A worked example
The numbers below are illustrative. They are not a forecast for any project.
Assume a unit is offered at launch for 75. A comparable finished unit is expected to be worth 100 at completion, three years later. The nominal discount is 25%.
Now assume you pay the full 75 at launch, and your money could otherwise earn a return of 10% a year (your hurdle rate). After three years, 75 at 10% a year grows to about 99.8. Measured against what the same money could have earned elsewhere, the 25-point head start has almost disappeared.
The hurdle rate decides how much is left:
| Hurdle rate | 75 paid at launch, grown over 3 years | Remaining advantage against 100 |
|---|---|---|
| 5% a year | 86.8 | 13.2 points |
| 8% a year | 94.5 | 5.5 points |
| 10% a year | 99.8 | 0.2 points |
The payment plan changes the picture
Most off-plan units are not paid in full at launch. Assume instead a plan of 20% at launch, 20% after one year, 20% after two years and 40% at handover. Less capital is tied up for less time, so the opportunity cost is smaller:
| Hurdle rate | Total cost including opportunity cost | Remaining advantage against 100 |
|---|---|---|
| 5% a year | 79.7 | 20.3 points |
| 8% a year | 82.6 | 17.4 points |
| 10% a year | 84.6 | 15.4 points |
The same 25% discount is worth very different amounts depending on how and when it is paid.
What the example leaves out
- The completion value is unknown. The 100 is an assumption. Prices at handover can be higher or lower, and comparable finished units may themselves be priced differently by then.
- Delays. If completion slips by a year, capital is tied up for longer and the advantage shrinks.
- Resale restrictions. Some developers restrict resale until a share of the price has been paid. That limits the option to exit early.
- Many units at once. When a large project hands over hundreds of similar units at the same time, they compete for the same buyers and tenants.
- Costs and risk. Fees, service charges and the risk of the project itself are not included.
How we use this
In our methodology, the off-plan discount is not a reason to buy on its own. It is one input, measured against the capital it ties up, the time to completion and the liquidity of the building after handover. See the methodology.
This article is general information, not investment, legal or tax advice. UAE Portfolio is a validation-stage project and not yet licensed. Join the waitlist to follow the research.