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Leaseback and buyback: win-win deals for developers and investors?

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Schemes gain traction as real estate developers work harder to entice buyers.

 

Long popular in developed markets such as Europe and North America, the leaseback scheme has traditionally not been a major feature of the real estate industry in the region. However, after a number of developers dabbled with it during the slow period in 2008, the leaseback model seems to be making a comeback. In a leaseback scheme, which is mostly popular for serviced residences, a developer sells property units to investors with the option of leasing back the apartment to the rental pool (managed by a hotel operator) for a set period of time.

This gives investors a guaranteed rental income and higher returns in comparison to a traditional residential unit. The developer gains from a higher sales price, mainly due to an association with a hospitality brand/operator, who will in turn ensure the units remain occupied. Developers also see this as an opportunity to offload unsold stock.

Rental pool

Damac Properties first launched its rental pool scheme in December 2013 at Damac Maison Mall Street in Business Bay. Soon after, it introduced the scheme to five other properties and recently to three towers in the Damac Towers by Paramount Hotels and Resorts. “What we operate is a successful rental pool system at a selection of our serviced hospitality properties,” said Niall McLoughlin, senior vice-president of Damac Properties. “It allows for revenue generation for our customers, without the stress of unit management and maintenance. The units are serviced and reservations managed in much the same way as a five-star hotel, following which all the generated revenue is pooled, and the profits are distributed accordingly among all participating owners.”

McLoughlin said the concept has been positively received by investors. And with Dubai a popular tourist destination, demand for short- to medium-term accommodation provides an ideal landscape for the success of schemes like the rental pool.

McLoughlin said owners can use the property for up to 14 days a year during peak season, plus unlimited use in off-peak times. In addition, unlike owner-managed tenancies, investors also enjoy a “no empty asset period” with Damac’s rental pool.

Dubai-based Sun and Sand Developers (SASD), which is currently constructing the 65-unit Suncity Homes in Warsan to be delivered in October, is offering something similar to a leaseback scheme: a 5 per cent net ROI for two years post-completion. Given the current market, Sailesh Israni, managing director of SASD, said investors can feel apprehensive if the apartment will rent upon completion. “So what we are saying is we will take care of service charges for two years and rent your apartment for two years with an option to sublease as a result of which the client gets a net yield of 5 per cent,” said Israni.

However, he clarifies this is optional. “So the client may also rent outside of scheme if he is getting a better yield.”

This scheme is beneficial to the buyer on two counts. “It implies that the developer is confident of the completion of the project in time. And any delay will have a financial impact of 5 per cent net ROI to be paid to the customer,” said Israni.

Azizi Developments said it is receiving strong response to a similar concept. “We provide our clientele with the opportunity to yield higher returns through our short-term home rental concept. Such concepts are very well aligned with current market trends and demand, backed by the surge in tourism. Customers own the title deed and are assisted in getting the DTCM licence through our turnkey solution,” said Gibran H. Bukhari, senior advisor to the chairman and CEO of Azizi Developments, adding that its properties offer a resort lifestyle. “This holiday and staycation-like environment is our response to a growing demand for short-term housing in the emirate.”

Buy-back scheme

Similar to a leaseback model, some developers are going one step ahead with buy-back schemes, where the developer pays a guaranteed ROI and then buys the property back. “These schemes are designed specifically for the investor who effectively ties up his/her money with the developer for a specific period of time, during which the investor is paid a set percentage net, free of costs,” said Mario Volpi, sales and leasing manager at Engel & Voelkers Dubai.

At the end of the term, the developer buys the property back at the same price as it was bought by the investor. Developer Vincitore operates this scheme across its projects in Arjan: Palaccio, Boulevard and Benesssere. For tying up the money for five years with the developer, the investor will get an income of 8 per cent net per year and at the end of the five-year term the developer buys back the property at the initial purchase price, according to Volpi. “This scheme is interesting in that a 40 per cent income is paid over five years, however, if the property has appreciated in price over this time, the investor will lose out by locking in the original price,” he said.

But Volpi adds that the investor will be in a winning position should the property depreciate in price over the five-year term because of the 40 per cent return plus the money that was paid at the beginning of the term.

Source: https://gulfnews.com

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