Mortgages and other tools- keys to growth 

Financing tools are critical to allowing buyers to participate in the industry.

When the latest set of new regulations on mortgage lending were implemented, many industry analysts were of the opinion that the reduction in the level of leverage and the increase in the required equity in a property transaction financed by a mortgage were not likely to have a great impact on the amount of speculation in the market. These opinions were based on the fact that the majority of property transactions were being settled in cash.

The latest figures from OLD have confirmed what we have all been surmising, that despite being 4.6% higher than the corresponding period in 2013, the property market in Dubai in the first six months has been slowing, with the second quarter producing Dh52b worth of transactions, down 15% on the Oh61b written in Ql.

The slowdown can be attributed to a number of factors: capital inflows seeking a safe haven were sure to weaken; alternative investment opportunities were sure to emerge as prices started to rise; the implementation of the 4% transfer fee and the developers’ proactive attempts to limit speculative practices had an initial effect; the new law regarding rental price increases also had an effect; some investor nervousness and trepidation have led to hesitancy in buying into a market that they feel is at its peak. Add to the list the implementation of the new mortgage laws, and there is a compelling suite of probable reasons for the slowdown.

The regulation of mortgages is interesting partly because the supply of mortgages is an industry in itself which is inextricably linked to the growth and contraction of mature property markets around the world. One only has to look at the current rush by financial institutions to capture a higher market share of the mortgage market to understand that providing mortgages is a lucrative business. Yet, of the 30,380 real estate transactions in Ql 2014 in Dubai, only 6,922 transactions were financed by mortgage. This is a worrying continuation of a trend as, according to UAE Central Bank data, mortgages only grew 1.1% to Dh708.32b at the end of 2013 compared to Dh700b a year earlier despite the huge growth in the industry during the same period. Some mature and stable markets are 85% reliant on mortgage financing.

The new mortgage cap has certainly produced a definite lag in demand as clients adjust to the new financial realities and many of them are planning to participate within the next three years.

And here comes the rub: that demand may never take significantly longer to be reflected in actual transactions as the low mortgage rates of today will probably not be available in two or three years.

The likelihood of interest rate rises in the US as early as Q3 2015 will make financing a UAE mortgage increasingly more costly due primarily to the AEO being pegged to the USD. The effect of widening interest rate differentials around the world will still affect affordability as some currencies will strengthen versus their peers, making investing in UAE more expensive when utilizing currencies with low interest rates.

We have been encouraging our clients to buy a more affordable property now and benefit from lower interest rates, and upgrade to their dream abode later. In addition, we have been recommending to developers that they implement easy payment schemes and/or implement rent-to-own schemes for the same reason.

The importance of main- tainting affordability for the average buyer is critical. The bedrock of any property industry is its owner-occupiers, and financing tools such as mortgages, easy payment  or lease- to-own schemes are critical to allowing them to participate in the industry.

It is they who will have a major influence on the future long- term growth prospects of Dubai’s real estate industry, and it is critically important for the industry to ensure their participation.

Managing your property portfolio

Nurture your portfolio to ensure its potential and capabilities are achieved.

I recently had a meeting with one of my long- standing clients. As the owner of a portfolio of several villas and apartments purchased early 2011, the past three years have been extremely lucrative for her, and her success is well-deserved given the astute and well-considered decisions she has made along the way.

The topic of the conversation was whether to sell her property assets as the market slowed in the first half of 2014. Rather than make a hasty decision, I offered to perform a thorough review and recommendation for her consideration and eventual decision.

An easy decision would be to sell my client’s. entire portfolio for a substantial profit close to 70% , but the question remained, where should her newly gained wealth be invested? There was no answer as there was no plan.

Looking at the issue more closely, we found that by retaining her portfolio, my client would continue to receive an average of 6.2% nett rental returns per annum on the adjusted value of her properties over the next five years. Notwith standing the recent cooling of the market, we estimated that she could expect, on average, a capital growth of at least 6 per annum over the next five years for an estimated nett total return of 12% per annum, a return we consider conservative.

The review included careful analysis of current maintenance requirements, market factors, regulatory developments, industry forecasts and trends, alternative opportunities, risk factors and the likelihood of relevant future events.

When I asked her what alternative investment could provide the same return without taking on greater or excessive levels of risk, she could not identify any.

The example of my client clearly illustrates that now, more than ever, property portfolios require very careful management. We all know the market has cooled. This is hardly a surprise as it was clearly impossible for Dubai’s property assets to continue to grow at an average rate of 30% per annum as they did in 2013. Various estimates of price growth for apartments from January to June 2014 range between 3.0% and 5.0% in established areas, while villas in the more iconic locations have experienced similar reduced levels of price growth. Meanwhile’, secondary locations enjoyed healthy, albeit slowing growth rates in the 6% to 9% range. Despite price growth being significantly reduced from levels experienced in 2013, there is hardly a need to panic as the residential market is clearly on a path to deliver a sustainable and acceptable 7% capital growth going forward.

Investing in property has a very simple purpose: to create wealth in the long term. However, your property investment portfolio needs to be nurtured, maintained and managed to ensure its wealth -creating potential and capabilities are achieved as it rides the inevitable cycles.

Not everybody has the time or is comfortable with managing a portfolio. However, there is expertise available to help you and you should consider engaging a good property manager who will ensure that you maximize returns from your property portfolio and enable your long-term strategy to be realized.

Delivering the strategy will require an activity plan addressing pricing and marketing,resourcing, customer relationship management, tenant management and policy, cost management, maintenance supervision, communications and review schedules, status reporting and financial statements. It should also comprehend the inevitable cyclical nature of the industry.

Think of your investment as your business, a business that will be affected by many different factors and events.Proper management is essential, and you need to en-sure it is in good hands providing you with the returns you expect with as little hassle as possible.

I own a third of a floor of office space in Business Bay, with two other parties sharing the balance of the floor space. We are having difficulty in finding reputable tenants at a reasonable lease rate. Can you offer any advice?

The issue of multi-strata ownerships. particularly when looking at office space. would be a concern as prospective tenants do not want to negotiate or deal with multiple owners.

One solution requires the willingness and commitment of all owners to form a type of cooperative or rental body. Under this concept. the owners would commit their space to a “rental pool” to offer to prospective tenants. This pool would be managed by a third party appointed by the owners so that tenants requiring space owned by more than one person would be dealing with one central body representing those owners, and aH owners benefit from the rental receipts garnered from leasing “pool” space.

This concept requires commitment. discipline, participation and cooperation from the owners, but if implemented with full owner support. will provide superior returns in an office market that is currently extremely competitive.

Would an asset bubble be reappearing in the Dubai real estate industry?

The recovery has been created by a number of market factors and catalytic events. the Expo 2020 bid win notwithstanding. Confidence has returned to the emirate as solutions to debt issues have been identified. e have a booming tourism industry. and a geo-political position which has been a prime attraction to capital fleeing troubled egrnes around the region. Seeing this, you will understand why demand would be accelerating a post-recession world as these fundamentals all add up to a compelling case for investment.

Do you think more affordable segments of the market offer any investment opportunities?

Definitely. While the greatest growth in the Dubai real estate recovery has been seen in the middle to high-end villa and apartment segments. there will be an increasing requirement for housing at the affordable end of the spectrum.

An investor taking a long-term view when creating a property portfolio will recognize that there is tremendous value promising extremely healthy returns in the affordable segments as demand will only increase as Dubai”s economy continues to grow.

Already, apartments in developments such as Skycourts, JLT and MotorCity have witnessed substantial capital appreciation. while villas in areas such as Dubai Silicon Oasis have appreciated significantly as well.

While it may be glamorous to invest in the more luxurious or iconic locations, sometimes it’s just as lucrative to invest in the lesser known and more affordable developments.

I have been considering taking advantage of the low office rental rates and relocating my business. Do you believe rates have bottomed out?

The office segment in Dubai has definitely bottomed out. and there are instances of rental growth emerging in some areas such as DIFC and in some space configurations.

For example. there is a relative shortage of Grade A.large floor-plate. single owner space. This type of space is favored by larger. often multinational companies and. with Dubai’s economy rebounding strongly. demand for this type of office space has been growing rapidly.

Vacancy rates outside the CBD/DIFC area are still quite high. In developments such as Business Bay. many buildings are suffering from fragmented ownership and configurations issues. However. depending on your size requirements. you may still find space that suits your needs at reasonable leasing rates

Question of the Week

My apartment is finally ready. When I stated that I would like to inspect the apartment , the developer said they had already completed their inspection,and I would be wasting my money as they believed the apartment to be satisfactorily finished , Is this right ?

Technically. once an official Completion Certificate has been issued for the building by the Dubai Land Department (OLD). it is deemed ready for handover and your contractual obligations regarding transfer of ownership remain. Nevertheless. I doubt if the developer has your best interests at heart in this instance.

You have the right to inspect (snag) your apartment. 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 twelve months following the transfer of ownership.

It is in your interests to snag your apartment. and I strongly recommend you engage a professional to do this on your behalf. There is a good chance that it will save you a substantial amount of money in the long term and provide you with some peace of
mind.

Since the prices are going up every month, should I continue to rent or should I consider buying a property?

Another way of phrasing your question is this: Am I better off using my money to increase my wealth or somebody else”s ?

Owning property allows you to better utilize your hard-earned dirhams from covering an expense which offers you no future financial return to an investment which does. In a way, it’s a forced form of savings which wil! reap future benefits for you in the form of property ownership. It allows you to build your individual net worth through the capital appreciation of your property.

Paying rent can actually inhibit your ability to build net who For example, as somebody who pays rent. inflation is a problem because you are consistently being asked to pay more, putting greater pressure on your disposable income.

But as a property owner,inflation is working in your favor, because, in all likelihood, your property is increasing in value and, if kept for years: you will enjoy an inflationary compounding effect on its value.

Is the property market cooling off? Is it still worth investing when the market is losing some of its steam?

We need to reset expectations and understand that high, double-digit capital appreciation is an unsustainable phenomenon that had been driven by a number of ad hoc, unusual or non-recurring events.

With the industry “cooling” somewhat to return to high single digit capital appreciation, we are witnessing the effect of new regulations and the market’s determination of fair value levels. It’s all part of the maturation process. One of the benefits of a robust, stable, well-regulated industry is the increased predictability and sustainability of price rises as compared to the boom and bust scenarios typical of young, undisciplined, unregulated markets.

If you are taking a long-term perspective, say, seven to 15 years, it is still the right time to buy. Barring any unforeseen shocks, economic or otherwise, and assuming your investment is well-managed, you can confidently predict an average YoY capital appreciation of at least 7% over that period, and a net rental yield of at least 5%

With prices having moved so quickly in the market, how can you tell whether you are paying a fair price for property?

You need to determine and locate the type of property that will work best for you. There is no such thing as a fair price for something you don’t want or value! You can contact a reputable real estate brokerage to assist you but make sure you conduct
your own research as well.

Remember that, fundamentally, price is determined by the market Through research, you will be able to ascertain pretty accurately what a property will sell for in any given market Remember, any significant deviation from your research findings usually means there is something wrong. If it looks too cheap to be true, it probably is! The key word is ‘value’.

Once you have found a property at what you believe to be is at fair market value, negotiations can begin. If you cannot find a property immediately that will satisfy your value expectations, do not settle for less, regardless of what’s happening in the market Be purposeful, perslstent, patient and pragmatic in your approach so you make a sound business decision.

I want to buy a residential apartment for long-term investment purposes. Should I buy one in Dubai Marina or Skycourts in Dubailand?

Assuming you have two alternatives, both priced at fair market value, cash flows and capital returns as a percentage offunds invested are likely to be greater in Skycourts.

Demand for more affordable developments is rising rapidly due to a strong “trickle down” effect as areas that were leading the recovery, such as Dubai Marina, have become too expensive. This has resulted in developments such as Skycourts overtaking the more established areas in terms of rental yild and capital appreciation .

Some properties located within Skycourts have shown an average 24% increase in gross rental income since the 3rd quarter of2012, outperforming virtually all of their more expensive peers. Meanwhile, apartments in the same development achieved YTD average price growth of 28%, with demand being driven mainly by first home buyers and investors seeking the increasing yields on offer.

Question of the Week

What is the difference between a leasing agreement and property management agreement?

You would enter a leasing agreement when you wish your real estate agency to locate suitable tenants for your apartments, facilitate the signing of the tenancy agreement leaving you to assume the responsibility and devote your time to managing the tenant and all aspects of the property thereafter. A property management agreement includes a lot more.

A competent property manager will provide an assessment. strategy and activity plan designed to harness the true financial potential of your property.

Considerations. include history, current market factors and risk factors, whether they be global, regional or local in nature requiring a good understanding of economic factors, industry knowledge extending to policy and regulation, finance and market dynamics.

An activity plan will be provided covering pricing and marketing, customer relationship management , tenant management and policy, cost management. maintenance supervision, communications and review schedules, status reporting, financial reporting and resourcing.

All of these activities will be performed by the property manager under a property management agreement.

I want to invest in apartments and I have been considering Dubai Marina and Downtown Dubai. Are there any other areas you recommend?

I suggest you consider more affordable areas of Dubai as well. Properties in Dubai International City, Dubai Sports City, Discovery Gardens and JLT are the places where people are now seeking more affordable accommodation as areas like Dubai Marina (including JBR) and The Greens have become too expensive.

Properties located within International City and Discovery Gardens have shown 23% and 26% increase, respectively in rental income since the 3rd quarter of 2012, outperforming virtually all of their more expensive peers. Meanwhile, a wide variety of apartments in Dubai Sports City, Skycourts and JLT achieved YTD average growth of 20.5%,23% and 21%, respectively with demand driven mainly by first home buyers and investors such as yourself seeking the increasing yields on offer. There are definitely opportunities in the more affordable end of the market.

Is it too late to buy or should I wait until prices come down again?

Trying to time property cycles is difficult. If you are buying your first property for personal use, and you are taking a long-term perspective, it is still the right time to buy as you will be making your first proactive move towards building your equity or net worth. Paying rent hinders your ability to build net worth. For a start, your rental payment is increasing somebody else’s wealth,
not yours. There are other factors, too.

Inflation is a problem because you are consistently being asked to pay more. Conversely, as a property owner, inflation is working in your favor because, in all likelihood, your property is increasing in value and, if kept for a number of years, you will enjoy an inflationary compounding effect on property value.

Owning property allows you to change the application of your hard-earned dirhams from covering an expense, which offers you no financial return, to an investment which does. In a way, it’s a forced form of saving which will reap benefits for you in the future

I am thinking about buying an apartment off-plan. Can you advise on what considerations I should be taking into account?

Buying off-plan means you can benefit from capital appreciation exceeding the market average in the period just prior to launch and over the ensuing 12 months.

As always, you must be thinking location, and anything which is close to the beach (especially with a sea view), a golf course view or situated near the downtown area is a good place to start. If you have close access to a metro station, even better. Study plans carefully, and ensure you are satisfied with spatial details, views, car parking plans, access to buildings and building amenities.

Get details of the planned infrastructure, utilities, surrounding amenities, expected service charges, and owners association formation, building delivery timings and payment plans including full disclosure of all costs associated with the purchase. Make sure you have a legal expert review any contracts before signing them and have them explain the latest investor protection laws to you.

What are the functions of the Tenancy Dispute Centre?

The Rent Dispute Settlement Centre is part of the Dubai Land Department and consists of two sections. The Judicial SectIon, chaired by judges, provides legally binding decisions based upon majority vote, and the Administrative Section is responsible for the operational and administrative requirements of the section ofthe center. One ofthe core aims of the new center is to provide timely resolution to disputes and, where possible, have disputes resolved amicably without the need for escalation.

Its Arbitration and Reconciliation department is tasked to settle rent disputes within 15 days from the date of the appearance of both parties, while all disputes must be settled in 30 days or less. Deadlines may be extended in accordance with the rules and procedures adopted by the chairman of the Centre while appeals will be allowed only in cases where the value in dispute is over Dh100,OOO.ln all other cases, judgments are considered final and legally binding.

Question of the Week

I heard that build quality is not too good in some Dubai developments hurriedly built during the boom times, and they are already showing serious quality problems. I want to buy off-plan but how can I guard myself against “buying a lemon”? 

First of all, you need to make sure you are dealing with a reputable developer. One positive effect of the global financial crisis was that a lot of poor developers were exposed and are no longer in business. Ask around or seek professional guidance, as those in the industry have a good appreciation of who the reputable developers are.

Make sure you query directly what proactive measures are taken to ensure the end product has been built to an acceptable standard, and take the time to inspect buildings already completed by the developer. 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.

Upon completion, you have the right to inspect (snag) your apartment 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 the transfer of ownership.

I am considering buying property to offer for rent. I am looking at two similar offers, one of which is located within 150 meters of a metro station, and offered at a premium of around 8 percent. Is this reasonable?

Let’s first look at why property situated close to the Metro can command a premium.

It’s all about convenience. cost and lifestyle efficiency. Your prospective tenants can enjoya cost effective. fast. comfortable and reliable mode of transport to either travel to work. visit friends or even do some light shopping. No traffic hassles. road works. parking. and wear and tear on the family car while the requirement for a secound family car is diminished. Many tenants are prepared to pay a rental premium for property which allows them to enjoy these benefits.

Our studies have shown that properties located within a.5 kilometer radius of the Metro in Dubai can command between a 6 percent to 11 percent premium when compared to similar  properties with no feasible ambulatory access to a metro station.

I was impressed with the Mohammed Bin Rashid City display during my last visit to Cityscape in Dubai. Do you have a point of view regarding the likely success of this development?

You are not the only overseas visitor to express interest in this amazing development. It is easy to be impressed with the concept. scale and enormous potential of the development. The concept is centered on family tourism. courtesy of the largest family leisure and entertainment complex in the Middle East. Africa and Indian Subcontinent. developed in collaboration with the Universal Studios. and supported by more than 100 new hotels.

There will be an extensive retail and cultural presence along with special focus being provided to entrepreneurship and innovation. and it is located within convenient proximity to three ofthe four BRIC economies. and on a major tourist route between the East and West. and the Northern Hemisphere and Southern Hemisphere. The market for such a wonderful attraction is enormous and. as recent ‘ears have shown. Dubai knows how to do tourism .

With prices increasing rapidly in Dubai, does it still make sense to invest or wait until things cool down a little?

A property investment requires the same approach and set of considerations regardless of the state of the mnarket. Be very clear as to what your investment expectations are and be sure to plan for the long term.

Know what you can afford. If you have the cash. I suggest you pay for it outright; however. don’t be afraid to take out a mortgage if need be.

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

You also need to consider the effectiveness of the owners association. service charges and the quality of maintenance services as these will have an effect on the long-term value of your investment.

A lot has been made of the Investor Protection Law. I am considering buying a property but I’m still nervous that, as an expat, my legal rights aren’t what they should be. Are expat investors well-protected by the law?

Lawmakers in Dubai have been working very hard to introduce laws that better protect investor rights. and standardize and clarify the relationship between developers and investors.

There has been a lot of progress made in providing protection to investors in a variety of areas including the introduction of escrow accounts. Strata Law governing the introduction and operation of owners associations. stipulations regarding recourse where delays in the handing over of projects changes specifications of properties. defects and any material departure from the contractual provisions has occurred.

Investor protection is one of the fundamental critical factors in driving sustainable profitable growth for the industry.

Question of the Week

With recent increase in property values , I am considering selling my 2 BR apartment in JLT . Do you think I should sell now or will my apartment continue to increase in value?  

I am assuming that your unit is in a good building in Jumeirah Lakes Towers. and that it is well- maintained with a good tenant.

JLT has performed well over the last 18 months with value increases of around 25 percent not unusual. Rents have been rising also so your cash income should have also risen over that period.

However. I wouldn’t rush into selling just yet despite the recent upswing! Real estate is a long-term game which revolves around cycles of approximately seven to nine years.

In our company. we believe that the market has at least another two years of solid growth. and I believe the property still has a bit left to offer you financially.

If you have identified an alternative investment give you a better income stream and capital return than what you expect to receive  in the next two years. then the right decision may be to sell.

However. if you haven’t identified a better alternative. I recommend that you hold on to the property as I believe that you will receive at leas a 6 to 7 percent net rental return. and achieve at least a 7 percent per annum capital growth in the next two years.