Land plots and joint ventures in Dubai: how investors and developers split the profit

Why is the real return higher than the headline margin?

Because the developer does not fund the whole build from its own pocket. Danil's example: land at AED 50 million, construction at 100 million, sales of 300 million. On paper that is 150 million of profit on 150 million of cost, or 100% over about three years.

In his account the developer puts about 20% of the construction cost into escrow. Once 20% of the project is built, buyers' instalments can be paid from escrow to the main contractor. Add roughly 10 million for design and marketing, and the capital actually committed is about 80 million, not 150.

That is also why he thinks developers with an in-house main contractor are more stable. A contractor's margin is about 20% of the estimate, he says, and it stays inside the group. He sees that as lower risk for apartment buyers and JV partners alike.

What happens to a JV when construction costs rise?

The overrun comes out of the shared profit. In the same example a 20% rise adds AED 20 million to the 100 million build, total spending becomes 170 million, and the partners split 130 million of profit instead of 150 million.

Danil says costs have already moved. He estimates steel up 8-10%, aluminium up 15-18%, and mechanical, electrical and plumbing works up about 15-20%. Facades, which he puts at 20-25% of a project, are hit hardest.

His conclusion is that land has to become about 20% cheaper for projects to work at February prices. Before, he says, a rising market forgave every mistake: a buyer could overpay for a plot and still come out ahead.

Has land in Dubai become cheaper?

Mostly not. Landowners are individuals, funds and companies with large capital, and a few months of stress does not force them to sell, Danil says. Discounts appear only where an owner is overleveraged. He has personally seen five such plots in two months.

One of his examples is an area where the asking price was AED 600 per square foot and is now AED 450. In his view that is the level at which a feasibility study worked three months earlier. The price did not collapse, it returned to what a developer can pay.

In Dubai Production City he says two plots can now be bought at about AED 250 per square foot of gross floor area. He names Dubai Land Residence Complex as undervalued, at AED 1,200-1,300 per square foot for finished homes, and JVC as overvalued at around AED 2,000.

Where do land investors lose money?

On rules that change after the purchase. In Dubai Land Residence Complex, Danil says, the master developer's fee for the right to sell apartments at retail went from about AED 30 to AED 100 per square foot. Owners who had not yet paid lost part of their margin.

His second example is Jumeirah Garden City, the former Al Satwa. The district has low-rise plots, two metro stations and the sea nearby, so studios were the most profitable product. He says the parking allowance was then cut, and a plan with 60 spaces became one with 40.

He says Dubai rules require a parking space per studio, so those owners must redesign with larger flats. He estimates the hit to project economics at 20-25%. Developers who already held permits were not affected. Speculators who were waiting for a higher price were.

What do FAR and GFA mean when you buy a plot?

FAR, the floor area ratio, is the multiplier attached to a plot, and GFA is the gross floor area it allows. Danil's example: a plot of 1,000 square metres with a FAR of 3 allows 3,000 square metres of GFA. Land is priced per square foot of that GFA.

Balconies do not count towards GFA, he says, which is why developers design large terraces: the space is sold but does not use up the allowance. Master plans also set a minimum average unit size, so a building cannot consist of studios alone.

Offices change the timetable. They can be sold as shell and core, without the 8-12 months of finishing that apartments need. Money therefore leaves escrow after about two years instead of three, at roughly the same selling price.

Why does Abu Dhabi come up in a conversation about Dubai land?

Because Danil's own company went there for offices. It bought several floors in a class A business centre on Al Reem Island, inside the ADGM financial zone, at about USD 6,000 per square metre on a three-year payment plan. He expects prices there to rise over about three years.

Land is a different matter. He says plot tickets in Abu Dhabi are much higher and permits take longer. Development is about time: the shorter the cycle, the higher the return, so for land he still looks at Dubai first.

On timing he is cautious. An owner who wants to sell should sell now, he says. A buyer may do better by waiting a few months to see how the regional situation and construction prices settle.