Gulf News

Ask the agent

Should I assign my property to a leasing broker or a property manager?

You enter into a leasing agreement when you wish your real estate agency to locate suitable tenants for your apartments and facilitate the signing of the tenancy agreement, leaving you to assume the responsibility of managing the tenants and all aspects of the property thereafter. A property management agreement includes more. It provides an assessment, strategy and activity plan designed to harness the financial potential of your property. Considerations include history; current market, economic and risk factors; regulations; finance; and market dynamics. An activity plan covers pricing and marketing, customer relationship and tenant management, and policy and cost management. These will be performed under a property management agreement. A good property manager will make your investment work harder for you and the returns you receive will outweigh any fees.

I wish to sell my villa, but the garden needs a little bit of work. Is it worth investing in improving the garden? Am I likely to get my money back?

For your garden to become a selling point, you need to establish a low-maintenance and functional landscape that is highly appealing to the potential buyer. Resist the temptation to clutter the landscape with every species of flora known to man. Plants grow and you need to keep that growth in check as your garden can look unkempt and create a negative impression. Ensure that all landscaping elements must be coordinated carefully. If you don’t know or understand the differing qualities of certain soils, it’s time to call your landscape gardener and have him produce an impressive garden for you. Even if you don’t plan on selling your home for another five or 10 years, now is a good time to lay the foundation for a great landscape design that will win over your future homebuyers.

I am planning to invest in Dubai. As this would be my first investment, can you give any useful tips.
First of all, know why you want to invest in property. You must have a clear understanding of what you are trying to achieve. Then you must set your financial objectives carefully. Success in property investment can only be attained when (and if) those objectives have been realised. Always think long term for your greatest success. Those who have had the greatest success possess the ability to think long term, make rational, well-researched and carefully thought-out decisions with the end objectives in mind and understand that every real estate industry globally will go through cycles of growth and contraction. Make sure you know your stuff by being able to communicate knowledgeably with the experts. Always strive to eliminate risks. Plan your finances, cash flows, capital requirements and debt levels carefully.

With many new projects and off-plan opportunities, I am nervous about the quality of end products. Can we expect an improvement in quality?

During the global financial crisis, many developers realised that properties of poor quality were dealt the harshest of value declines. As a result, many developers did not survive. Having said that, the old caveat of “buyer beware” still applies. Deal with a reputable developer. Ask around or seek professional guidance. Ask what proactive measures are taken to ensure the end product has been built to an acceptable standard. Warranties and any quality assurance policies should be discussed in detail, and have the sales and purchase agreement reviewed by a professional. Engage an expert to inspect (snag) your property and report any legitimate issues to the developer for rectification. Remember, once you have taken ownership of the apartment, the developer is still obliged to fix any issues that may arise during the full 12 months following the transfer of ownership.

Question of the Week

I am buying an off-plan property. Can you explain the principle of escrow.

An escrow can be described as a legally recognised financial instrument held by a third party (typically a bank) on behalf of two other parties (typically a buyer and a seller) who have agreed to conduct a particular transaction in accordance with certain conditions. Funds are provided by the buyer and held by the party (bank) providing the escrow service until it receives the formal advice that certain previously agreed obligations of the seller have been fulfilled upon which time, the seller can receive funds to the amount specified in the agreement between the seller and buyer.

The use of escrow accounts by Dubai developers has now been mandated by law for the purpose of protecting the prepayments made by buyers. This limits developers from gaining access to funds until certain construction milestones are completed, helping ensure developers are not misappropriating funds provided in advance for purposes other than which they are intended.

Anybody can open an escrow account, but not anybody can open one for the purposes of property development in Dubai. The developer must first be registered as a bona fide developer with RERA which involves providing documents including details of its officers and solvency, title deeds proving ownership of the land to be developed, NOC from relevant parties to performance guarantees.

Gulf News Saturday, June 10,2017
FREEHOLD

FACTORS THAT IMPACT THE REAL ESTATE SECTOR

By: Mohanad Alwadiya
Published: Gulf News Freehold

With the advent of globalization and the exponential rise of cross border capital flows, the number of factors that affect local economies and the industries that operate within those economies has increased dramatically in both number and complexity. Here are some that we will be considering as we advise our clients in 2017.

Oil. Despite the amount of diversification that has occurred in the Dubai economy and the small proportion of Dubai’s GDP that oil represents, the price of oil still affects liquidity levels, oil dependent economy’s performance and overall investor confidence. There is no doubt that that maintaining oil at or above the $50 / barrel for the duration of 2017 will assist in creating market stability.

Currency rates. With anywhere between 40% and 50% of investment in Dubai property coming from investors who usually deal in currencies that are not pegged to the US dollar, any strengthening of the US dollar makes it more difficult to invest in Dubai for those investors. A recent example is the devaluation of the Russian ruble which resulted in Russian investment declining significantly in Dubai’s property market. The USD is likely to strengthen in 2017 as we see the US Federal Reserve continue to raise interest rates and the effect of Trumpenomics and “America First” protectionist policies begin to take effect.

Political instability. Almost omnipresent for well over a decade, the level of political instability in the world today seems unprecedented. From Middle East conflicts, Chinese actions in the South China sea, North Korean nuclear ambitions, Brexit and even significant dissatisfaction with the US election result and subsequent presidential performance, the world is a very unsettled place which leads to investor nervousness. There are no signs that political instability is going to ease any time soon.

Demand and supply. As always, economic fundamental will always play a role in any industry performance. 2017 will see a continuation of balancing of the demand / supply situation in the market as the recent pivot towards affordable properties makes up a greater proportion of deliveries and the demand generated by the rapidly approaching 2020 Global Expo accelerates.

Legal framework. The legal framework that has been developed for the property industry in Dubai has is both comprehensive and effective in protecting the rights of tenants and investors and holding developers to account. Developments will continue in 2017 further increasing the already high levels of confidence among investors with regards to their legal protection and risk minimization.

Mortgage market/ regulations. Historically, mortgages have represented no more than 30%-35% of property sales in the emirate. This ratio has now climbed to well over 45% during 2016 and, in some months, levels of 60+% were achieved.  This is great news for several reasons.

First, this trend highlights both confidence of lenders and consumers, mostly owner occupiers, in the market. The second reason why this is such good news is because we are witnessing, in real time, the market adapting to legislative changes that were made in early 2014. There is no doubt that the implementation of the mortgage caps earlier in 2014 had affected the demand for many first home buyers who were relying on a mortgage to acquire their dream home

Finally, a growing number of mortgages are being undertaken for properties that are purchased in the more affordable areas of Dubai, which further demonstrates the systemic shift to affordable housing in the Dubai property market is becoming even further entrenched as a long-term characteristic.

Confidence levels/ buyer’s sentiment. Confidence levels of investors globally have been shaken by the global events of the past few years. The levels of uncertainty surrounding economic policies, geo-political turmoil and social discontent in many countries around the world has created an environment of indecision amongst investors. Nevertheless, the property industry has weathered this quite well and showed a maturity and flexibility that wasn’t evident earlier in the decade. Sure, prices have declined since 2014, but this has been more because of a much-needed market correction. While global events have had an effect, the market’s resilience has been impressive.

Performance of other investment instruments (stock markets, gold, equities, bonds). There is a global competition for a greater share of the capital pie. Capital will always follow the best risk adjusted returns and movements can be swift and of great magnitude. They can be so dramatic that some governments will restrict capital flows. For example, China recently announced new restrictions on capital flows out of the country. Observations from property industry pundits all around the globe suggest the new restrictions are already putting the brakes on what has been the biggest global real estate accumulation by any nationality in modern times. While Chinese demand will continue to benefit many markets those who had not previously established off-shore assets will find it significantly more difficult to invest beyond Chinese borders until the restrictions are raised.

Infrastructure development / government spending. The ongoing commitment to economic development and the associated infrastructural spending has been well-chronicled. The continuing preparations for the 2020 World Expo will help the local economy achieve around 3.5% GDP growth for the year which is very healthy by global standards.

Taxes and transaction costs (registration and transfer fees, commissions, NOC fees) The costs of transacting in real estate in Dubai compare well globally and no new costs or fees are expected to be introduced in 2017. Somewhat conversely, we expect the slew of offers in the market place designed to increase affordability to continue. Great news for first home buyers and investors.

Annual service charges and overall cost of ownership (utility fees, maintenance, insurance, PM costs) Similarly, the costs of owning and operating property is expected to remain stable and should not affect buyer’s decisions other than normal calculations regarding yields, cashflow and asset protection.

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Commercial property investment

The majority of my clients are comfortable with investing in residential property because most have rented or bought a property for their own use and therefore understand what that experience entails. However, very few have actually had a similar experience with commercial property and, therefore are a little less confident in investing in this potentially lucrative segment of the market.

So, why consider investing in commercial property?

Commercial property can add diversification to a property portfolio. Segments within the Real Estate market rarely move in tandem and a mixture of residential and commercial property can make an overall portfolio more resilient to inevitable market cycles.

All things being equal, commercial properties generally produce an ROI at least double that of residential properties. This is mainly due to lower per sq. ft.capital cost but also reflects the higher levels of risk associated with owning commercial property.

Managing tenants in a commercial property is also more straightforward. You will have a business-to-business relationship with your tenant and many of the emotional issues which can complicate residential leasing arrangements won’t exist. It’s easier to keep interactions professional and focused and relationships are built over time with the opportunity to attract a ‘blue chip’ tenant and are likely to rent your property for a long period of time and less likely to default on rental payments. In many cases, commercial tenants and property owner interests are aligned. The tenant wants an efficient operation which presents a favorable impression to his customers, business associates or peers and, in this way, is more likely to assist the owner maintain or even improve the property.

Establishing a true value of the investment is often easier with commercial property. Reviewing the current owners’ income statement and existing lease details will provide a good indication of the likely future cash-flows and help to establish an accurate valuation. Residential properties are often subject to more emotional pricing or developer inefficiency and cost recovery considerations.

Lease variations abound with commercial properties. The requirements of a tenant operating a high turnover major regional distribution and logistics center for non-perishable goods will be vastly different of those of a tenant who requires refrigerated goods storage to supply local retail outlets in shopping malls. In addition to lease rates and periods, negotiations can include such items as maintenance, implementation of storage and logistical systems, provision of office fit-outs, insurance, lease to buy provisions and options … the list goes on. The variations are countless.
However, there are some possible downsides that the investor should consider.

Let’s use a warehouse as an example. As most commercial leases are of a duration exceeding 2 years, with many being of 5 years duration with options for an additional term of 5 years, it could take some time to find a new tenant for the warehouse. Additionally, your current tenant may vacate due to tough economic conditions. Residential property can be resilient when it comes to economic factors over the long term and finding new tenants is not as difficult.

As the lease for each commercial facility can be negotiated with flexibility only limited by law, owning a portfolio with numerous commercial properties can be time consuming and complicated. You will need professional help if just to handle issues such as maintenance and emergencies. Remember, your clients are in the business to make money and will be relying upon you to address any issues that arise with your property immediately. They, like you, do not want to forgo any revenues or incur any costs because of a problem with the property or premises that you provide.

Purchasing a commercial property of a size that can generate significant cash flow will typically require more capital up front than a residential investment. Also, as the scale or size of the premises can be huge, unexpected repairs or major maintenance items can also be very expensive. This requires careful provisioning for expenses and emergencies when calculating lease rates and free cash-flows for re-investment.

There is a greater array of physical and safety risks associated with commercial properties. Warehouses, for example, are often frequented by trucks, forklifts or other heavy machinery which means damage can be substantial from accidents. Having proper insurance is a must, not only for damage to premises and systems, but also in the event of personal injury or death where you, as the owner, can be held liable. Remember, your investment is actually operating as a commercial venture and can receive high volumes of people traffic.

As usual, greater returns will attract greater risks, however, as part of an overall balanced investment portfolio, there is no doubt that commercial space can be very lucrative indeed.

Published: Gulf News Freehold
Dated: 26-March-2017

Why buy rather than rent this year?

I am predicting that over 70% of the people who are reading this article are concerned about ensuring their financial security by building equity or “net worth”.

I am also predicting that every person reading this article understands that owning property allows will allow them to achieve their financial security goals by building an asset base that will serve them and their families’ well into the future.

For those who don’t act upon that knowledge, the opportunities that will emerge in 2017 will go begging and are bound to be viewed in retrospect with some regret by the clear majority of Real Estate investors because, put simply, only a few will open their eyes to the opportunities that 2017 will offer. History has shown us time and again, the majority will be too late to make the most of the opportunities on offer today. They will wait, pontificate and procrastinate and, later ruminate on how they missed the boat.

If you are living in Dubai now, you are uniquely placed to take advantage of a variety of positive developments.

For a start, the market is offering the best value for some time. A slew of affordable properties that have been launched over the past 2 years and there will be more launched in 2017. This structural shift in the market has been a boon for first home buyers and affordability, or a lack thereof, as a reason to continue to rent is disappearing fast. Whether it’s an affordable studio or a luxury villa, there are great value opportunities in every segment of the market supported by the most affordable payment plans seen in years.

Also, the value of your property will be increasing as the US dollar continues to strengthen in 2017. The US Federal reserve is committed to normalizing interest rates in 2017 which is good news for investors who are holding assets denominated in or pegged to the value of the US dollar.

And then there are mortgages themselves … although interest rates will be increasing going forward, they will remain at very affordable levels for quite some time. Now is the time to do some financial planning to determine how you can obtain that most desirable of assets, the family home.

And the economic environment will improve from this time forward. Put simply, Dubai needs people to support an economy that is expected to grow at an estimated annual average of 5% for the remainder of the decade and to deliver initiatives such as the 2020 World Expo. The Expo alone is expected to generate an additional 270,000 jobs and drive demand for housing and commercial facilities that, by and large, don’t currently exist. 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% annual increase from today’s population of 2.25 million.

While the price of oil is a big issue for the region’s economies, with oil representing only about 4% of Dubai’s GDP, the effect of the decline in oil prices is not as drastic as some may think. Infrastructural spending continues unabated with the total budget outlay of Dh 48.7 billion for 2017 being marginally up from Dh 48.55 billion allocated to 2016. Looking at the 5-year budget plan of Dh 248 billion, the average annual spending of Dh49.6 billion is higher by 6.5 per cent than Dh 46.6 billion spent during 2014 to 2016 inclusive. This is significant as it demonstrates an unwavering commitment to economic and societal development.

Dubai’s economy is being driven by fundamentals such as tourism and trade and a slew of new projects to grow these important revenue generating economic segments. Predicted by Mastercard’s Global Destination Cities Index to be the 4th most popular destination in the world by year end, Dubai will have welcomed almost 16 million overnight visitors in the by the close of 2016. This will represent a 12% increase over 2015 and continue a trend of approximately 10% per annum since 2010.

And those visitor number will seem paltry once the 2020 Expo kicks off. And the 277,000 extra jobs that are generated to ensure the estimated 20 million visitors to the Expo see Dubai in its most favorable light cannot be underrated in terms generating significant 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 is sure to have a significant effect on property values.

The structural shift towards more affordable housing will not only serve to accommodate the expected rapid population growth associated with the 2020 expo, but also serve as an important factor in the development of the Dubai economy overall. Every emerging economy needs to develop a strong middle class as its expansion is critical to growing a sustainable economy and developing resilience in the face of external financial and economic shocks.

2017 will be remembered as a year of the astute investor. When opportunity knocks, be ready to welcome and embrace it.

Published: Gulf News Freehold
Dated: 19-March-2017

REITS… preferred by some investors

In November of 2016, Saudi Arabia created its local version of a Real Estate Investment Trust (REIT). The reasoning behind this move was to enable the smaller investors to provide liquidity to the market and support government efforts to resolve a housing shortage and increase the percentage of housing generated by developers to 30 per cent from its current level of 10 per cent.

So, while there are advantages for the government to have financial structures such as REIT’s to support burgeoning property and construction industries, what are the advantages for the investors who will be providing the capital?

There was a time when the property game was for the wealthy investor and those with only small amounts to invest had to look elsewhere to invest their hard-earned capital. This is no longer the case due to the rise of new investment platforms which enable even the smallest of investors to enjoy the returns of investing in property.

One such platform which is relatively new to the local market is the REIT. REIT is an acronym for Real Estate Investment Trust which, as a trust company that accumulates a pool of money through an initial public offering (IPO), buys, develops, manages and sells real estate assets. The IPO is identical to any other security offering with many of the same rules regarding disclosure and reporting requirements and regulations.

Investors, whether large or small, instead of purchasing stock in a single company, have the opportunity to buy a unit which is actually a portion of a managed pool of real estate. This pool of real estate then generates income through renting, leasing, selling and financing of property and distributes it directly to the REIT holder on a regular basis.

Units held in a REIT can be bought like a stock on a stock exchange. The REIT invests in real estate directly, either by buying, selling or leasing properties or by investing in property mortgages.
There are 3 types of REIT’s. Equity REITs invest in and own properties and therefore are focused on increasing the value of those properties while also accumulating revenues from their properties’ rents. Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans while Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.

Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in REITs that are listed on the stock exchange. Among other things, REITs invest in shopping malls, office buildings, apartments, warehouses and hotels. Some REITs will invest specifically in one area of real estate – shopping malls, for example – or in one specific region, state or country. Investing in REITs is a liquid, dividend-paying means of participating in the real estate market.

REITS allow both small and large investors the ability to invest in real estate without investing large amounts of capital or devoting a lot of time in directly managing a property portfolio. A REIT also allows a greater amount of portfolio diversification because of the large amounts of pooled funds available to the REIT Management team enables the accumulation and operation of different types of property assets in different locales.

Investing in a REIT is no different to investing in any company. Some companies represent lucrative opportunities, while some companies may represent too much risk or poor value. Investors still need to look at the REITS performance in terms of Nett Asset Value growth and dividend payment history, current portfolio composition and performance, the management team, future plans for the REIT as well as have an understanding of the likely performance of the property market and overall economy in which the REIT participates. Investors, having completed a thorough and in depth assessment of the probability that the REIT will provide desired returns, can participate at the level that is consistent with what they can afford to invest.

Another investment platform which allows smaller investors to participate in the property market is Crowdfunding. A relatively new concept Crowdfunding entails the pooling of funds by a group of individuals to finance initiatives such as real estate investment projects. This is usually done via the internet.

The advantages are obvious. Investors get access to the real estate market with small amounts of money and can pick and can efficiently choose which Real Estate projects they wish to invest in, thereby spreading risk and enabling the possibility of building a portfolio made up of a variety of assets, in a variety of locations being developed by a variety of developers.

For developers, Crowdfunding provides another source of funding for their projects. Using the internet is an efficient way of attracting interest to their projects and the reach that the internet provides magnifies the potential for raising funds more quickly.

However, as with any investment, Crowdfunding is not without its risks. Obviously, investors will be exposed to any gyrations in the market along with all the other investors. In addition, the risk of default from developers can be higher when compared to peer-to-peer and direct real estate investment funding. In addition, unlike investing in a REIT, the absence of a secondary market restricts the ease with which an investor can liquidate his or her position. These risks need to be considered carefully when determining the type of return required and, as with any investment, extensive due diligence by all investors, regardless of whether they be big and small, is of paramount importance.

Investing in 2017? Five key points to ask

1- HOW MUCH DO YOU REALLY KNOW ABOUT PROPERTY AS AN INVESTMENT?

You must have some knowledge about any investment that you might be considering. Property is no different. The old adage of “Don’t invest in anything you don’t know” applies. You may not be an expert, but you need to be able to communicate intelligently and knowledgeably with the experts.

Do some homework on the industry and gain an understanding of where the industry is now, where it is headed and what is driving its direction and development. Get a feeling of its composition and what it has to offer you in terms of wealth generation opportunities, how you might be able to engage those opportunities and when you envisage starting your foray into the property investing space.

It’s difficult for anybody to accurately assess opportunities and the risks associated with those opportunities if they have little knowledge of what it is they are investing in.

2- ARE YOUR INVESTMENT OBJECTIVES CLEARLY DEFINED AND WELL CONSIDERED?

As with any investment, 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 a clear understanding of what you are trying to achieve and what role your property portfolio will play within a larger diversified investment portfolio. What proportion of your total investment portfolio is allocated towards property? towards stocks or bonds? towards gold or commodities? etc.

The only person who can determine what you are trying to achieve is you so be sure you know you’re your objectives are before doing anything.

3- WHAT IS YOUR SOURCE OF FINANCE?

Needless to say, investing in property is often a capital intensive exercise and, depending on your strategy, returns can be subject to relatively long lead times. A sufficient and robust finance plan is essential.

What is your source of finance and where do the greatest risks lie in the event of an economic downturn or change in circumstances?  How liquid might you need to be? How exposed will you be to interest rate increases and or exchange rate fluctuations? What level of gearing or leverage are you comfortable with? Will you be able to preserve capital invested in your property portfolio during cyclical swings in the market or will you need to move capital among portfolios?

All these questions (and many more) need to be addressed and the more skillful you are at conceptualizing your wealth generation schematic, the greater your likelihood of generating successful strategies to grow your wealth.

4- DO YOU HAVE A FINANCIAL ADVISOR? (THAT YOU TRUST)

I always recommend that clients consult with a financial advisor prior to embarking upon the purchase of a property.

Investing in property requires careful planning and a clear understanding of what it will entail; the effects it will have on lifestyle, the risks it may pose, the stresses that may emerge while, at the same time, the benefits of generating wealth in, what can be,  a very lucrative industry . A financial advisor can help you understand and assess all these elements by helping you determine what you actually need to do (or do without) to achieve your objectives.

Ask yourself if you know definitively what you can afford, how best to use available finance, how to accurately assess alternative investment options, how best to utilize your current assets and how investing in real estate is going to enable you to grow your wealth in the future. A financial advisor will view your investment as one part of your overall financial landscape and should be able to guide you into committing the right type and the right amount of resources to acquiring that dream home that everybody aspires to.

As with any investment, investing in property is all about recognizing and capitalizing on opportunities that are consistent and supportive to your overall wealth accumulation objectives.

5- DO YOU HAVE A TEAM OF PROFESSIONALS (THAT YOU TRUST) WHO CAN ASSIST YOU IN YOUR QUEST?

Are you able to identify, engage and work with a professional in the industry? Do you have the skill to select the right agency? Do you know what separates professionals that will provide you with tangible added value rather than simply line their pockets with your money? It’s up to you to choose wisely and remember, cheapest is not always best.

Do you know where to find an experienced and passionate team with people who really enjoy what they are doing? An agency that exhibits a breadth and depth of industry knowledge and expertise? This is important.

Look for longevity and evidence of good relationships with key industry stakeholders such as the major developers or authorities such as the   Dubai Land Department, RERA, DEWA or Economic Department.

And finally, look for an agency that has received some form of Industry or peer recognition. These are the hardest plaudits to get!

Mortgage trend in Dubai set to continue

There has been a very pleasing trend that has developed during 2016 which is yet another demonstration of the development and maturation of Dubai’s Real Estate industry.
The marked increase in the utilization of mortgages to purchase properties in the emirate demonstrates a market that has undergone a structural shift to supply more affordable properties and the maturation of buyers in structuring their financial affairs to obtain a mortgage and buy the home of their dreams. For the first t.

Historically, mortgages have represented no more than 30%-35% of property sales in the emirate. This ration has now climbed to over 50% during 2016 and, in some months, levels of 60+% were achieved.

This is great news for several reasons.

First, while this trend highlights confidence of lenders in the marketplace it also highlights the increasing confidence of consumers, mostly owner occupiers, in the market to the extent that they are prepared to take on the risks associated with committing to a mortgage for the sake of purchasing some property.

This is very important to the development of long term sustainable growth for the industry as the bedrock of any property industry is its owner occupiers.  They represent the core of the industry as it is they who view property as an investment in life, not just a way to make a quick buck. And yet, historically, they have attracted focus in a market still undergoing the maturation process which is falling short and not proportionate to their importance.

Owner occupiers see Real Estate in a different light. For them, it’s about creating a lifestyle. It’s about creating a home which will provide an environment that is safe and secure within which the individual, couple or family can grow and develop in all aspects whether physical, emotional, social and, of course, financial. In this respect, they have a lot more at stake than those investors with financial interests only.

Typically, they form the core of society, not overly wealthy, who are concerned with providing the family with a future. For some, the purchase of the first family home is the first step towards creating a legacy which hopefully, for the more romantically minded, will turn into a dynasty. These are the dreams which make owning their own home the most important decision they are likely to make. They are in it for the long term; there is a lot at stake, which is why availability of finance through mortgages is critical.

The second reason why this is such good news is because we are witnessing, in real time, the market adapting to legislative changes that were made in early 2014. There is no doubt that the implementation of the mortgage caps earlier in 2014 had affected the demand for many first home buyers who were relying on a mortgage to acquire their dream home.  I remember writing an article at the time of the legislative change and observing the following …

“At Harbor, we see 62% of our clients who were considering buying a property prior to the mortgage caps delay their purchase until they can accumulate the down-payment differential while 38% have settled (or compromised) for a cheaper property to get an initial foothold in the market.”

As predicted, “… the new mortgage caps have certainly produced a definite lag in demand as clients adjust to the new financial realities and many of these clients are planning to participate within the next three years.”

 I am pleased to say, that these observations have essentially been proven correct. The legislative change made by authorities was implemented to help cool what was then, a rampant market. The desired effect was achieved but buyers didn’t simply disappear, they modified their purchasing behavior, another sign of an increasingly resilient and maturing market.

Finally, a growing number of mortgages are being undertaken for properties that are purchased in the more affordable areas of Dubai, which further demonstrates the systemic shift to affordable housing in the Dubai property market is becoming even further entrenched as a long-term characteristic.

A natural occurrence within any economy that is growing rapidly and is formally recognized as maturing and transitioning from being a “frontier” to “emerging” market as Dubai did back in 2013, is that its middle and lower-middle income segments will expand to support the rapid rise in commercial activities and economic initiatives being instigated by entrepreneurs and corporate or government entities. This expansion is unavoidable if the economy is to grow and providing affordable housing to enable this expansion is a critical element to the future growth of Dubai and the development of the Real Estate industry into a mature model that can efficiently cater for a broad and diverse set of people with different incomes, tastes, preferences and requirements.

And demand is set to grow very rapidly. A case in point … the World Expo is predicted by independent analysts to create over 270,000 jobs. The vast majority of these jobs will not be for people occupying senior executive positions. They will be for people in middle management or lower positions, many with families, who will be seeking affordable accommodation.

The importance of maintaining affordability for the average buyer is critical and the availability of affordable finance in the form of mortgages is vital to enable many to gain access this lucrative market going forward.

The YEAR 2016 WAS NOT JUST ABOUT OIL

By Mohanad Alwadiya
CEO, Harbor Real Estate
Senior Advisor & Instructor, Dubai Real Estate Institute

I believe that the malaise that was felt in Dubai’s real estate industry was due to a wide variety of factors, not just the price of oil and that considering oil prices alone is simply too one dimensional. The factors that have affected the Dubai property industry in 2016 are many, varied and, in some instances, quite complex.

Many investors had high expectations for 2016 but not many really expected 2016 to announce its arrival with such mayhem and drama. In short, most investors started the year peering into a fog of uncertainty with only continual negative headlines to guide their reasoning.

The issues in 2016 were as varied as they were significant. Everything from a U.S. presidential race that has the world bemused (and perhaps frightened as to its outcome) to doubts regarding the capability of China to effectively manage and steer its economy away from being export driven to relying on local consumption and the development of its middle class to a massive refugee crisis will continue as long as there is violence in the Middle East which, of course, shows little sign of abating.

Then there was the continuing saga of U.S. Federal Reserve’s shift from the near-zero interest rates that continued to spook investors to the extent that all rational and fundamental analysis enabling investment decisions seems to have been replaced by an intense and sometimes amusing focus on the vocabulary and grammar used in Fed statements in an effort find some hidden indication of its intent. Thankfully the Fed raised interest rates on December 14, putting to rest all the unnecessary speculation and pointless chatter that was crowding the airwaves.

Meanwhile, the ongoing collapse of oil and commodity prices had threatened to trigger recessions in emerging economies like Russia and Brazil all at the time that Europe continues to struggle for growth. Thankfully, OPEC and a few other oil producing nations such as Russia finally came to some agreement to cap supply after realising that unbridled production in pursuit of long term market share was beginning to destroy some economies.

Then of course, there was Brexit, the effects of which will be as diverse as they will be complex… if only they can figure out how to do it! Experts are still unsure as to  how the decision made by the majority of Brits will affect everything from the European geo-political and socio-economic landscape, the strength and resilience of the European Union in the face of further discontent within its member states, the social and economic ramifications to a newly  “independent” United Kingdom and the inevitable question as to whether the United Kingdom can remain united given the Scottish and  Northern Island  wishes to continue as part of the EU.  The pound has plummeted and is likely to remain subdued for some time.

Not surprisingly, the IMF trimmed its global growth outlook for 2016 to 3.1 percent, down from 3.6 percent, however it is forecasting 3.4 percent for 2017.

So, what could an investor do in 2017? …  mired in the depths of despair and confusion at the deluge of negative headlines, Trump tweets and seemingly shallow financial advice and at the direction of global economies and financial markets, and feeling clueless as to where the opportunities for returns on his hard-earned capital might be?

Well, investing in Dubai Real Estate has still provided significant potential to satisfy the appetite for investment returns and the fundamental reasons are compelling.

As detailed above, an economy growing on the back of strategic commercial and infrastructural initiatives unique to the region driving population growth of 7% annually makes investing very interesting, particularly when taking the medium to long term view.

Tourism and Trade are flourishing in Dubai and the focus of spending has been on new projects to grow these important revenue generating economic segments and further diversification. The launch of 2 major theme parks in 2016 will ensure Dubai attracts over 15 million visitors in 2017, continuing a growth trend of approximately 10% per annum since 2010 and is well on track to attracting over 20 million visitors in 2020.

Then, continual diversification of the economy provides reduced risk and is the language of economic planners now, not oil, and any risk is well compensated for by superior returns with rental yields in Dubai being among the highest in the world with the added advantage of favourable tax conditions for most investors.

ESCROW AND HOW IT CAN PROTECT YOU

By Mohanad Alwadiya
CEO, Harbor Real Estate
Senior Advisor & Instructor, Dubai Real Estate Institute

There are not many people who understand the concept of escrow and how this legally binding arrangement can provide a substantial level of protection for investors.

In its simplest form, an escrow can be described as a legally recognised financial instrument held by a third party (typically a bank) on behalf of two other parties (typically a buyer and a seller) who have agreed to conduct a particular transaction in accordance with certain conditions. Funds are provided by the buyer and held by the party (bank) providing the escrow service until it receives the formal advice that certain previously agreed obligations of the seller have been fulfilled upon which time, the seller can receive funds to the amount specified in the agreement between the seller and buyer.

The use of escrow accounts by Dubai developers has been mandated by law for the specific purpose of protecting the prepayments made by buyers for properties that are being bought off-plan. This limits developers from gaining access to funds until certain construction milestones are completed helping to ensure developers are not misappropriating funds provided in advance for purposes other than which they are intended.

Anybody can open an escrow account but not anybody can open an escrow account for the purposes of property development in Dubai. The developer must first be registered as a bona fide developer with the Real Estate Regulatory Authority (RERA) in Dubai which involves the provision of an expansive array of documents ranging from those which establish the bona fide nature of the developer including details of its officers and solvency,  Title Deeds proving ownership of the land to be developed, No Objection Certificates (NOC) from relevant parties such as the Master Developer to performance guarantees backed by a financial institution and all planning and financial details regarding the project.

RERA requires that the land subject to development should be fully paid and a title deed should be issued in the name of the owner.  Where the owner of the land cannot register as a developer, RERA permits the land owner to enter into a property development contract with an existing registered developer to develop the project on behalf of the land owner.  The property development contract however must be approved by the senior legal adviser of DLD to be accepted by RERA.

Only when a developer is recognised as a “registered developer” with RERA can they apply to RERA to open an escrow account.  When selling off-plan, the developer must ensure all proceeds of sale of the units are deposited into the escrow account and are used solely for the purposes of construction of the project.  Failure to comply with the Escrow Law can lead to hefty fines or criminal charges which may result prison sentences being administered. Once the developer has submitted all the required documents to RERA and the developer is granted the authority to sell units off plan RERA will issue an NOC to allow the developer to open an escrow account with an authorized bank in the UAE.

Obviously, the bank which will be providing the escrow service needs to understand all the details of the underlying agreement to ensure that it acts in accordance with the provisions of that agreement. In this way, the bank can help protect the buyers pre-paid funds by referring and strictly adhering to the conditions of the underlying agreement

But while the introduction of escrow as a legal requirement for developers has helped safeguard the funds of off-plan investors, there are other steps that investors must take to provide additional self-protection.

First, buyers need to make sure you are dealing with a reputable developer, regardless if the developer is registered with RERA. Ask around or seek professional guidance, as those in the industry have a good appreciation of who the reputable developers are.

Warranties and any quality assurance policies should be discussed in detail. Have the Sales and Purchase agreement reviewed by a professional, to ensure you have legal recourse should any quality issues arise and make the effort to exercise your right to inspect (snag) your property and report any legitimate issues to the developer for rectification. Items which can be remedied in the short term should be fixed immediately and remember, once you have taken ownership of the apartment, the developer is obliged to fix any issues that may arise for a full 12 months following transfer of ownership.

Ask the Agent

By Mohanad Alwadiya
Published: Gulfnews
Dated: November, 2016

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

Initially, your landlord needs to give you the notice of increase at least 90 days prior to the expiration of your current contract. You should familiarise yourself with Law No. 43 which
introduced the following restrictions (summarised) with regard to 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 neighbourhood
• The annual rent increases can range from 5 up to 20 per cent 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

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.

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

It depends on an accurate estimation of construction timelines which are invariably fluid, and the demand for real estate assets due to Dubai’s growing population that is 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+ per cent annually for the remainder of the decade, and initiatives such as the Expo 2020 are expected to generate an additional 270,000 jobs, the demand for housing and commercial
facilities is expected to grow significantly. Much of the city’s planning comprehends the number of people living in the emirate to grow to 3.4 million by 2020, a 7 per cent annual increase from today’s population of 2.25 million.

How is the Dubai real estate market? Is now the best time to buy, or should I wait for prices to fall further?

The real estate market is an industry full of surprises. The Dubai market has been correcting for several months and is picking up again, as the next five years
are expected to see a strong economic growth in Dubai. My recommendation is for you to start your property search immediately in the places you like as proper due diligence can take time. If you have the cash, we suggest you pay for it outright; however, don’t be afraid to take out a mortgage with varied easy payment plans that will save you considerable amounts of money.The location, surrounding infrastructure, construction quality and developer reputation as well as building amenities or properties close to an iconic development, such as Downtown Dubai or those with close access to the Dubai Metro or Tram usually provide good returns. Finally, be purposeful, persistent, patient and pragmatic, and you are well on the way to making a very sound business decision.

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?

The simplest way to determine a good rental rate for your property is the sales comparison approach (SCA) which relies on identifying a factor that is homogenous to similar properties. For example, an apartment similar to your planned investment which attracts a monthly rental rate of Dh7 per square foot can indicate the likely cash flow you expect; however, as property managers, we do not advocate this approach.A more comprehensive method is the capital asset pricing model (CAPM) which comprehends levels of risk and opportunity cost as it applies to your investment. It identifies your potential return on investment derived from capital appreciation in addition to net rental income and compares it to other investments that you may be considering. This enables smarter investment decisions and, therefore, is the one that we use as standard procedure.

Question of the Week

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

Like any industry jargon, there are quite a few confusing acronyms used in real estate but those that you have highlighted 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 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 is excluded from the GFA.

Meanwhile, 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.

The net floor area (NFA), on the other hand, is the GFA minus the facade of the building (measured from the centre 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 and calculating potential revenues to be derived from selling or leasing a building to estimating cleaning costs.