Rent Returns

Know the difference between sales comparison approach and Capital Asset Pricing Model

I have just purchased a new apartment as an investment. What is the best method of determining an optimal rental rate to attract my first tenant?

The simplest method is the Sales Comparison Approach (SCA). This method relies on identifying a factor that is homogenous to similar, if not, identical properties. For example, if an apartment similar to the one that you are planning to invest in is attracting a monthly rental rate of AED7 per sq.ft. per month, then this will indicate the likely cash-flows you can expect. This is an extremely simplistic approach that we, as property managers do not advocate although it’s surprising how many people limit their analysis to this simple method only.

A more comprehensive method is the Capital Asset Pricing Model (CAPM). The CAPM comprehends levels of risk and opportunity cost as it applies to your investment. This model identifies potential Total Return on Investment which is derived from Capital Appreciation in addition to net rental income and compares it to other investments that you may be considering.  This is a much more comprehensive evaluation tool which enables smarter investment decisions and, therefore, is the one that we use as standard procedure.

Please ensure you engage an experienced and professional property consultant when considering building your portfolio. You are about to make a big decision and should utilize expertise that will help you minimize risk and maximize your returns.

There seems to be a lot of confusion in the press as to Dubai’s Real Estate oversupply? Given the importance of Supply and Demand in determining pricing and values, how can such confusion exist?

Calculating optimal supply levels, particularly when emerging from a recessionary period when lots of project s were cancelled or delayed, is particularly challenging. It depends on an accurate estimation of construction timelines which are invariably fluid and demand for real estate assets which will emanate from population growth which, in Dubai’s case, will be largely driven by overall economic growth going forward. In addition, it needs to comprehend a lag effect from the time that conditions conducive to development are identified by developers and when properties are finally released onto the market.

Given that the economy of the emirate of Dubai is expected to grow at an estimated 5%+ annually for the remainder of the decade and initiatives such as the 2020 World Expo are expected to generate an additional 270,000 jobs, the demand for housing and commercial facilities is expected to grow significantly going forward. Much of the city’s planning comprehends the number of people living in the emirate to grow to 3.4million people by 2020, a 7% annual increase from today’s population of 2.25million.

We at Harbor take, at minimum, a 5 year view when trying to estimate supply and demand. When taking into account the nature of the markets resurgence, the strong growth in fundamental economic drivers such as tourism and trade, the levels of investment into infrastructure and initiatives and stakeholder commitment to sustainable growth, we believe that, while inventory levels may spike in the interim, they will not be excessive at the end of our 5 year forecast period.

By Mohanad Alwadiya 
Published in Property Weekly Magazine
Dated: December 2015

Leave a Reply