Wednesday, May 27, 2009

The Wave gets tough on off-plan purchasers?

The Wave, the first big tourist development in Oman & located just west of Seeb airport, is making moves to try and force some off-plan buyers to commit to their purchases in the mega-development.

Properties at The Wave's later phases - still far from completion - were snapped up in the heady days of last year, to the extent that lotteries had to be held to decide who would even be allowed to just put down a deposit. Such was the feeding frenzy people were even paying 10 to 25 thousand rials [US$ 25k-62k!] to people who simply had such a 'ticket to purchase', just to get in line to buy these properties even before they had been built.

But those days must seem an age away to all the property developers in Oman right now. Resale prices have collapsed, but then liquidity is exceptionally low (my real estate friends say they haven't registered a sale of a Wave property on the after market all year).

Right now the real estate agents Cluttons are listing 75 properties for sale at the Wave. Gulf Properties list a somewhat shocking 172.

One of many properties being offered for sale at the Wave...

The problem is that many people who bought at the Wave were only planning to hold and resell for a huge profit - as those fortunate enough to get in on Phase 1 did, with some friends of mine cashing out mid-last year and making off with 150k rials profit in 18 months. (I know, Nick Smith is on record saying that speculators were only 20% of purchasers, I'm just not sure I believe him as I know a LOT of Omanis who were buying only in the hope of a quick buck, and without hindsight, who can blame them?).

But now, the market value of any yet to be completed off-plot purchases are probably worth a lot less than the total of the remaining payments, the negative equity trap. What to do?

The collapse in the market has meant many people are not making their promised follow up payments, unless they are already in so deep it would be crazy to even contemplate a default. Economically, the best solution if you made a deposit on such a now negative equity property - even if you still wanted a place to really live in or even to rent out - is to stop making any more payments, eat your loss on the original deposit, and consider buying a different place in the after market, as that will end up costing you less than your remaining payments for the same property.

As a response to this problem, The Wave is thus taking the unusual step of offering those purchasers the ability to only pay after the property is completed, instead of having to make interim payments now as in the original sales agreement, and blaming the lack of credit liquidity.
heres the letter they sent out a few days a go - with just 14 days to respond!

RE: Amendment to Schedule Payments - XXXX
We are aware that the current adverse global financial circumstances have affected many of our customers who have bought property with us. We know that many have liquidity issues, and coupled with this, it is now more difficult than last year to arrange bank funding. This funding issue is particularly acute where properties are at an early stage of construction...

Hence we would like to offer you the following options:
1. To continue paying any outstanding invoice(s) and future invoice(s) in accordance with the provisions of the Agreement; OR
2. To pay any outstanding invoice(s) and/or future invoices(s) at the final stage subject to the terms and conditions stated in the next paragraph below.

2. It is your sole responsibility to ensure that payment of all outstanding invoices is made at the final stage as invoiced by the Developer....

Nick Smith,
CEO The Wave

Note this 'generous' offer seems to be being made only in return for them agreeing to change the sale and purchase agreement and in the process ensuring those who take the new deal become fully liable for the full payment later.

Quite clever. It forces people to make a choice: default now and loose your deposit, or, avoid default now (which no one really likes to do) but become locked in for the full payment later. It also allows the Wave's accountants to keep all those shakey sales on the books.

But they are a bit naughty not making that 'exchange' a bit more explicit. But, hey, business is business.

As the Wave is essentially Government backed, it's a reasonably safe investment in terms of completion (and has a pretty good history of being almost on time), but I personally thought it was always a bit pricey. Still, at least it's being built and some 100 homes have already been completed and handed over (albeit with a few concerns in places over changing the specifications of car garage dimensions..).

Note: there is no danger of the Wave itself getting short of cash, as they have the effective backing of Bank Muscat, which is essentially an Omani Government backed bank. They are as solid as it gets.

And The Wave might (with some justice) argue that if you really just wanted to live there, this is a great deal.


  1. Hhhmmm, nice effort from the Wave with the option of what is essentially deferred payment scheme.
    Keeps the sale on the books - tick
    Supports valuation of sold properties approaching settlement - tick.
    But does it really help to establish the "market price" for freehold property in Oman??? I think not.

    It basically delays the risk of loss for the buyer until a later stage..and potentially the financier, depending on the LVR and price drop.
    It may also be artificially supporting prices in the Wave – and for the benefit of who - the customers???
    The market will determine the price – one way or another – this you can count on.

    What the Wave should really be looking into is cost savings from contractors, consultants, etc and revise down the contract prices for buyers accordingly.
    This could be pro-rata with the most inflated sales prices at the top of the boom, getting a better discount to create a price floor.
    This idea will be howled down from some quarters but is already happening in more developed and distressed markets such as Dubai and Abu Dhabi.

    The “Payment Plan” method of financing - where the developer receives the funds from the customer to pay the contractor, is now relying on the customer to have confidence in the value of the product. If the customer is underwater – they will walk away – either now – or later.

    I think this scheme is a little naive and is an attempt to avoid the problem of default by hoping that it all gets better at a later stage. Anyone in their right mind will take the delayed payment option & avoid the interest costs/put their money to use elsewhere and see how it pans out.

    What the developer misses is the opportunity to make savings, material, labour, consultants, services, etc – as all these things have reduced (no matter what the providers will tell you!) This can’t be done when all the work is complete and the money spent.

    What happens at completion when prices elsewhere have dropped, banks won’t lend to buyers at inflated values, buyers default, the developer gets the realestate back on the books and has to re-sell at market rates??? Everybody loses!!
    The deposit will be contested – an most probably retained by the developer.
    The investors will be burned and will have a negative view on the development – not good if this includes lots of locals who you need to support the retail/hotels/etc.

    The Developer has to “grasp the nettle” and put in the hard work to support their customers.
    It won’t be pleasant to renegotiate, scrimp & save to keep their customers “in the game” – but unfortunately they have the most to lose if it all goes wrong down the track .

  2. Farmer Joe

    Excellent points - they need to get the costs and hence sales prices down to where buyers would not be subject to significant negative equity.

    Taking option 2 seems better, BUT, I think under the original S&P agreement the buyer would only be liable for loss of deposit if they pull out now. But if they agree with the new defered payment agreement it will then make them liable for the full sales price.

  3. UD - If Buyers become liable for the full sale price, this may be
    motivational if you live local (assuming that the buyer HAS the means to
    complete) to avoid default/jail/repercussions etc. However, assuming a foreign investor takes option 2, decides not to complete because he is
    underwater on the dwelling value at completion - these buyers will walk from their deposits.
    Is the Developer going to pursue all these defaulting buyers
    for the balance? Due to the variety of country legal complexities, costs and time - methinks not.

    The amount of "flippers" that have now turned into "skippers" in Dubai, resulting in stalled projects due to funding collapse is a good example to learn from.

  4. I heard new properties are launched by Wave. Does anyone has idea of the price of 2 bedroom apartment?

  5. What will be the resident permit status of the tenant and or investor- any idea

  6. Does anyone know whether regulation of Oman's billion dollar real estate industry was discussed at the first Construction summit that concludes today?

    Check out OER's September issue on what The Wave's CFO had to say about the how customers were supported in the form of payment holidays during the credit crunch. Selected customers he forgot to mention .....

    It's a good time to re-visit a representative sample of those customers for their feedback on the CFO's support package; including those who now can't complete the sale of apartments because they can't fund the negative equity between the price they bought at 2-3 years ago (which would buy you a villa today), and today's market value.


If you wish to post anonymously, please pick a nickname by selecting the Name/URL option, or at least sign off your comment with one! I will delete comments I find objectionable or needlessly inflammatory. Sorry for the word verification.... OMG the spam has gotten BAD these past 12 months... trying to avoid making one log in...