Repossession auctions in Dubai will hit house prices

Dubai developers who have completed more than 80 per cent of their projects are beginning the process of repossessing properties from customers who have missed payments under a new ruling, and will sell these partly completed units at auction.

According to The National letters are being sent via the Dubai Land Department. Under the new rules 40 per cent of the amount paid will be kept and the properties auctioned off by the Dubai Land Department if clients do not come up with the missing money within two weeks.

First letters sent

The proceeds from the auction will go to the developer unless the auction produces a surplus. The National said letters have gone out from Emaar and dozens of other developers including Al Fajer Properties and Al Mazaya Real Estate.

However, property foreclosures and such repossession auctions are not good news for house prices in Dubai. Property sold at auction usually sells for a discount to the market price, and certainly well below the asking prices for Dubai real estate that many agents say are still way too optimistic.

Indeed, the auction process is a way of establishing a true market price. The danger is that it can also magnify price reductions, particularly if a large amount of property is auctioned to a small number of buyers very quickly.

The Dubai Land Department is sensitive to its position as the guardian of the local property market but it also has a duty to the developers who are stuck with partly paid property and clients who either cannot or refuse to come up with the final payments.

This is the final solution to clearing up the off-plan mess left by the bursting of the Dubai real estate boom in October 2008. A great deal of work has already been done behind the scenes in terms of consolidating projects through transferring clients to alternative properties.

Off-plan mess clearance

Now the true financial position of the developers will also become much clearer. Can they meet their bank debt obligations from their projects, for example. Sadly too this will be the end of the road for many off-plan buyers who took on more property than they could afford in the boom.

How far this auction process will affect existing home prices is hard to assess. A lot does depend on how it is handled, so that a disorderly market is not created. Some buyers will get bargains. Others might by from a developer that turns out to be bankrupt and so still cannot complete the unit.

But if the experience of other global markets is any guide repossession auctions do exert a strong down pressure on prices until they are over, and then the market recovers.