Gulf News

3 factors that will influence Dubai reality

Cityscape is finished for this year and the headline results are impressive: A record turnout that showed a year on year increase of 25%; over 300 exhibitors requiring 2 extra exhibition halls; a new initiative to allow sales transactions to be completed onsite resulting in a 186 per cent increase in off-plan property transactions being registered with the Dubai Land Department during the period and the reveal of plans for the Expo 2020 site gave this year’s Cityscape some real gravitas.

I walked away from the exhibition with a feeling that Dubai’s property industry has just commenced one of the most important 3 years of its relatively young life since the post Global Financial recession and that this period will have clearly defined bookends, with the recently completed Cityscape at one end and the Dubai Global Expo 2020 at the opposite end.

So, what do we have to look forward to over the next 3 years? The obvious answer is the Dubai 2020 World Expo. The market has been waiting patiently for the positive effects that the Expo generated population growth will bring to the market to eventuate.

But there are other real and pervasive influences that we need to consider and observe, for they will have a significant effect on what happens in our industry leading up to the much anticipated 2020 event.

The first challenge is VAT which has fast become the most popular acronym in the industry today. VAT is not a new phenomenon. It has been implemented in many economies around the world and is considered an efficient and equitable way for governments to collect tax revenue. As oil prices have declined significantly, oil dependent economies require new sources of revenue to continue to invest, innovate, develop infrastructure and provide services that are required for sustainable economic growth. The IMF has predicted that the USE may improve GDP by as much as 1.5% by implementing a 5% VAT. Some countries have applied 20% VAT’s to generate the revenues required by their governments.

But VAT will have an inflationary effect on the economy as most items required for everyday life will be taxed. Salaries and wage increases will likely lag the introduction of the tax which may impact disposable income levels and affect the ability to save for a house deposit.

As a purchaser of a new home, your purchase is exempt from VAT, but the price will certainly be adjusted to cover the VAT that has already been paid on the value for materials, labor, marketing and other services etc. that the developer had to incur to bring the project to market, while, sellers in the secondary market will be exempt from VAT, yet still need to pay VAT on any Real Estate Agents fees, marketing fees, and maintenance or staging fees.

The sale of Commercial properties, however, will attract the VAT, adding to the cost burden of setting up or operating a business. Once again, consumers will eventually be affected.

The second challenge will be a strengthening US dollar. In an industry where at least 40% of purchases are made by investors that hail from countries whose currencies float freely, the postponed yet inevitable interest rate hikes by the US Federal Reserve, the effectiveness of US fiscal policy and the diplomatic, trade and geo-political effects of increasingly nationalistic policies are likely to present challenges in terms of relative value and affordability as property in other markets such as the UK, Asia or Europe become more attractive. This will be compounded somewhat as the on-going saga of the Brexit implementation is likely to carry on for some time, probably leading to a continuance of a weak British pound for the foreseeable future.

A strong US dollar will also impact one of Dubai’s fundamental and burgeoning economic pillars, tourism. A strengthening AED, combined with the application of the VAT, makes visiting the Emirate a more expensive proposition, particularly if currencies of other countries competing for the tourist dollar are weakening.

Finally, there is no denying that oil prices are very important. While the Dubai economy is only minimally reliant on oil for its GDP, the price of oil does have a strong effect on the levels of liquidity available for the property market and greatly influences the confidence levels of overseas investors in the region.

Somewhat conversely, there are those that believe, for variety of reasons, that the historical inverse relationship of oil prices and USD strength has changed. If so, we may be entering a sustained period whereby oil prices rise in sync with the USD. A positive correlation would certainly help offset increasing USD strength, however, it would make a return to a weak USD and strong oil price scenario increasingly unlikely.

We live in very interesting times.

Ask the agent

Gulf News Saturday, November 4, 2017
FREEHOLD
By: Mohanad Alwadiya CEO, Harbor Real Estate

I was advised to hire a property agent to get a better deal. They show what they have and say what others offer are not good. Are they being truthful?

The real estate market, like any sales-oriented industry, is a tough place to operate in since everyone is out to make a sale for themselves. So having observed the behaviour you mentioned, it would benefit you a lot to ensure you are dealing with a reputable agency with qualified professional agents. Since embarking on a real estate investment venture is a major decision you will have to make, it would be worth your while to do a little research, or ask people with some real estate know-how as to which companies have established themselves well in the industry. You may also want to have a look at the Dubai Land Department’s Brokers App, which shows you a ranked list of approved brokers in Dubai and could assist you greatly in picking out the agency that will work with you and for you.

Where can people go and discuss, or lodge a complaint against a property developer?

It is a fact that issues related to property transactions and deals (tenant vs. landlord, buyer vs. developer, buyer vs. broker) cannot be avoided; thus, authorities have come up with platforms where complainants can air their grievances. The Government of Dubai has made a web portal called “eComplain” available on the Dubai Government website.

Through the said portal, customers may lodge a complaint and if the matter involves a specific government department, the complaint is routed to the appropriate government entity for further action and resolution.

But in order to deal with real estate matters directly, any issues or complaints involving property industry stakeholders, in this case, a developer, need to be referred to the Real Estate Regulatory Agency (RERA) if the parties involved have failed to come to an amicable arrangement regarding the issue in question.

Who is responsible for the upkeep of leased premises? Is there no scope for natural wear and tear in lease contracts?

The landlord is responsible for the general maintenance of a leased property unless the parties have agreed otherwise in the contract. The owner is also responsible for taking care of any defects or faults that affect the tenant’s use of the property.

However, sometimes the landlord may also transfer responsibility for maintenance to the tenant as it may happen in the case of some commercial leases (Article 16, Law No. 26 of 2007).

Natural wear and tear is taken into consideration by law (Article 21, Law No. 26 of 2007) though upon the expiry of the lease, it is assumed that the tenant will return the property to the landlord in the condition that the property was in at the beginning of the tenancy.

We are very unhappy with the facilities management services in our building. What recourse do we have when the landlord is unable to offer a solution?

In Article 16 of Law No. 26 of 2007, it states that “Landlord shall, during validity of the tenancy contract, be liable for undertaking maintenance of the property and shall rectify any defects or faults that affect tenant’s intended benefit from the property, unless the two parties agree otherwise.”

The law very clearly states that property upkeep and repair is a responsibility of the landlord. The Rental Dispute Settlement Centre, which is the judiciary arm of the Dubai Land Department (DLD), would be your last recourse in case you have already exerted effort to properly communicate the matter to the landlord and/or the property manager to no avail. It hears complaints and provides solutions in a transparent and efficient manner.

Ensure though that you bring with you the required documents when filing a case.

Question of the Week

Now that protecting the environment and sustainability have become essential considerations across various sectors, are there rules to encourage builders to promote human and environmental health?

The already existing Article 7 of the Dubai Municipality’s Decree No. 66 of 2003 involves the selection of glazing for facades with the objective to minimise solar thermal heat gains. However, the article does not provide for penalties in terms of non-compliance.

A Mandatory Progression programme was introduced in 2008 with an objective to ensure new buildings meet “green” standards.

A more current development, however, is the introduction of the “Al Safat” green building rating system. The rating system applies to all types of buildings including residential, commercial, industrial and others.

The four classifications are platinum, gold, silver and bronze (in descending order), and the system requires new buildings taking permits from September 1, 2016 to meet requirements for bronze certification at a minimum.

Old buildings will have to be retrofitted to meet the minimum requirements.

Meanwhile, buildings that have previously acquired green building certification will need to apply again to be Al Safat certified.

Send in your property issue-related questions to be answered by industry experts, mentioning Ask the Agent’ in the subject line, to: properties@gulfnews.corn

Mortgage trend continues this year

There has been a very pleasing trend that we first noticed in 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.

Historically, mortgages have represented no more than 30%-35% of property sales in the emirate. This ratio has now climbed to over 50%, in some months, levels of 60+% have been 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.

Understanding value-added tax (VAT)

The UAE will implement VAT at the rate of five percent in January 2018. This is not breaking news but still many people are concerned as to how the VAT will affect them personally. The VAT will affect every individual and every institution in the UAE in some way.

The easy way to understand a Value Added Tax is to consider it to be a “consumption” tax. Put simply, for most goods and services, every time somebody sells a good or service to a customer, regardless of where they are in the supply chain, 5% will be added to the price which is collected by the seller and remitted to the governments tax department.

VAT is not a new phenomenon. It has been implemented in many economies around the world and is considered an efficient and equitable way for governments to collect tax revenue. As oil prices have declined significantly, oil dependent economies require new sources of revenue to continue to invest, innovate, develop infrastructure and provide services that are required for sustainable economic growth. The IMF has predicted that the USE may improve GDP by as much as 1.5% by implementing a 5% VAT. Some countries have applied 20% VAT’s to generate the revenues required by their governments.

For businesses, there are procedural and systems that need to be implemented to ensure that compliance with is achieved in the most resource efficient way possible. Usually, this requires the implementation of an appropriate accounting solution package. Non-compliance could be expensive, with heavy penalties expected to be imposed for those businesses who do not comply.

Those businesses who are unsure of how the VAT works or will affect them, need to seek expert legal advice as to their obligations under the VAT regulations and engage accounting experts to ensure their systems and procedures are correctly recognising, applying, recording and remitting VAT.

Individuals, meanwhile, will be impacted in their everyday life. For example, Electricity and water services will be subject to VAT, so will most of the food that you buy and the purchase of that new car and any subsequent maintenance that it will require and private education will also attract the VAT.

Fittings and furniture for your new home will also attract VAT, as will services such as housekeeping, dry cleaning or laundering.

There are some goods and services that will be VAT exempt. Items such as fuel for your car, essential healthcare items, public education, air travel and taxis. It is important that, when a VAT is being applied, that the poorer segments of the population are not disadvantaged by taxing the necessities of life.

Technically, the VAT will not apply to your rental expense however landlords will be subject to VAT on items such service charges and maintenance, indirectly driving up the cost of rentals over time.

If you decide to purchase a new home, there will not be VAT applied directly to the purchase but it will be applied to the real estate agents’ fees. Of course, as a purchaser of a new home, your purchase price will certainly cover for the VAT that has already been paid on the charges for materials, labor, marketing and other services etc. that the developer had to incur to bring the project to market.

If you are selling your current house in the secondary market, the sale itself will be exempt from VAT, however, you will need to pay VAT on any Real Estate Agents fees, marketing fees, and maintenance or staging fees that you might incur.

For developers, VAT will affect virtually every supply and construction contract that exists. This will have an inflationary effect on the industry as the additional cost burden of the VAT will be passed on to the consumer. Developers need to ensure that they have the systems to recover the VAT cost and ensure that future planning considers the inflationary effect so that any possible drop in demand due to the rise in prices is comprehended with minimal effect on margins.

VAT is not something to be feared, but it is something to be understood, particularly by the business community. The only cost to business is the administration required and the expense of ensuring compliance while the consumer will only notice the effects at the cash register.

ASK THE AGENT

Which would be a better investment, buying a townhouse or an apartment?

In the UAE where there is a great deal of variation in the properties on offer, making a choice becomes all the more difficult for those who are new to property investment. The market rarely moves uniformly. There is always a difference in the investment returns to be expected from different asset types, in different areas, at different stages of completion, over different periods of time, being completed by different developers. Invest in affordable apartments or construct a portfolio of affordable apartments and townhouses, and even villas, as the case may be. But do take note of the keyword here which is “affordable.” There are many projects scattered all over the country that are filling the affordable housing void. These offer high quality, reasonably priced and extremely spacious homes with the potential to provide excellent returns as affordable housing will continue to be in demand.

I want to give my tenant a one-year notice to vacate the flat. Is there a format and any other formalities?

You need a valid reason for requesting the tenant to vacate the premises. Has the tenant breached the tenancy agreement? Has the tenant broken the law by utilising the premises for an unlawful purpose? Do you want to sell the property or occupy it yourself? if the tenant has breached the agreement or broken the law in some way, you must serve a 30-day notary public notice. It must clearly state why the tenant is being given the notice. If the tenant does not respond to the request, you can go to the Rental Dispute Settlement Center and request an eviction order. If you want to sell the property or use it yourself, you need to give a 12-month notice stating your intention through the notary public. The notice should be delivered by courier. Keep a record of the delivery report as evidence of receipt by the tenant if he refutes receiving your notice.

I am interested in working for a real estate broker as I have experience in the US. Can you please advise.

Since the UAE market is unique while sharing some general characteristics with global real estate hubs, I suggest you join a company that will enable you to fast-track your learning and mastery of the UAE property market. Go for a full service company to gain a greater understanding of what the local real estate business is all about, who the key players are and the procedures you need to be familiar with. The company you choose should be prepared to invest in you by providing you with the types of learning experiences that come with formal training (mandatory to become a licenced agent in Dubai) and in-house training. This may involve being assigned to a mentor, being placed on an internal rotation scheme to enable a broader knowledge of the business, or being given special projects that will facilitate learning. Firms that invest in high-potential people typically succeed. Surround yourself with people who are passionate about the industry.

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 per cent 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.

Question of the Week

I have mortgage on an apartment that I live in and I happen to have some cash currently. Should I settle my loan or invest the cash elsewhere?

It all depends on what interest rate you are paying on your mortgage, and what return you could expect if you invested elsewhere. If you can achieve a return greater than your mortgage interest rate, then you should invest the cash elsewhere and take advantage of the low mortgage rate you will be getting. There are some very attractive mortgage products in the market, with a few mortgage providers offering rates for as low as 3.99 per cent or even 3.49 per cent. If you have a mortgage with such a low interest rate, it would not be too difficult to find an investment that will yield in excess of your mortgage rate. For example, you may consider investing in an apartment which will provide you with a net annual cash flow of 5 per cent, and over a period of five years, an annual capital appreciation of anywhere between 5 per cent and 7 per cent. This would be a more lucrative allocation of your cash. If, however, you are not confident about achieving a return on your cash that exceeds your mortgage rate, then I suggest you pay down your mortgage outright as you will definitely be able to save on interest costs.

Escrow and how it can protect you

Off-plan investors urged to take other steps to boost self-protection.

Anybody can open an escrow account, but not anybody can open an escrow account for property development in Dubai.

With Cityscape just around the corner, more people will be considering purchasing their first home or investment property, or expanding an existing investment portfolio by making an off-plan purchase.

An important feature of any off-plan purchase is escrow there are not many people who understand the concept of escrow and how this legally binding arrangement can provide protection to investors.

An escrow is 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 providing the escrow service (bank) until the latter receives formal advice that certain agreed obligations of the seller have been fulfilled, upon which time, the seller can receive funds in the amount specified in the agreement.

The use of escrow accounts by Dubai developers has been mandated by law to protect buyer prepayments. This limits developers from gaining access to funds until certain construction milestones are completed.

Anybody can open an escrow account, but not anybody can open an escrow account for property development in Dubai. The developer must first be registered as a bona fide developer with the Real Estate Regulatory Agency (RERA) which involves the provision of an expansive array of documents.

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 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 for an escrow account. When selling off-plan, the developer must ensure all proceeds of the sale of the units are deposited into the escrow account and are used solely for the construction of the project. Failure to comply with the Escrow Law can lead to hefty fines or criminal charges. Once the developer has submitted all the required documents to RERA and 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 authorised bank.

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. In this way, the bank can help protect the buyers’ pre-paid funds.

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.

Buyers need to make sure they are dealing with – a reputable developer regardless if the developer is registered with RERA. Ask around or seek professional guidance.

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. Remember, once you have taken ownership of the property, the developer is obliged to fix any issues for 12 months following the transfer of ownership.

ASK THE AGENT

I have accumulated a portfolio of apartments and villas in Dubai. Is there still a way to make any profit during this slowdown period?

There are too many investors who are under the illusion that investing in property is almost a “set and forget” proposition, but nothing could be further from the truth. The property industry is incredibly dynamic and requires constant attention as factors influencing its performance as an investment are as broad as they are complex. Investing in property is no different from investing in any other assets. Its purpose is to create wealth but it needs to be nurtured and managed just like any other investments. With a portfolio this large, you need professional help to manage your investment, particularly during times when yield is harder to generate. You need a good property manager who will ensure that you maximise returns from your property portfolio and enable your long-term strategy to be realised.

We’re a new company looking for an office space with the best value. Should we rent or buy?

At this stage, you need to keep costs down until you become fully established in the market. The old cliché “location, location, location” is all about the convenience and prestige it can bring to any business. For instance, great value, affordable and well-constructed office spaces are found in areas like Business Bay, but may not work for your business if the location is a hindrance to your operations. We always advocate businesses acquiring their own premises if they commit to operating long term in Dubai. There is no tax advantage in leasing in the UAE and as long as your office space is appreciating, your balance sheet will grow stronger over time. If you decide to lease your premises, look for the best deal and lock it in for at least three to five years. Lease rates in Dubai will soon increase, going forward, so make sure you take advantage of current rates.

How do I know if my property consultant is giving me the correct advice?

In any relationship, trust is key. Do some research to verify the veracity of his claims and assertions. If in doubt, seek alternatives as there are plenty of property consultants out there hungry for your business. Look for experience and passion. Ask friends who recently conducted a real estate transaction and listen to their feedback. Find a consultant that exhibits a breadth and depth of industry knowledge, and expertise. Look for an agency that has been in the industry for a long time and has built good relationships with major developers or authorities such as DLD, RERA, DEWA or DED for they will be able to operate more efficiently. And finally, look for an agency that has received some form of industry or peer recognition as they lend credence to the reputation of the realtor in question.

I come from overseas and I am looking to rent a home. I heard about “district cooling.” What exactly does it mean?

District cooling for the provision of chilled water has emerged globally as a way to provide cooling to buildings in a more environmentally sensitive way. It is considered to provide great benefits in the long run and helps save on the costs of electricity. Most units serviced by chilled water district cooling are offered at slightly lower rental rates. However, ask how your cooling charges will be calculated and which are included in the cost. As to consumption charges, I assume you will have a BTU metre installed in your apartment. If so, you will be billed directly by the cooling services provider. The DEWA savings will be offset somewhat as you may incur an additional utility charge as some unit owners equipped with district cooling will be passed on the slightly higher utility charges involving the remuneration of the capital cost of providing the infrastructure.

Question of the Week

I am looking at the UAE as a possible destination for retirement. I would like to buy a property here, rent it out initially and later use it myself. Any advice?

The key to choosing your property is determining the right balance between the amount to be invested, the returns you require in the interim period before you retire, and what type of property you want to enjoy during your retirement. The good news here is your tastes are likely to be shared by your tenants in the interim so renting it out should not be a problem. There are many quality properties available; however, if you want to purchase in the prime areas of Dubai, either in Downtown Dubai or somewhere close to the beach or with a golf course view, the amount is double or triple. You can expect a minimum net rental return of around 5 to 7 percent which, given the cheap financing available at the moment, makes for a solid investment in preparation for outright ownership and retirement. Be careful with fluctuations in exchange rates. Factors such as location, the developer’s record and reputation, quality, service fees, building management and a functioning owners association will require a reputable local real estate professional to help minimise risks in your investment, whether during the procurement stage or until you are ready to assume occupancy.

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

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