Month: February 2016

Ask the agent

Question: I have just joined the market as a property investor. Can you please help me in determining an optimal rental rate to attract my first tenant?

There are different ways by which a good rental rate for your property can be determined, the simplest being the sales comparison approach (SCA) which 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 AED 7 per sq.ft. per month, then this will indicate the likely cash flow 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 your 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 a 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 you should utilize expertise that will help you minimize risk and maximize your returns.

 

Question: Has the market bottomed out? Is now the best time to buy, or should I wait for prices to fall further?

The property market is an industry full of surprises, and it is always hard to spot the bottom of a market cycle. However, the market has been correcting for over a year now, and we expect it to pick up again sometime this year as the next five years are expected to see strong economic growth in the Dubai. My recommendation, thus, is for you to start your property search immediately as proper due diligence can take time.

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 and make sure you consider the many and varied easy payment plans that are currently on offer as many of these plans will save you considerable amounts of money.

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

Finally, be purposeful, persistent, patient and pragmatic, and you are well on the way to making a very sound business decision.

 

Question: Is there a state of oversupply in Dubai real estate? How does one know for sure?

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 the 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+ percent 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 3.4 million people by 2020, a 7 percent annual increase from today’s population of 2.25 million.

 

Question: Can you please share some details on how rental increases are determined in Dubai?

Initially, your landlord needs to give you notice of at least ninety (90) days prior to the expiration of your current contract if he wishes to increase your rent.

You should familiarize yourself with Law No. 43 which was issued on 22 December 2013, and which replaced Decree No. 2 of 2011. It introduced the following restrictions (summarized) to take immediate effect with regard to the calculation and implementation of legally allowable rental increases:

  • There should not be any rent increase if the rent for the real estate unit is no more than 10% below the average rent that a similar property commands within a neighborhood
  • The annual rent increases, as specified by the decree, can range from 5% up 20% according to how much the current rent is less than the market average
  • The market average rates are to be determined by the RERA rental index (via the RERA Rent Calculator)

The implementation of Law No. 43 is necessary to safeguard consumer interest, the overall industry and the economy at large, from rampant and unjustifiable rental increases on existing rental contracts. It does not set out to control the rental value of new contracts and, where a property is to be let for the first time, or to a new tenant, it is up to the owner and prospective tenant to agree as to how much rent should be charged for the property.

 

Question: What do the terms “BUA”, “GFA” and “NFA” mean? I have heard some realtors use these terms and, as an investor, I am left in the dark.

Like any industry jargon, there are quite a few confusing acronyms used in real estate but those that you have highlighted are very important as they relate to the actual dimensions of the property you are buying or leasing. For this reason alone, it is imperative that you understand them and their significance.

The built-up area (BUA) is the total area being developed or constructed. It is the gross floor area plus parking plus any service area associated with the subject building or project.

Meanwhile, the gross floor area (GFA) is the total floor area of a building including any underground saleable or leasable area (such as basement shops) but excluding parking and underground technical areas. Any building used as some form of supporting service plant should be excluded from the GFA.

Finally, the  net floor area (NFA) is the  GFA as described above,  minus the façade of the building (measured from the center line of glass), plant areas, service risers, building structural core, fire stairs, lifts and lift lobbies, common corridors and common toilets.

The individual measurements are used for separate reasons ranging from purchasing a building, calculating potential revenues to be derived from selling or leasing a building to estimating cleaning costs.

Capital and clarity lead to confidence

By Mohanad Alwadiya

CEO – Harbor Real Estate

Instructor & Advisor – Dubai Real Estate Institute

 

Like the proverbial race between the turtle and the hare, global economics, by its very nature, has become a machine on a constant race against time and tide.

Mid-January 2016, RBS gave a rather bleak projection of the immediate economic future by advising everyone to “sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.” Though not everybody went into panic mode, a lot of industry stakeholders did reach for that panic button while hoping against hope that the worst is over.

Now again, late last week, there was news that the global stock markets fared a little better after a slight rebound in oil prices, and the promise of interest rate cuts from the European Central Bank (ECB). The US, European and Asian markets all performed positively amid assurances of more support for the economy – which, by all appearances, must refer to the global economy – whose performance has become the bedrock of most (if not all) of our business and investment decisions.

And while we may want to separate ourselves from the global economy and assert our ability to make independent decisions based on prevailing local conditions, we are unable to do so – thanks to the phenomenon of globalization. We, as nations, are now interlinked through a series of socio-economic and geopolitical relationships from whose web we have become inevitably intertwined.

But in order to not get too caught up in what appear to be lukewarm financial prospects, and to avoid making hasty, ill-advised investment decisions, it is always useful to master the fundamentals.

In real estate, the three essential ingredients considered prerequisites for the property market to function effectively remain to be the 3Cs: CAPITAL, CONFIDENCE and CLARITY. For investors, potential owner-occupiers, developers or another industry stakeholder, these ingredients are of paramount importance in ensuring long-term profitable and sustainable growth in an industry which, in itself, is a key ingredient to long-term economic growth.

The 3Cs are interdependent whereby a shift or change in any one element will affect the other two. The relationship between all 3Cs can be either positive or negative, and can lead to a multiplier effect on growth, or can increase the rates of contraction or decline.

The amount of CAPITAL injected into Dubai real estate in 2015 amounted to AED 135 billion which, last year’s market slowdown notwithstanding, exceeded the AED 109 billion total invested in the year 2014. The exceptional performance of Dubai real estate even in the midst of global and regional economic challenges, and its ability to attract a variety of investors worldwide are strong indicators of the CONFIDENCE investors have in the quality and performance of Dubai property.

When you are investing in real estate, you are really investing into an economy, and you must have confidence in its future. The UAE economy in general, and the Dubai economy in particular, are both faring quite well as the promotion of a more diversified economy has softened the impact of last year’s falling oil prices. Economic growth in the UAE is projected at a modest 2.6 percent by IMF, with the economy being driven by fundamentals such as tourism and trade and a slew of new projects to grow these important revenue-generating economic segments.

Upcoming initiatives such as the 2020 Expo are also important in building confidence in the emirate. The effect of the 2020 Expo on the UAE economy cannot be underrated in terms of generating demand for real estate assets. Hosting the World Expo will provide additional impetus for the industry to enjoy continued growth, and the predictable surge in demand for accommodation and commercial space of all types, from labor camps to offices to warehouses to apartments to executive villas, is sure to have a significant effect on property values.

The last ingredient, CLARITY or transparency, is arguably the most important. Investor confidence in and the level of understanding of their legal rights, the consistency in the application of the law, government economic and social policy along with knowledge of  developers track record in terms of quality, integrity and proficiency can be boosted by a proactive drive for clarity.

Lawmakers have been working hard in Dubai to address the issues of CLARITY and CONFIDENCE in particular. Steps have been taken to introduce laws that better protect investor rights and standardize and clarify the relationship between developers and investors. The law is aimed at protecting investors in a variety of areas, from delays in the handing over of projects, changes specifications of properties, defects and any material departure from the contracts provisions.

These steps towards increased CLARITY, showing clear intent by the regulating authorities to develop a more sustainable and consistently profitable industry model, have been essential in driving renewed CONFIDENCE in the industry resulting in massive injections of creditors’ and investors’ CAPITAL into Dubai real estate.

So now, armed with the knowledge that several factors come into play in our business and financial lives, especially as property investors, we can now take better heed of what global economics is telling us and what we know to be, where we are, and then make sound investment decisions without having to reach for that panic button.