Value is derived by the agreement of a willing buying and seller in an arm's length transaction. However, what if a buyer is willing to pay more directly to a developer, who is willing to sell for more? What if many buyers are willing to pay more in the primary market while the secondary market is suffering and spotted with distressed deals? Is the two-tiered market really that divided?

The Dubai market is saturated with an array of new developments and a supply pipeline of approximately 32,000 units still scheduled to be delivered in 2017. Fundamental market principles of supply and demand dictate the direction of prices overall. This is evident in the decline of -2 per cent in the past year alone, in line with government regulations implemented to curb demand while an abundance of new supply continued to enter the market.

Demand was driven by affordability and socioeconomic factors while supply was driven by the optimism of developers who have invested heavily in Dubai. The result, an overall reduction in prices and a divide between the primary and secondary markets.

Speculation was fuelled by the announcement of Expo 2020 which boosted the secondary market initially. It can be argued that the secondary market was then curbed by government regulations in order to assist the primary market. While hefty deposit and purchase cost requirements halted secondary market purchases, incentives were provided through easy payment plans within the primary market to ease purchases. The market, therefore, has been driven by off-plan transactions during 2014-2017.

We are now at a stage where a significant proportion of new developments are near completion, hence the primary and secondary markets are competing on a like-to-like product. The secondary market is still driven by demand while the primary market is driven by the developers' profit margin. Some developers have been known to believe that the market is not demand driven and that demand is merely a made-to-believe concept while prices are being determined by developers. It is hard to believe, however possible in this part of the world.

There is a significant proportion of buyers opting to buy direct from developers in the primary market. What is more interesting is that they are paying a higher price to fulfill the developers' higher price requirements by comparison to the secondary market. On average, buyers are paying five per cent more than what is on offer in the secondary market. Although they are getting a new property, the underlying reason to pay more could be due to another factor.

The costs incurred on a secondary market purchase include two per cent agency fees, four per cent registration fee and another one per cent on other charges, particularly for mortgage buyers. In the primary market, however, there would be zero agency fees and the four per cent registration fee is paid by the developer in most cases. As it transpires, the gross price paid in both the off-plan market and secondary market is very similar.

What needs to be remembered is the net price, which is unlikely to be achieved when the primary market buyer decides to sell his property. At that point, the importance of market fundamentals and supply and demand will prevail again, when the seller must be willing to sell his property at the price a secondary market buyer is willing to pay.

The writer is partner and head of residential valuations at Cavendish Maxwell. Views expressed are her own and do not reflect the newspaper's policy.

Source: Khaleej Times