Increased demand raises the “down payment” for off-plan properties

Real estate experts said that some developers have raised the down payment percentage for purchasing an off-plan property to 20%, due to the high demand for state-owned properties, given the advantages they provide to investors, in addition to their competitive prices and quality compared to other markets.

They explained to “Emirates Today” that the first payment will be in the escrow account, and not any other account, so that it can be used to develop the project. It is also considered one of the tools for risk management and improving the quality of the developer’s cash flows, until his project is completed and it protects him from stumbling.

However, other real estate agents considered the increase in the down payment percentage to be exaggerated and unjustified, noting that from 2010 to 2019, down payments ranged between 5% and 10%.

In detail, the Managing Director of Harbor Real Estate, Muhannad Al Wadi, said that most real estate developers still receive a down payment for purchasing a property off-plan of 10% of the property value, but he pointed out at the same time that some developers have raised this percentage to 20%, considering it acceptable to eliminate the percentage of speculators in the market.

He explained that the down payment is in the escrow account, and not any other account, as the money is not withdrawn from it except to develop and complete the project, noting that the first payment helps the developer increase the escrow account, especially for developers who do not have sufficient liquidity, and this confirms the importance of having sufficient funds in the escrow account to complete the project.

For his part, CEO of Malak Real Estate, Tariq Ramadan, stated that increasing the value of the first payment is a type of risk management and cash flow management by some developers, especially in light of the rise in prices in the market, as the risks of buyers or investors defaulting may increase in the event of a change in the market trend, noting that it is expected in any real estate cycle when prices rise that there will be some type of correction at some point, and therefore the developer sometimes imposes higher obligations on buyers, in a way that serves the cash flow of the project and prevents its default.

Ramadan considered that such a matter is very beneficial for the real estate development sector, pointing out that excessive facilities may lead to unnecessary risks for developers.

He said that raising the down payment for purchasing real estate is due to the increased demand for state real estate, given its great attractiveness and the rewarding returns it provides to investors, in addition to its competitive prices and quality compared to other markets.

In turn, real estate marketing expert, Alaa Masoud, said that the noticeable increase in the down payment percentage from 5% or 10% to 20% has several reasons, including that it may reflect a change in the financing strategies of some real estate developers, in terms of reducing the financial risks related to their projects, as some of them guarantee securing a larger portion of the capital at the beginning of the project, which reduces their reliance on loans.

He added that another reason may be related to changes in construction costs and raw material prices, as an increase in the down payment may offset the higher costs.

Regarding some developers raising the monthly installments for purchasing the property, Masoud explained that the increase may be due to several factors, including increased financing costs and higher interest rates. There may also be a desire by some developers to speed up the process of recovering capital by increasing installments, which allows them to reduce the debt repayment period and achieve faster profits.

In the same context, the founder and director of Al-Liwan Al-Malaki Real Estate Company, Mohammed Buharb, said that there is a trend by some developers to increase the down payment from 10% to 20%, and some of them were taking 5%, considering that the 20% rate is exaggerated and unjustified with regard to the value of the down payments.

Buharb added that from 2010 to 2019, the first payments ranged between 5% and 10%, but after the Corona pandemic period in 2021, some developers raised the value of the first payment to 20%.