Off-plan in Dubai: how can you reduce risks by buying real estate in the construction stage?

When buying a property, investors need to choose between an off-plan or a ready-made house or apartment. If your goal is to buy real estate in Dubai and save money at the same time, then it’s best to consider off-plan real estate. Of course, not all investors want to invest in an off-plan residence because it can come with some risks. But remember that real estate under construction (off-plan) is about 20% cheaper than a ready-made apartment or house. In this article, we’ll explain these risks and why it can be profitable to buy off-plan real estate in Dubai.

Contents:

• What is an off-plan property in Dubai?
• The pitfalls of buying off-plan real estate
• How to protect yourself from risks
• The pros of off-plan real estate
• How the state guarantees investors reliable off-plan housing
• What costs to expect when you buy an off-plan property
• Conclusion

What is an off-plan property in Dubai?

Off-plan real estate is any type of house, apartment or property under construction. You might know that the cost of say, an apartment in a building that hasn’t yet been commissioned is always lower by about 10-20%. On the flip side, buying off-plan comes with some risks. But you can minimize this if you pay close attention to the proper procedures when you choose your future home.

The pitfalls of buying off-plan real estate

There are some main risks to consider when you buy a property under construction.

1. «Frozen» construction. Europeans are familiar with cases of developers deceiving real estate buyers or shareholders. In the United Arab Emirates, this rarely happens. We’ll explain how off-plan property is regulated through the law.
2. Postponed deadlines. If a construction company runs out of funds, «frozen» construction can continue being developed if the completion date is postponed. Sometimes this delay is several months or years.
3. Price changes in the real estate market. This is unpredictable because a country’s economy is affected by the global economy. Even experts can’t always predict how prices will change.

How to protect yourself from risks

Before you buy a property under construction in Dubai, check out the tips listed below.

• Get all the developer’s information.

  Find out detailed information about the developer, especially their reputation and track record. According to real estate experts, you must carefully check the construction company and the number and quality of their previous projects. It’s also important to check if the land where the property is built is rightfully owned by the developer.

  You can easily do this on the Internet. Organizations with good reputations have information about their completed projects on their websites and social networks. They also openly tell investors and buyers about any construction changes and share other useful information.

  In Dubai, developers’ information is freely available, including in a mobile application made specifically for the Dubai Land Department called DUBAI REST. You can trust these construction companies in the UAE:

  • Meraas Holding;
  • DAMAC Properties;
  • Dubai Properties Group;
  • LIV Developers.

  These are leading and established developers in the Arab Emirates. They have built not only entire residential neighborhoods and buildings but also most of Dubai's attractions.

  In some rare cases in Dubai, when construction is postponed, a buyer has the right to receive compensation. The developer may offer extra services or take on some of the buyer's expenses.

  If the available information isn’t enough or you have doubts about making a decision, you shouldn’t rush things and contact an expert instead. A real estate lawyer in Dubai or certified agents will have all the correct information.

• Learn about the relevant laws.

  Before you decide to buy an apartment in a new building in Dubai, make sure the state can return your money if construction is frozen or delayed. But remember, this only applies to off-plan and not pre-launch properties.

  The Dubai Land Department sees to everything real estate-related in the emirate. It strictly monitors that all rules and laws in construction are followed. Purchase and sale transactions must be registered with the Dubai Land Department and all investors' funds are stored in escrow accounts. This is a modern security measure to protect the developer’s and buyer’s interests. The developer can only use these funds if they reach a certain construction phase. If something goes wrong and construction stops, the Dubai Land Department should immediately hand over the construction to another capable developer. If this doesn’t happen, the state has to return all funds to the buyer who deposited them in the escrow account.

  A developer can only sell off-plan apartments if they meet several requirements. Importantly, 20% of the property must be built. This does not apply to pre-launch real estate (sale at the project stage) – it’s sold without additional protection for a buyer. And because of this, pre-launch houses or apartments are much cheaper than off-plan.

• Consider your options.

  Before you sign a sales contract with the developer, be sure that you’ll be able to pay on time. The laws established by the UAE government protect the interests of not only buyers but also construction companies. If an investor can’t pay on time, the development company can terminate the contract and return the invested money after taking a penalty. So, if less than 60% of the construction is completed, then the developer can keep up to 25% of the property’s total value. If more than that is complete, the developer can keep a penalty of 40%.

• Pay property costs in installments.

  In Europe, developers prefer 100% payment for an apartment. If a buyer doesn’t have the full amount, they can get a bank loan. But, paying the full amount can be risky. It’s safest to invest your money gradually as specific stages of construction are completed. This is what Dubai construction organizations offer when you buy off-plan real estate. The buyer can make an initial payment of about 20% of the property’s total value when they sign a contract and pay what’s left after they move in. Most real estate developers are asked to make a small down payment of about only 5% of the total cost. This is convenient because you don’t invest all your money at once but you can budget carefully.

The pros of off-plan real estate

The main advantage of off-plan real estate is its low cost. According to statistics, in 2021 in Dubai, the average cost per square meter of an apartment at the early stage of construction was AED 7,775. Over time and once the housing was complete, the average cost per square meter was AED 14,047. These low-cost investment benefits are great.

Another advantage of buying off-plan real estate is that you can resell it at a better price even before construction is complete. This is one of the most profitable ways to invest in Dubai. An investor can increase their income by 25% in a short time. And when the building is completed and people can move in, the cost of off-plan real estate can grow by 35%. But, keep in mind that you can only resell if you meet some of the developer’s requirements. And this can change from one developer to another. For example, you can only resell an off-plan apartment from the well-known Emaar Properties after you pay 40% of the property’s full value.

How the state guarantees investors reliable off-plan housing

A special state body – the Department of Land Resources of Dubai (RERA, Real Estate Regulatory Authority) - monitors that developers comply with their requirements. All construction companies must comply with these requirements to get a construction permit and sell off-plan apartments or houses on the Dubai market.

So, a development company should:

• Fully own the land where the housing is constructed.
• Guarantee that the real estate will be completed and keep funds in an escrow account for 12 months after completion. This must be 10% of the total cost of the project. These funds will be used to tackle any problems that may happen during construction.
• Complete 20% of the construction before selling apartments.
• Have a guarantee fee. This was 20% until 2020. Now, the state has a measure to check if the construction organization has enough funds and if it can complete the project on time. Since 2020, these bank guarantees increased to 50% of the entire project’s cost. This and all depositors' funds must be held in an escrow account.

What costs to expect when you buy an off-plan property

It’s important to know the price of apartments in Dubai and what extra costs to expect when you register the purchase and sale transaction. So, you’ll protect yourself from the risk of missing a great opportunity because you didn’t have enough money for extra costs.

In Dubai, there’s no annual property tax. But, you have to pay a 4% registration fee (of the total cost) when you buy a villa, apartment or house. Many developers pay this fee but always double-check this.

Also, a buyer must pay a AED 3,000 registration fee to confirm ownership.

Conclusion

To protect yourself from any risks that come with buying off-plan real estate, you must be sure of some important points. The main one is if the construction company is reliable. How can you do this?

• Check the developer’s reputation. There are several leading real estate companies operating in Dubai who publicly well-known trusted. You can even see them on the sides of amazing buildings they developed in Dubai, like DAMAC and Emaar Properties.
• Check if the construction is legal. The developer and their projects must be registered with the Dubai Land Department and RERA.
• Check if they fulfill their obligations. Your investments must be put in an escrow account, controlled by the Dubai Land Department.

Buying an off-plan house or apartment comes with understandable risks. But in Dubai, these risks are minimized because the state supervises and controls how real estate is bought and sold. It is important to contact an expert who can advise you on the ins and outs of Dubai’s real estate market. Get the help you need to make sure you’re protected when you buy your dream home. Turn your burdens into a simple process with our professional assistance!