has disappeared with your 30%, you spend your days sitting in queues at RERA.

 

[badrah]

who r u kidding here?
this is very theoretical and has nothing to do with reality, it misses a lot of objectivity and disregards a lot of facts.
wake up and smell the:

property crash
hold/cancellation of more than 50% of projects
thousands of cases in courts
developers running away with investors money
off plan is highly overpriced than ready units
...etc

 

[PropGuy]

You forgot something ....

Scenario 3..... In 4 years your off-plan property still looks like a giant swimming pool, your developer has disappeared with your 30%, you spend your days sitting in queues at RERA.

That is included in a way, same as drop more than 30% in real estate value isn't it? Make it 100% drop it would be similar to 'scenario 2.'

 

[PropGuy]

who r u kidding here?
this is very theoretical and has nothing to do with reality, it misses a lot of objectivity and disregards a lot of facts.
wake up and smell the:

property crash
hold/cancellation of more than 50% of projects
thousands of cases in courts
developers running away with investors money
off plan is highly overpriced than ready units
...etc

Part if it is answered in my previous reply with 100% drop in value.

Second, this is an economic model and they are meant to test parameters and results. Purpose of them is to analyze in a systematic way rather than do just what seems good and depend on what crowd is doing.

You put parameters of your scenarios in the model see the outcomes.

Here is the definition of economic model:

In economics, a model is a theoretical construct that represents economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified framework designed to illustrate complex processes, often but not always using mathematical techniques. Frequently, economic models use structural parameters. Structural parameters are underlying parameters in a model or class of models.[1] A model may have various parameters and those parameters may change to create various properties.[2]

http://en.wikipedia.org/wiki/Model_(economics)

Scenario planning [or scenario thinking or scenario analysis] is a strategic planning method that some organizations use to make flexible long-term plans. It is in large part an adaptation and generalization of classic methods used by military intelligence.
The original method was that a group of analysts would generate simulation games for policy makers. The games combine known facts about the future, such as demographics, geography, military, political, industrial information, and mineral reserves, with plausible alternative social, technical, economic, environmental, educational, political and aesthetic (STEEEPA) trends which are key driving forces.
In business applications, the emphasis on gaming the behavior of opponents was reduced (shifting more toward a game against nature). At Royal Dutch/Shell for example, scenario planning was viewed as changing mindsets about the exogenous part of the world, prior to formulating specific strategies.
Scenario planning shines especially if it includes systems thinking, which recognizes that many factors may combine in complex ways to create sometime surprising futures (due to non-linear feedback loops). The method also allows the inclusion of factors that are difficult to formalize, such as novel insights about the future, deep shifts in values, unprecedented regulations or inventions. Systems thinking used in conjunction with scenario planning leads to plausible scenario story lines because the causal relationship between factors can be demonstrated. In these cases when scenario planning is integrated with a systems thinking approach to scenario development, it is sometimes referred to as structural dynamics.

Scenario planning - Wikipedia, the free encyclopedia

 

[PropGuy]

One more thing, yes current off plan prices are high and this model also servers to check where off plan prices become more attractive than completed properties if developers want to sell their off plan units.

 

[Sixgun]

One more thing, yes current off plan prices are high and this model also servers to check where off plan prices become more attractive than completed properties if developers want to sell their off plan units.

Propguy,
your pitch, shpiel, and theories, are commendabley intense and complicated,
However, please tell me,
When you can collect all your money, your parents, and grandparents, cousins etc... will you put it all into off-plan property in Dubai??

 

[PropGuy]

Propguy,
your pitch, and theories are commendabley intense and complicated,
however, please tell me,
When you can collect all your money, your parents, and grandparents, cousins etc... will you put it all into off-plan property in Dubai??

Yup preferably 20/80 payment plan, if that is not available then 30/70 with the right price. Look it this way 30% would be in risky investment but higher return, 70% in less risky like sukuk with right amount of fixed returns. Makes more sense?

 

[sasherwani2]

Everybody I speak to these days are saying they are buying completed properties because they less risky and gives immediate return on investment, but this just following the heard mentality like before when most people were buying off-plan in 2008 and got burned.

Of course this depends on the payment plan, price, and development; but my main point is some off plan investments are better yet people are ignoring them with following the heard mentality. Second, and most important it serves as a model to test against off-plan vs completed real estate investments.

Lets take 30/70 payment plan which is estimate to take 4 years to handover vs completed property (all else equal).

=====================
30/70 payment plan property:
=====================
Investment Strategy:
- 30% in installment.
- 70% invested with a bank for 4 years in sukuks, bonds, fixed deposit, etc. Max rate I come across is 7.5% pa and I believe people for 4 year investments can negotiate better return, but I'll use 7.5%.

Scenario 1 (market value of real estate rose by 20% in 4 years):
Return from real estate: 66.67% (20% to TV; total value changed to 50%)
Return from bank: 30% (21% to TV; TV increment 91%)

Total return/loss: 41%
Wealth appreciation/depreciation: 141%

Scenario 2 (market value of real estate dropped by 50% in 4 years):
Return from real estate: -100% (-30% to TV; total value changed to 0%)
Return from bank: 30% (21% to TV; TV increment 91%)

Total return/loss: -9%
Wealth appreciation/depreciation: 91%

=====================
Completed property:
=====================
Investment Strategy:
- 100% invested in real estate since it is completed property.
- 10% fixed rental for 4 years. Now rentals are not fixed for 4 years but for the sake of argument I'll assume fixed 4 year rental of 10%.

Scenario 1 (market value of real estate rose by 20% in 4 years):
Return from real estate value: 20% (20% to TV; total value changed to 120%)
Return from rental: 40%

Total return/loss: 60%
Wealth appreciation/depreciation: 160%

Scenario 2 (market value of real estate dropped by 50% in 4 years):
Return from real estate value: -50% (-50% to TV; total value changed to 50%)
Return from rental: 40%

Total return/loss: -10%
Wealth appreciation/depreciation: 90%

Conclusion:
In the above cases, 30/70 off plan property is less risky in downturn because investors maximum exposure to real estate drop is 30% (assuming investor just walks away with 50% drop in value) and returns from bank or financial institution is guaranteed. On the other hand, investor has full exposure to 50% drop with completed property; furthermore, example used 10% fixed rental, but in real world it is not guaranteed.

Your scenarios might be applicable to more developed countries but not this place. Owner's of finished projects have "some" ROI on their investments in the form of "rental returns". This partially if not fully covers the mortgage. The rents will go down so shall the ROI but atleast there will be SOME returns. Owner's of offplan properties present the same scenario outside RERA nowadays as the season's Heathrow airport passenger traffic. There is no guarantee their properties will EVER see completion (forget 3 years). Many of the developers have already exited the country with excess baggages (which I'm sure they didnt mind paying for).
So yes your scenarios are true for the world outside Dubai.

 

[PropGuy]

^^^ emotional rather than logical. And need to read carefully and understand first.

Your scenarios might be applicable to more developed countries but not this place.

It is the model. Scenarios not important, they are just for quantitative demonstration. Scenarios can be replaced with other scenarios (scenario analysis).

And it covers project default in a way and applicable to any market, read post #4.

Owner's of finished projects have "some" ROI on their investments in the form of "rental returns". This partially if not fully covers the mortgage. The rents will go down so shall the ROI but atleast there will be SOME returns.

That is again following the heard mentality without understanding the mechanics. In US home owners went under on finished property (keyword is 'negative equity').

Owner's of offplan properties present the same scenario outside RERA nowadays as the season's Heathrow airport passenger traffic. There is no guarantee their properties will EVER see completion (forget 3 years). Many of the developers have already exited the country with excess baggages (which I'm sure they didnt mind paying for).

How many time I've to repeat: the main advantage in off-plan with 30/70 plan (there are better plans though) that only 30% is at risk, but 70% can be put in financial instrument which would give fixed returns without losing nominal value. With finished 100% is at risk of losing nominal value (including ROI through rental) in the housing market movements.

 

[sasherwani2]

^^^ emotional rather than logical. And need to read carefully and understand first.


It is the model. Scenarios not important, they are just for quantitative demonstration. Scenarios can be replaced with other scenarios (scenario analysis).

And it covers project default in a way and applicable to any market, read post #4.


That is again following the heard mentality without understanding the mechanics. In US home owners went under on finished property (keyword is 'negative equity').


How many time I've to repeat: the main advantage in off-plan with 30/70 plan (there are better plans though) that only 30% is at risk, but 70% can be put in financial instrument which would give fixed returns without losing nominal value. With finished 100% is at risk of losing nominal value (including ROI through rental) in the housing market movements.

Ok one question, why should one go for an offplan property in Dubai in the current situation when even the most trusted developers are running away. The risk of losing the 100% of the "30%" is a lot more higher dont you believe? Good analysis nonetheless!