Developers often turn to special incentives for buyers if off-plan residential sales in prime areas turn sluggish, or if they introduce a new concept.
To add punch to its sales, Kirchmann Hurry guarantees a 10% gross first-year return on investment to buyers at the Lincoln in Melrose Arch.
IFA Hotels & Resorts offers an 8% net return for the first three years to buyers at the Laguna Towers in Dubai, to be run by Swiss hotel group Movenpick.
Both will give occupation in late 2007 or early 2008, are reputable and have the assets to back their guarantees.
But do their guarantees make their developments good investments?
Kirchmann Hurry Projects is selling units for about R22 000/m²; say, R2,2m for a one-bed and R4,4m for a two-bed penthouse. The family has been developing residential units since the 1970s and, says Andrew Kirchmann, has been getting 0,6%-0,8%/month gross return. "We are getting R12 000/month on a furnished one-bed unit in Melville Road, Illovo."
Trafalgar's head of national letting, Neville Schaefer, says high-quality, one-bed units are drawing about R6 000 and two-beds about R8 000/ month.
But Kirchmann and Pam Golding Properties' Melrose Arch agent Peet Strauss claim the mixed-use development is a special case, with enormous demand and minimum rents of R14 500/month.
"Some rents go up to R40 000/month," says Strauss. "There is strong demand from European and US corporations such as Volvo, which have people on contract here."
Corporate Relocations' Corallie Pringle confirms she placed a client in an unfurnished, two-bed unit at R14 500/month. "Melrose Arch is probably the prime rental area right now, particularly for young, single Europeans," she says. "I think they could be getting the rents they say they are."
Strauss says R14 500/month can be achieved for a 100 m², one-bed unit. That would give a gross return on a R2,2m purchase of 8%/year. The net return is 7% after deducting a R17/m² monthly levy. But rents should be higher at the end of 2008, rising at, say, 4%/year to R16 300/month and providing a gross return of 9%.
IFA backs its guarantee with data on the hotel market in Dubai that shows enormous demand. There are 30 000 hotel rooms in Dubai, with current occupancy at 90% and average room revenue at US$124 (R780)/day. British research firm HVS says supply will rise to about 50 000 by 2010. "This will fuel risk of oversupply," it says.
The researchers indicate that occupancy could fall to 61%. But Dubai's current compound growth rate of 7%-10% "clearly reflects the ability of the market to absorb any new level of supply", says HVS. "We expect a market correction between 2007 and 2009 and the market to recover in 2010 and occupancy to stabilise at 70%-75%."
You will pay about 800 000 dirhams (R1,5m) for an average unit at Laguna Towers. Clearly, the three-year guarantee from late 2007 to 2010 is needed to cover the oversupplied market. IFA's guarantee is for a net return, so you will get R121 500/year.
But you have a one-month use of the unit as well. So the actual return is 8,7%, almost the same as the Lincoln during its guarantee period. From 2010 you will get 50% of the pooled room revenue. HVS forecasts a 50% increase in the room rate to R1 170/day, less commission of, say, 15%. So you would get R497/day. At 70% occupancy, your income would be about R90 750/year or 6% net yield. With 30 days' use, this increases to 6,7% - similar to the Lincoln.
The Dubai investment is international and needs no management. But it is far from home. The Lincoln might have more potential for growth as Melrose Arch reaches completion.
You need the IFA guarantee. Unless you are risk-averse, you would probably be better off negotiating a discount of, say, 5% with Kirchmann Hurry to give up the guarantee and increase your yield.
- The writer's airfare to Dubai and hotel costs were paid by IFA Hotels & Resorts
