Can oil affect realty?

MrMhannad

Everybody knows that oil is really important. To dismiss the effects of shifts in supply, demand and prices on economies will be akin to denying history and ignoring logic. But those who overestimate the consequences of the tumultuous oil industry only exacerbate fear of unlikely events.

We should have learned from the recent global financial crisis that cooler heads should prevail in times of stress. The recent reactions to the dramatic reduction in oil prices have been disturbing and far from rational.

The need for a balanced analysis

The reactions of global stock markets were noteworthy because of their rapidity and severity. They were also significant because of the lack of cool-headed analysis that should have been applied to save the situation.

The old adage of panic breeds panic sprung to mind as I received a flurry of phone calls from investor clients, finance brokers and journalists. But it also gave me an idea of the level of unease surrounding the likely effects of oil prices on Dubai’s real estate industry.

I was surprised at the short-sightedness of the opinions being offered. A balanced analysis of what a decline in oil prices really means in terms of demand for Dubai’s real estate in the long term was absent.

Those in the oil industry understand that given the costs of exploration and high level of capital required to commence greenfield operations, possible price fluctuations must be carefully considered to ensure continuity of profitable operations. In ensuring that excess profits are reserved for when prices fall, established players in the industry can smoothen out the peaks and troughs of oil revenues.

The UAE protected

So, while many doomsayers were predicting a halt in public spending and infrastructural investment in the UAE, they forgot that a decade of record oil prices has enabled Abu Dhabi alone to accumulate an estimated $800 billion (about Dh2.9trillion) in reserves. Needless to say, it would take a long duration of severely de-pressed oil prices for these reserves to be diminished.

Additionally, with an economy that as diversified to the extent that only 6 percent of Dubai’s GDP is reliant upon oil, and the fact that lower prices will assist the growth of trade and tourism, the emirate does not appear to be particularly vulnerable to a temporary dip.

Similarly, non-government oil conglomerates that enjoy lower costs of production due to more established operations and low cost extraction methods are also in a position to absorb the fall. It is only high cost operations, some of which are highly leveraged, that face a threat. But as they say, there is nothing like a good industry shake out to bring markets back to a state of equilibrium.Oil Prices

In the short term

There are several advantages to lower oil prices in the short term. If you come from a country that has to import all its energy supplies, then a decrease in the price of oil can lower costs in sectors such as manufacturing, distribution, travel, tourism and transport.

This will allow an increase in disposable incomes, which can, in turn, significantly contribute. To economic growth. And every country in the world is chasing that dream at present. Many investors who enjoy returns from Dubai’s real estate market hail from countries such as India, which can benefit enormously from cheaper energy. In fact, other than Russia, which is mired in many more serious issues, a vast majority of people comprising the Dubai investor mix will not be affected and perhaps even tangibly benefit from lower oil prices.

So why the panic? Most players and stakeholders agree that Dubai’s real estate industry has achieved a level of maturity that led to a successful rebound. Why would it succumb to this latest de development and collapse?

As an industry, we need to embrace changes and challenges. How we analyse and address them is a measure of maturity. And it seems we have some way to go.

Ask The Agent

Ask-the-agent

I heard about the Andalusia collection at the villa project, can you tell me what makes these villas more special when compared to other villas within Dubailand?

The Andalusia Collection consists of 69 ready-to-move-in premium limited edition villas renowned for their unique design, levels of grandeur, quality and value. It boasts some of the biggest plot sizes while the villas have been fitted with high quality features and fittings. Other features include marble flooring, designer staircases, an overflow swimming pool, decorative fencing, a fully enclosed and air conditioned central courtyard and unique Andalusian archways connecting large living areas, some adorned with wooden beams. The project has proven very popular. If you are interested in owning one, you better hurry because they are as popular as they are rare. And they are currently being offered with a 3-year-in-house payment plan for a limited period.

 

I would like to buy an apartment for investment purposes. Do you advise I buy in the main areas of Dubai or should I consider the projects located in the outer rings of Dubai?

I suggest you consider the more affordable areas. Properties in international City. Dubai Sports City (DSC). Discovery Gardens and JLT have benefitted from a “trickle down” effect as the market has recovered and more people are now seeking more affordable accommodation. A wide variety of apartments in Skycourts and DSC achieved YTD average growth of 20.5%, 23% and 21%, respectively with demand being driven mainly by first-time home buyers and investors such as you. International City and Discovery Gardens have shown a 23% and 26% increase in rental income since the 3rd quarter 2012, respectively. I also suggest you check the apartments in Queue Point in Liwan, and Ajmal and Windsor Residence in Dubailand. They are all expected to perform very well going forward as the demand for affordable properties continues to grow.

 

I have properties in Dubai Marina and Downtown Dubai and wish to acquire more. What areas in Dubai will have good investment potential?

Given that you are already exposed to the more upmarket areas. I suggest you use your next investment activity to diversify your property portfolio. There are some lucrative opportunities in the affordable housing segment which stand to benefit greatly from Dubai’s well-chronicled economic and population growth over the next five years. I suggest you look at the apartments in Queue Point in Liwan, Skycourts, Ajmal and Windsor Residence located in Dubailand. If you wish to diversify asset types, consider the recently launched Pacific Village located adjacent to the renowned The Villa Project. City of Arabia and Falcon City of Arabia This project offers high quality. Spacious villas and townhouses. All the above recommendations will provide you with good rental and capital appreciation returns.

 

We’re a family of five with three dongs relocating from New Zealand, with UAE work to be based in Business Bay. Which villa communities would you recommend for people like us?

You need not look further than The Villa Project. An easy 20-minute commute to Business Bay, it offers affordable and spacious living within a secure gated community complete with 24 hour security. The project was designed and inspired by Spanish architecture and is ideal for family living. It offers affordable free-standing 4.5 and 6-bedroom villas set among lush and expansive landscapes ideal for exercising your dogs, and is located within easy driving distance from some leading schools. Amenities include a mosque, children’s nursery, playground, a community center and a new tennis academy. Spinneys is currently under construction and plans are underway for a new health club. Shopping is not an issue with Dubai Outlet Mall only 10 minutes away, Mirdif City Centre 15 minutes away and The Dubai Mall 20 minutes away.

 

Question of the Week

 

How do I select the best real estate broker to represent me in buying my family home in Dubai?

For you, the homeowner, there are many consideration to take into account and what follows are just few things to watch out for.

Look for and experienced and passionate team. The best way to find such is to ask around. Seek out friends or peers who have recently conducted a real estate transaction and listen to the positive as well as negative stories.

Look for an agency that exhibits breadth and depth of industry knowledge and expertise. When conducting initial meetings, make sure you assess how much the agency or its broker actually know.

Look for longevity. Those that survived the recent recession must be good.

Seek an agency with a strong network of contacts.

Agencies with good relationships with key industry stakeholders such as major developers or authorities such as DLD, RERA, DEWA or the Economic Department will be able to operate more efficiently and effectively.

Finally, look for an agency that has received some form of industry or peer recognition. These are the hardest plaudits to get.

ASK THE AGENT

Dec20

I am considering buying an off-plan property. How do I determine its potential versus buying an established property with a history of returns?

The fundamentals still apply. Make sure that an off-plan purchase is consistent with your property portfolio strategy. Location is critical and cannot be underestimated. The asset type is also important. Be smart about the “product” that you buy. Look for certain property types in locations which you believe will be keenly sought in the future. You need to do some careful financial analysis which will enable you to determine the value of the discount that you anticipate receiving by buying off-plan. Check easy payment plans which can ensure you limit your capital exposure before completion. You also need to be conversant with financial concepts such as NPV (Net Present Value) and IRR (internal Rate of Return) to guide you when you make your decision.

 

I am thinking of adding property to my other investments, but have no prior experience. What advice can you give?

Investing in property is all about recognizing and capitalizing on opportunities that are consistent and supportive to your overall wealth accumulation objectives. You must have some knowledge about the investment you are getting. You may not be an expert, but you need to be able to communicate knowledgeably with the experts. You must have a clear understanding of what you are trying to achieve and what role your property portfolio will play within a larger diversified portfolio. What is your source of finance and where do the greatest risks lie in the event of an economic downturn? How liquid might you need to be? All these questions need to be addressed. Finally, you need to be able to identify, engage and work with a professional in the industry. Selection of the right agency is a skill in itself and it’s up to you to choose wisely.

 

I know that the market has slowed but is the slowdown being experienced across the board, or do some areas still look promising?

The affordable segment in Dubai still shows a lot of promise as these properties will be in high demand as Dubai’s strong population continues to grow on the back of a strong economic recovery. Properties located in non-prime areas such as Dubailand continue to do very well. With the recovery in real estate going from strength to strength, we have witnessed the more affordable or secondary areas of the market continue to do well where the prime areas have slowed. Examples of affordable projects that provide good rental returns and expected capital appreciation are Skycourts and Queue Point. Skycourts has seen excellent capital growth with some apartments growing by 20% to 25% over the past 18 months with rental premiums of at least 7% not uncommon. Queue Point is also attracting rental yields of 6% to 7%. Demand for this type of housing has been growing steadily as the population swells in the run-up to Expo 2020.

 

With property now cooling in Dubai, does it still make sense to invest, or wait until the market is showing signs of picking up again?

While the market is cooling a little, there are definitely opportunities available and advantages to be gained from purchasing now. The market will pick up again as the next five years are expected to see strong economic growth in Dubai, but picking the exact timing is always difficult. Start your property search immediately as a property investment requires the same approach and considerations regardless of the state of the market. Know what you can afford. If you have the cash, pay for it outright; however, don’t be afraid to take out a mortgage. Think carefully about location, surrounding infrastructure, construction quality, and developer reputation and building amenities. You also need to consider the effectivity of the owners association, service charges and the quality of maintenance services. Finally, be purposeful, persistent, patient and pragmatic in your approach and you are well on the way to making a sound investment decision.

 

Question of the week

 

Do you expect the Dubai Tram to have the same effect on property values as the metro did when it commenced operations?

The effect of a metro system on property values can be significant. It’s all about convenience, cost and life style efficiency that a fast, comfortable and reliable mode of transport to travel to work, visit, friends or even do some light shopping can bring.

Hassles with traffic, road works and parking can be eliminated, wear and tear on the family car is kept to a minimum for property which allow them to enjoy these benefits.

In Dubai, the metro definitely become a factor when considering the rental return or sale price of a property located within proximity to stations. Dubai properties located within a five-kilometer radius of the metro can command between a 6% and 11% premium compared to similar properties with no feasible ambulatory access to the metro.

We would expect to see similar moves in values of properties resulting from the new tram, providing the effect of the system addresses one of the issues confronting residents in Marina and JLT areas: traffic congestion. If the Tram is successful in reducing it, then the value will increase. We will all be watched closely as only time will tell.

 

Qualities of a property manager

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Know what you should look for when hiring someone to manage your property

Many people misunderstand the role of the property manager, thinking that it does not extend beyond the collection and remittance of rental receipts and acting as a buffer between the landlord and the tenant. Little do they realize that a good property manager will generate a greater return from their property portfolio and enable a long-term portfolio strategy to be realized.

What should you look for when selecting a professional to manage your property?

Firstly, you need someone experienced in the market. If you find somebody with at least seven years experience, you will have found somebody who has survived the global recession. That should provide an indication that he is in the business for the long term and had the skills to navigate and survive the property slump.

A competent property manager will provide a host of services for you, but the most important is the development of a property portfolio strategy. Your chosen professional must be able to articulate his thoughts after conducting a thorough assessment of your personal situation and property portfolio. He must be able to provide you with a credible strategy and activity plan designed to harness the true potential of your property and provide you with the maximum rate of return.

Not just anybody can formulate a credible and implementable strategy. A true professional will have a strong knowledge base on topics including industry history, current market factors and trends, risk factors, and the likelihood of relevant future events that will affect the performance of your property investment. This knowledge should span global, regional and local landscapes.

“Remember to choose wisely. It is your investment, and you need to ensure it is in good hands, providing you with the returns you expect.”

Forming a strategy is one thing, but being able to bring the strategy to life is quite another. You will require an activity plan which will include details of pricing and marketing, customer relationship management and tenant management. This area of expertise is related to the “topline” or revenue generation and management of the property.

Equally important are the cost management and maintenance supervision of the property. Many times, I have seen excellent “topline” performance being eroded due to poor operational and maintenance cost controls.

Managing your property portfolio will also require proper performance measurement, communications and review schedules, and status reporting and financial statements. You should always seek examples of these elements as transparency and candid performance appraisals are essential for managing your portfolio correctly.

You also need to choose a property manager who you can work with and who has your best interests at heart. Your property manager must be customer centered.

There is no point entering a business relationship that is lacking in mutual trust and respect. You must have confidence in his ability to manage a business, your business, which just so happens to be a property portfolio.

As with all investments, there will be good and challenging times. If you do not respect the manager you have appointed, the relationship will not survive the challenging times and you will need to go through the whole process of finding a replacement.

So, take your time, but invest your time to your benefit. Ask for referrals. Call some existing clients. Seek out success stories. Ask your property manager questions for you to gauge the depth of his knowledge.

Ensure that the organization you are dealing with has the resources to support the manager of your portfolio. In these times of eliminating overheads, individual performance can be inhibited because of lack of organizational support.

Finally, remember, it’s your investment, and you need to ensure it’s in good hands, providing you with the returns you expect with as little hassle as possible.

Choose wisely.