I am considering buying property to offer for rent. I am looking at two similar offers, one of which is located within 150 meters of a metro station, and offered at a premium of around 8 percent. Is this reasonable?

Let’s first look at why property situated close to the Metro can command a premium.

It’s all about convenience, cost and lifestyle efficiency. Your prospective tenants can enjoy a cost effective, fast. comfortable and reliable mode of transport to either travel to work, visit friends or even do some light shopping. No traffic
hassles, road works, parking, and wear and tear on the family car while the requirement for a second family car is diminished. Many tenants are prepared to pay a rental premium for property which allows them to enjoy these benefits.

Our studies have shown that properties located within a.5 kilometer radius of the Metro in Dubai can command between a 6 percent to 11 percent premium when compared to Similar properties with no feasible ambulatory access to a metro

I was impressed with the Mohammed Bin Rashid City display during my last visit to Cityscape in Dubai. Do you have a point of view regarding the likely success of this development?

You are not the only overseas visitor to express interest in this amazing development. It is easy to be pressed with the concept, scale and enormous potential of the development. The concept is centered on family tourism, courtesy of the largest family leisure and entertainment complex in the Middle East, Africa and Indian Subcontinent,developed in collaboration with the Universal Studios, and supported by more than 100 new hotels.

There will be an extensive retail and cultural presence along with special focus being provided to entrepreneurship and innovation, and it is located within
convenient proximity to three of the four BRIC economies ,and on a major tourist route between East and West, and the Northern Hemisphere and the Southern Hemisphere. The market for such a wonderful attraction is enormous and, as recent years have shown, Dubai knows how to do tourism!

With prices increasing rapidly in Dubai, does it still make sense to invest or wait until things cool down a little?

A property investment requires the same approach and set of considerations regardless of the state of the market. Be very clear as to what your investment expectations are and be sure to plan for the long term.

Know what you can afford. If you have the cash, I suggest you pay for it outright; however, don’t be afraid to take out a mortgage if need be.

Finding the right property can be a challenge. Think carefully about location, surrounding infrastructure, construction quality, developer reputation and building amenities. Properties which are close to the beach, with a sea view, a golf course view or part of an iconic development such as Downtown Dubai usually provide good returns. If you have close access to the Metro, even better.

You also need to consider the effectiveness of the owners association, service charges and the quality of maintenance services as these will have an effect on the long-term value of your investment.

A lot has been made of the Investor Protection Law. I am considering buying a property but I’m still nervous that, as an expat, my legal rights aren’t what they should be. Are expat investors well-protected by the law?

Lawmakers in Dubai have been working very hard to introduce laws that better protect investor rights, and standardize and clarify the relationship between developers and investors.

There has been a lot of progress made in providing protection to investors in a variety of areas including the introduction of escrow accounts, Strata Law governing the introduction and operation of owners associations, stipulations regarding recourse where delays in the handing over of projects changes specifications of properties, defects and any material departure from the contractual provisions has occurred.

Investor protection is one of the fundamental critical factors in driving sustainable profitable growth for the industry.

Question of the Week

With recent increases in property values , I am considering selling my 2BR apartment in JLT . Do you think I should sell now or will my apartment continue to increase in value ?

I am assuming that your unit is in a good building in Jumeirah Lakes Towers, and that it is well maintained with a good tenant.

JLT has performed well over the last 18 months with value increases of around 25 percent not unusual. Rents have been rising also so your cash income should have also risen over that period.

However, I wouldn’t rush into selling just yet despite the recent upswing! Real estate is a long-term game which revolves around cycles of approximately seven to nine years.

In our company, we believe that the market has at least another two years of solid growth, and I believe the property still has a bit left to offer you financially.

If you have identified an alternative investment to give you a better income stream and capital return than what you expect to receive in the next two years, then the right decision maybe to sell.

However, if you haven’t identified a better alternative, I recommend that you hold on to the property as I believe that you will receive at least a 6 to 7 percent net rental return and achieve at least a 7 percent per annum capital growth in the next two years.

Expert Eye – Minding the interest rate trap

Expert Eye – Minding the interest rate trap

The mortgage supposed to make things easier for you should not become a burden

I read an interesting advertisement some time ago which I couldn’t forget. On offer was a mortgage with an interest rate of 3.99% fixed for two years, no exit fees, no bank arranging fees and, not surprisingly, claiming to be the best deal in the market. From the looks of it, it was a good deal indeed.

However, it begs the question that every prospective mortgagor needs to ask, that is, what type of interest rate will they be paying in the future? There is no doubt
that paying 3.99% interest for two years is an attractive proposition, but given
that most mortgagors will be paying off their home for at least 20 years, careful
thought must be given as to the effects of rising interest rates, inflation, lifestyle changes, and changing personal expenditure patterns.

It is not a question of whether or not interest rates will rise, but when. As the world slowly returns to a semblance of reasonable economic growth, inflation, important for economic growth and sought by every economy, will become a factor. A modicum of inflation is desirable (the US Federal Reserve is targeting 2%); however, as inflationary momentum accelerates,interest rates also increase to keep inflation under control as excessive inflation is highly undesirable for all of us.

This eventuality needs to be understood by mortgagors as the attractive 3.99% interest rate enjoyed today will, in all probability, be replaced with a significantly higher rate in two years’ time, requiring increased mortgage payments to cover the interest rate hike.

Consider the following simple example. A 20-year mortgage for Dh2 million with an interest rate of 3.99% will require a monthly payment of Dh12,109. An increase in interest rates to 5.99% on the same mortgage would require a significant increase of approximately 18% on the monthly payment. For the purpose of reflection, this is what happened to many mortgages in the United States leading up to 2008. The inevitable rapid growth in mortgagor defaults became a major factor in the bursting of their real estate bubble that had developed over the preceding six years, and the eventual onset of the global financial crisis.

So careful analysis is required by the mortgagor who needs to envisage his or her economic circumstances at least two years into the future. The question to be answered is: “Given my projected earning capability and desired lifestyle, what mortgage payment increase will be financially feasible and acceptable to me in two years’ time?”

There are several factors at play here. First of all, estimating a projected earning capability can be a little daunting. We all hope to progress rapidly in our professional (a.k.a. financial) pursuits, but there are generally more people disappointed than delighted with their achievements. And as history has shown, salary increases generally tend to lag behind cost of living increases so conservatism in estimating future cash flow is a must.

Then there is lifestyle. Is there a new baby planned in the near future? A new car perhaps? What effect will significant family or lifestyle events have on disposable income? Are there existing children who will need to start school in that time frame? All these events will have an effect on disposable income and, thereby,will decrease one’s financial flexibility to address interest rate shocks.

And finally, what is financially feasible may not be acceptable. How much sacrifice are you and your partner willing to make to service your mortgage? What are you willing to do without, and what lifestyle changes are you prepared to make? Once again, being honest with oneself is paramount.

So, notwithstanding economic recoveries and resurgent markets, cautious financial planning based upon realism and honest self reflection is key when planning the purchase of your dream home. Your future depends on it.