Dubai’s standard of living, secure environment and the business opportunities provided by Dubai have made it a hub for real estate investments from around the world. Construction finance plays a critical role in Dubai’s impressive growth, as construction sector is a cornerstone of its economic development. The mega construction projects that are taken up in Dubai like the Burj Khalifa, Palm Jumeirah etc. require considerable financial assignments that require meticulous planning and execution. The continuous growth of Dubai creates a regular demand for new residential, commercial and mixed-use properties which necessitates financial mechanisms to support the supply of this demand in the real estate sector of Dubai.
To understand construction finance in Dubai requires an understanding of various sources of funding and financial tools available to developers and investors like traditional bank loans, equity financing and government and institutional financing etc. For an investor or a developer who wishes to be part of Dubai’s success story, it is very important to understand all the nitty gritty of construction finance in Dubai. To help such entities ‘GrowBiz’ has a team of professionals who with their experience and expertise help businesses get construction finance at the best possible terms and without any hassles. In the following text, we will try to understand the dynamics of construction finance in Dubai.
Types of Construction Finance
Bank Loans:
The main tool of construction finance in Dubai is still the bank loan. In Dubai, the banks usually provide short term loans to cover the construction costs of a builder while they provide long term loans for the development of a whole project. The conditions for loan approval by a bank typically could be like track record of a builder or developer and credit history.
Equity Finance:
When a business or a developer decides to sell equity or shares of a business or a project to raise capital it is called equity financing. Investors and venture capitalists and sometimes individuals by equity in a project thereby helping the developer raise the required capital.
Real Estate Investment Trusts:
Real Estate Investment Trusts pool money from different sources such as multiple investors and venture capitalists to finance viable construction projects. The REITs help investors make money through the projects while providing the required funding to the developers.
Property Mortgage:
A business can also take a short term construction loan by mortgaging any of it’s properties in the form of a mortgage loan to complete it’s construction project. There are many mortgage loans available to a builder in Dubai like fixed rate mortgage, variable rate mortgage and Islamic mortgage loans.
Government and Institutional Funding:
In Dubai, government agencies like the Dubai Land Department and Dubai Investment Development Agency help the developers by financing their construction projects. Such partnerships between government agencies and private businesses share the risks and profits together of a project.
Project Financing:
Sometimes there are some mega-projects and infrastructure projects that have excellent projected cash flows and banks or other financial institutions provide loans to these projects irrespective of the credit history of the developer. This type of project financing is prevalent in Dubai.
Financial Tools
Construction Loans:
Construction loan is an important financial tool where a short term loan is disbursed by a bank in stages to a builder to finish the construction work. It is released in stages by the bank i.e after a stage of construction work is completed, the bank does an inspection of the site before releasing the amount.
Bonds and Islamic bonds:
In Dubai, bonds and Islamic bonds known as sukuk are also used to raise capital for a construction project. Bonds pay interest to investors while islamic bonds are based on profit sharing. Because of the adherence to islamic sharia law, islamic bonds have become popular in Dubai to raise capital for large projects.
Performance Bonds and Guarantees:
Performance bonds provide an assurance to investors that a construction project will be completed and are issued by surety companies while guarantees on construction projects are given by banks and financial institutions to give additional guarantees to developers.
Sustainable Finance:
For projects that are environmentally sustainable, banks and financial institutions offer sustainable finance options to the developers in Dubai such as green bonds and sustainability linked loans.