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Ask the agent

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

There are different ways by which a good rental rate for your property can be determined, the simplest being the sales comparison approach (SCA) which relies on identifying a factor that is homogenous to similar, if not identical, properties. For example, if an apartment similar to the one that you are planning to invest in is attracting a monthly rental rate of AED 7 per sq.ft. per month, then this will indicate the likely cash flow you can expect. This is an extremely simplistic approach that we, as property managers, do not advocate although it’s surprising how many people limit their analysis to this simple method only.

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

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

 

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

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

Know what you can afford. If you have the cash, I suggest you pay for it outright; however, don’t be afraid to take out a mortgage and make sure you consider the many and varied easy payment plans that are currently on offer as many of these plans will save you considerable amounts of money.

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

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

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

 

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

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

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

 

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

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

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

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

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

 

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

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

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

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

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

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

The value of a property manager

Many people misunderstand the role of a property manager, thinking that the role does not extend beyond the collection and remittance of rental receipts, and acting as a buffer between the landlord and the tenant. Little do they realize that a good property manager will generate greater returns from their property portfolio and enable their long-term portfolio strategy to be realized.

So what should you look for in selecting a professional to manage your property?

Well, first of all, you need a professional who is experienced in the market. Not just in any market though, in this instance, the Dubai market. Typically, if you find somebody with at least 7 years of experience, you will have found somebody who has witnessed and survived the global recession, and that should provide a reasonable indication that they are in the business for the long term, and that they had the skills needed to navigate and survive Dubai’s last property slump. Many didn’t.

A competent property manager will provide a whole host of services for you but the most important is the development of a Property Portfolio Strategy. Your chosen professional must be able to articulate and present his thoughts after conducting a thorough assessment of your personal situation and property portfolio. He must be able to provide you with a credible strategy and activity plan designed to harness the true potential of your property and provide you with the maximum rate of total returns It is essential to have a well-thought out strategy for your property portfolio if you are to maximize your returns.

Not just anybody can formulate a credible and implementable strategy. It requires years of expertise and a fundamental understanding of what makes real estate such a worthwhile and superior investment. A true professional will have a strong knowledge base on topics including industry history, current market factors and trends, risk factors, and the likelihood of relevant future events that will affect the performance of your property investment. This knowledge should span global, regional and local landscapes, and will require a good understanding of economic factors, industry knowledge extending to government policies and regulations, finance and market dynamics.

Forming a strategy is one thing, but being able to bring the strategy to life is quite another. You will require an activity plan which will include details of pricing and marketing, customer relationship management and tenant management and policies for the entire portfolio. Essentially, this area of expertise is related to the “topline” or revenue generation and management of the property.

Equally important is the cost management and  maintenance supervision of the property. Many times, I have seen excellent “topline” performance being eroded due to poor operational and maintenance cost controls.

Managing your property portfolio will also require proper performance measurement,  communications and review schedules, and status reporting and financial statements. You should always seek examples of these elements as transparency and candid performance appraisals are essential to managing your portfolio correctly by addressing shortfalls to objectives, issues requiring redress, and opportunities for performance improvement, in addition to your peace of mind.

You also need to choose a property manager whom you can work with and who, you believe, has your best interests at heart. Your property manager must be customer-centered and, unfortunately, in this business, this is not always the case.

There is no point entering a business relationship that is lacking in mutual trust and respect. You must have confidence in his ability to manage a business… your business… which just so happens to be a property portfolio. As with all investments, but especially investments in property, there will be good times and challenging times. There is no such scenario as “set and forget”. It doesn’t exist. If you do not respect the manager you have appointed, the relationship will not survive the more challenging times and you will need to go through the whole process of finding a replacement.

So take your time but invest your time to your benefit. Be sure to ask for referrals and call some existing clients. Seek out success stories. Ask to see examples of client reports so you have an idea of their work’s completeness, continuity and timeliness. Ask your property manager carefully thought out questions to enable you to gauge the depth and breadth of knowledge that he possesses.

Ensure that the organization you are dealing with has the resources to support the manager of your portfolio. In these times of eliminating overheads, individual performance can be inhibited because of a lack of organizational support. You should ask to meet the team.

Finally, remember, it’s your investment, and you need to ensure it’s in good hands providing you with the returns you expect with as little hassle as possible. Once you appoint a property manager, your ultimate return on your investment is largely in his hands.

Choose wisely.

Ask the agent

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

This is a common dilemma faced by investors in the residential market. 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.

Just remember that 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.

So in today’s market, knowing what we know about Dubai’s economy going forward, I usually recommend to my clients to 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.”

Projects in Dubailand like Queue Point in Liwan and Skycourts are filling the affordable housing void and, if you wish to diversify asset types, I suggest you consider Shamal Terraces in JVC as this recently launched project offers very high quality but reasonably priced and extremely spacious modern townhouses.

Properties in the above communities offer good quality affordable solutions with little compromise and have the potential to provide excellent rental and capital appreciation returns as affordable housing will continue to be in high demand going forward due to the demand for such options among the middle and lower middle income segments in Dubai.

Question: I am interested in working for a real estate broker as I have extensive property experience in North America, but I don’t know which company to join. Can you please advise me on how I can find the best company to work for?

It appears that you are confident in your industry experience, and feel you can be a real asset to the company you will join. However, since the UAE market is also 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. Make no mistake, you still have a lot to learn; but having a good solid foundation of real estate principles should help you progress with greater speed.

Try to go for a full service company so that you can 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 value you as an individual and remunerate you appropriately. But they should also be prepared to invest in you by providing the types of learning experiences that come with formal training (mandatory to become a licensed agent in Dubai) and also 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 to be developed, or being given special projects that will facilitate your learning by encouraging you to seek answers and solutions yourself to enable you to complete the task at hand. Those companies that invest in high potential people are the ones that typically succeed.

Finally, it is very difficult to be passionate about your chosen profession if it is not part of the culture of the company that you work in. Try to surround yourself with people who are passionate about the industry because passion is contagious and it is what sets champions apart.

Question: I want to give my tenant one-year notice to vacate the flat. Is there a format and any other formalities? I sent him a notice through a courier company but he said it is not valid. Do I have to give it through the court?

You need a valid reason for requesting the tenant to vacate the premises. Is the tenant in breach of the tenancy agreement? Has the tenant broken the law by utilizing the premises for an unlawful purpose? Do you want to sell the property or occupy it yourself?

If your tenant is in breach of the tenancy agreement or has broken the law in some way, you must serve a 30-day notary public notice to the tenant. The notice must clearly state why the tenant is being given 30 days’ notice to fix the matter, and the details of the matter itself.  If the tenant does not respond in accordance to the request, then you can the landlord go to the Rental Dispute Settlement Center and request an eviction order.

If you want to sell the property or use it yourself, you will need to provide 12-months’ notice to the tenant through the notary public stating your intentions.  You may then refuse to renew any lease for a period that extends more than 12 months past the date of notification.

The notice should be delivered by courier, and it is important to keep record of the delivery report as evidence of receipt by the tenant as you may need this if the tenant refutes receiving your notice.

Question: Are we headed for another recession?

Even as there is an ongoing market-wide slowdown in real estate activity, my answer is NO, I do not believe that we are going to witness a crash any time soon. However, real estate price correction has been taking place which is not necessarily a bad thing.

The market has cooled for a number of reasons. For starters, the capital inflow that was extremely strong during the initial part of the recovery has started to slow down after reaching peak gains late in 2013. Capital is not an infinite resource, and will ebb and flow in accordance with supply and alternative investment.

Also, a number of structural changes have also started to crimp demand. The implementation of the 4% transfer fee, the implementation of new mortgage laws and new laws regarding rental price increases have also had an effect.

Although some people share a negative outlook on the way things are especially with the slower GDP growth compared to last year, for a country to be considered technically “in recession,” it has to experience two consecutive quarters of negative economic growth reflected in its GDP – which is definitely not the case with the UAE.

And given the history of the Dubai real estate market in the run up to the Global Financial Crisis and the dramatic, now infamous, sudden rise and then sharp decrease in asset values that occurred during the crisis, it is not surprising that some industry stakeholders have become nervous about the current state of affairs. While this point of view is understandable, Dubai 2015 is definitely not in the same position as it was in Dubai 2008.

Additionally, the UAE government, acting with strategic foresight, has Vision 2021, UAE’s long-term economic plan launched in 2010, which prioritizes the diversification of the country’s economy thereby reducing UAE’s dependence on hydrocarbon assets.

Question: I have a 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 marketplace with a few mortgage providers offering rates as low as 3.99% or even 3.49%. 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 yield you a net annual cash flow of 5% and, over a period of 5 years, an annual capital appreciation of anywhere between 5% and 7%. This would be a more lucrative allocation of your cash.

If, however, you are not confident in achieving a return on your cash that exceeds your mortgage rate, then I suggest you pay down your mortgage outright as you will save on interest costs.

 

 

Expert Eye

Open houses and getting your home sold

Some easy-breezy steps to make the process a fun affair

Holding an open house can be a great way to  get  your home  sold.  Here are four easy-to-remember steps that might help you.

Step 1: Plan and prioritise

You need to identify what improvements are required.  Discuss this with your real estate agent and make a realistic plan that fits your budget and time frame. Be business-like in your approach and set aside your emotions.

Identify who the target audience might be so you can prepare accordingly. Your agent can help you determine what type of buyer your area is attracting. To establish an emotional connection  between  your buyers  and  the  home, develop  a  perception  of value for money and make your  home  appear  ready for  immediate  occupancy.  Jot down problem areas or those that need embellishing.

Once you have finished your list, address the issues quickly.

Step 2: Tackle big-picture projects

General fixes you should consider making are:

Cleaning  –  Pay  special attention  to  your  kitchen and  bathrooms;  they  pose the  biggest  turn-off  to potential buyers if dirty.

De-cluttering and depersonalising – Put away family photos.  Clean and organise closets and storage space.

Fixing  what’s  broken –Make  sure  all  broken windows,  loose  door handles,  leaky  faucets  and non-functioning  light switches  are  in  working order.

Painting – Painting your interior walls in neutral colours is one of the most cost-effective ways to make your home show well. Paint can also work wonders on outdated cabinetry.

Replacing flooring, carpets or floor tiles – Try cleaning and repairing damaged flooring, or replacing it.

Updating light fixtures – They are the jewellery of a home.  Buy inexpensive, contemporary fixtures, or revamp the old ones.

Step 3: Focus on the details

Use these tips to fine-tune each area in your property:

Front yard and entryway – Keep your lawn mowed and well-maintained. Plant colourful flowers.  Replace old welcome mats and door knockers.  Give the front door a fresh coat of paint.

Living  room  –  Arrange furniture  to  create  a focal  point  around  an entertainment  suite  or  a large  window  to  create  a “wow”  factor.  Disguise old sofas with fashionable coverings.

Kitchen  –  Remove  magnets  and  photos  off  the refrigerator  and  clear  off countertops  with  non-essentials. Add stylish accessories.  Use greenery to fill empty corners.

Bedroom – Emphasise luxury and comfort. No extra beds, golf clubs, workspaces or  anything  that  does  not belong in a bedroom.

Bathroom  –  Put  new towels,  a  new  shower  curtain and fresh, fancy soaps. Dress up the space with candles or a silk flower arrangement.

Backyard – Make it a place where buyers can see themselves spending time. Add furniture and set out a tray with some cool drinks, or put out some coffee and snacks.

Step 4: Put on the finishing touches

Don’t forget these last-minute details:

Set out vases of fresh-cut flowers – They will make your home smell nice and add a splash of colour.

Let in the light – Buyers want a bright, open house, not a dark and dreary cave.

Turn on all the lights and open all the curtains.

Adjust the temperature – Keep the home comfortable, not too cold or too hot.

Safeguard your belongings – Stash valuables and prescription medications in a safe place.

Leave – Go see a movie, visit friends, or have a long lunch.  Spend the day out and about and let your perfectly prepped home sell itself.

Expert Eye

Purchasing a home? Plan carefully

Eliminate any surprises by conducting careful planning and due diligence

There is no doubt that the Dubai real estate market presents some fantastic opportunities for both investors and first-time home buyers. For the latter, there is no better time to take advantage of the value that is currently on offer and start to build a solid financial future.

However, just because the market is currently strongly in favor of buyers doesn’t mean that careful planning and due diligence should not be adhered to. There is never a market scenario which demands hasty decisions; the markets will always demand and reward timely decisions. This is an important distinction to make as taking shortcuts in preparation and planning, particularly in financial planning, is a common shortcoming of investors and home buyers who are keen to take advantage of the varied opportunities.

One area that is often overlooked is the many additional costs “of buying, owning and occupying a home. Many first-time home buyers tend to only focus on the purchase price and mortgage costs and forget that there are other costs to be considered.

Assuming you have con ducted a thorough search and have identified the property that you would like to buy, your negotiated buying price will be subject to a 4% property registration fee at the Dubai Land Department (DLD). You may be taking advantage of some recent payment plans whereby the transfer of ownership and registration fees are deferred until all payments are satisfied; regardless, it is a cost that you need to cover eventually. There will also be a charge of .25 % of the value of any mortgage payable at the-time of registration.

Speaking of mortgages, most lenders require property insurance and you would, in all likelihood, wish to insure your belongings. This is in addition to the loan protection insurance that you need to take out as a prerequisite to finalizing your mortgage so that your spouse and children are protected from having to pay down the mortgage if you should pass away prematurely. You may also consider other forms of insurance covering disability and terminal illness.

Every building or community requires maintenance and operational management. So, you need to understand what fees you will pay to those who will provide the services that make your new home a secure place to live. Fees can vary depending on your location or the development you are part of, so ascertain what you will pay before you sign the purchase agreement.

 Then there are the costs of actually occupying your home. It starts with paying deposits to set up utility accounts followed by monthly utility bills for electricity, gas and water, as well as Pay TV, telephone and Internet services.

Then there are the moving costs. If you are a single or a young couple, you may be able to handle this yourself. For some families, moving may require renting a truck or hiring a moving company.

 Of course, you need to consider the additional new furniture or decorative items you need to buy so that your new home lives up to the vision that inspired you to buy it in the first place.

If you have purchased a new villa, you will want to do some landscaping. This may include the addition or modification of outside entertainment areas such as patios or BBQ areas, design or redesign of plants, trees, shrubs and pathways along with the establishment of a healthy and robust lawn. Play equipment for children may need to be purchased along with additional items such as security systems, fencing or exterior lighting.

Thus, planning a home purchase entails more than just figuring out what your mortgage payments may be. With careful planning, you can eliminate any surprises with your next purchase.

Ask the agent

Can you explain the term capitalization rate?

Capitalisation rate (cap rate) is the rate of return on a real estate property based on the income that the property is expected to generate. It is used to estimate the investor’s potential return on investment. It maybe calculated by dividing the investment’s net operating income (NOI) by the current market value, where NOI is the total revenue derived from renting or leasing the property minus all operating costs. Put simply, the cap rate = NOl current market value. Given that the capital values for Dubai properties have shown greater volatility than the income being derived, the NOI being generated from the property at today’s value needs to be looked into. This allows us to see whether the property’s performance is improving or declining by referring to the cap rate. If the cap rate is declining, this leads us to conclude that selling the property would generate greater income.

Where do you think the best investment opportunities are in the Dubai real estate market?

Definitely in the affordable segment of the market!

We are encouraging clients to invest in this important segment as there are some great opportunities and the demand for affordable housing is likely to continue increasing as Dubai heads towards the Expo 2020. There are many affordable developments that have been sprouting in Dubailand and other parts of the city, especially in the outskirts. They are strategically located, with easy access to major road networks like the Shaikh Mohammed bin Zayed Road, thus residents enjoy fast transit times to most of Dubai’s popular areas. The demand for this type of affordable accommodation will continue to grow. invest in apartments and retain ownership for atleast five years to gain superior capital growth and enjoy healthy net annual rental return in the meantime.

Do you think the property prices will fall further in this current cycle? If so, would now be a good time to sell?

The fact that the property industry is notoriously cyclical is widely known yet viewed differently. Investors with a clear strategy and long-term plan simply accept, foresee and plan for cycles in the industry. They look for longer—term sustainable growth rather than take additional risk by trying to accumulate wealth by taking advantage of shorter-term spikes or dips. Investing in property has a very simple purpose: to create wealth over the long term. However, your portfolio needs to be nurtured, maintained and managed to ensure its wealth-creating potential is achieved as it rides the inevitable cycles that occur in the industry. Adopting a short-term vision and reacting unreasonably to inevitable industry slowdowns will lead to underperformance in the longer term. Consider engaging a good property manager who will ensure that you maximize returns.

I plan to purchase our first family home. What are the factors to consider when getting a mortgage?

There are a number of considerations that you need to factor into your plan of buying a home. One of these is getting a mortgage. Generally speaking, you are much better off financially in applying your hard-earned money towards building equity, but keep in mind that mortgage payments can be subject to fluctuations as interest rates rise. Not all mortgages are the same. Try and have the mortgage establishment fees waived. Depending on the institution, this may save you up to Dh3,000. Also request that you are not penalized for paying the mortgage down faster or in its entirety. By law, the mortgage provider cannot charge you more than 1% of the outstanding amount or a maximum of Dhl0,000, but try to have this stipulation dropped from your contract. Make sure your provider will allow you to utilize the equity you build in your home over time. Some lenders will allow you to use this as security for further borrowing.

Question of the week

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

An escrow can be described as a legally recognized 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 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, NOC from relevant parties to performance guarantees.

Capitalization rate card for investment

Many investors use gross yield and net yield to assess differing property investments in order to determine which course of action represents the best decision from a financial point of view.

But there is another calculation which is often ignored which is instrumental in determining how to deliver the best returns on an investor’s equity. This calculation is called the Capitalization Rate and is an important indicator for investors to consider. In the post Global Financial Crisis (GFC) period, yields from any type of investments became increasingly harder to find and without doubt, the post global recession environment saw investors having to take greater levels of risk to generate acceptable and goal satisfying yields. Dubai’s rental yields have always been strong, particularly when compared to countries where rental income is taxed at high marginal tax rates. With a market that boasts an Average Gross Yield of around 7 percent, it has for some time stood as a beacon for those who appreciate the significant structural and regulatory development that the market has undertaken which, in reality, decreases the risk perception associated with investing in the market. A close look at Gross Yields can reveal a number of insights. It can provide a retrospective view or learning opportunity by revealing how accurately market factors were comprehended, analyzed, forecast and modeled when planning a particular development. Gross Yields can also highlight inefficiencies because inefficiencies, unless corrected, must be eventually supported by either Gross Yield or margin reduction. Investors are concerned with what can be put into his wallet and expectations of Net Yield will always pressure Gross Yield and the cost of resources required to generate that Gross Yield. In times of tight supply, inefficiencies in construction, administration, maintenance and operating methodologies are hidden because elevated Gross Yields driven by excessive market demand are more likely to drive acceptable Net Yields for investors. However, the real test as to effective Yield management is when supply exceeds demand. But really, what is the true meaning of Gross Yield? Gross Yield is the income on an investment prior to expenses being deducted expressed as a percentage. Simple. But Gross Yield only measures the income as a percentage of the original purchase price and does not reflect the effects of significant underlying fluctuations in underlying asset values such as those that have been witnessed in Dubai during the last 5 years. Now, what is the Capitalization Rate (Cap Rate) of an existing property? Cap Rate is the rate of return on a real estate investment based on the income that the property is expected to generate. The capitalization rate is used to estimate the investor’s potential return on investment. The Cap Rate may be calculated by dividing the investment’s net operating income (NOI) by the current market value of the property, where NOI is the total revenue derived from leasing the property less operating costs. Simply put, the Cap Rate = Net Operating Income/ Current Market Value. Given that the capital values for property in Dubai has, in many cases, shown significantly greater volatility than the income being derived from the property, we need to look at the Net Operating Income being generated from the property at today’s value. This allows us to see whether the property’s wealth generating performance is improving or declining by referring to the Cap Rate. If the Cap Rate is declining, it may lead us to conclude that to sell the property and reinvest elsewhere would generate greater income and/or overall wealth even if the Gross or Net Yield still looks impressive.

Cap Rate is used as part of the objective when establishing a client’s property portfolio. We will determine the lowest cap rate that the client should accept in order to make the investment worth-while. Typically, we will suggest a Cap Rate of between 5 and 10 per cent depending on expectations of asset value fluctuations going forward. As revenues are typically locked in line with rental contracts, the ability to accurately forecast the potential and likely shifts in property asset values will be essential to establishing realistic Cap Rates and forming longer term portfolio strategies. Another useful application of the Cap rate is to determine an estimation of the payback period of an investment. When you divide 100 by the estimated Cap Rate you arrive at an estimate, expressed in years, which will provide an indication of the payback period of the investment. For example, an investment with a cap rate of 7 per cent will have an estimated payback period of 20 years. Caution must be used when using this ratio, however, and it must be reviewed periodically as the underlying asset value and the revenues generated from the asset will always exhibit different rates of volatility.

Ask the agent

mohanad_in_style

Q1) There are many opportunities invest in off-plan properties, but the values in the secondary market have improved significantly. Are there still advantages of buying off-plan?

Purchasing a property off-plan can provide you with superior capital gains by the time of completion, providing you are buying at a discount to today’s finished inventory and the market strengthens up to the completion date for the particular property that you are considering. This will depend on an estimation of economic growth, population expansion, the number of competing projects in the pipeline and eventual industry inventory position. Be smart about the “product” that you buy and try to avail yourself of a payment plan. Look for certain property types complete with amenities and facilities in locations you believe will be sought in the future. Deal only with reputable developers and check the status of the escrow account.

Q2) I am planning to invest in Dubai real estate.As this would be my first property 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 and what role your property portfolio will play in building your wealth. 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 intelligently and knowledgeably with the experts. Always strive to eliminate risks. Plan your finances, cash flows, capital requirements and debt levels carefully.

Q3) 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, 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.

Q4) While the correction in the Dubai property market is broad, certain segments have undergone a greater correction than others. Are there greater-opportunities in some segments in terms of long-term ROI?

Definitely! We are encouraging everyone to invest in the lower priced, higher value, affordable segment of the market as there are some great opportunities. There are many high-performing, yet affordable developments spread all across Dubai, giving investors a wide range of options to choose from. Apartments in some developments have seen excellent capital growth with some residences growing by 35%-over the past two years, with rental premiums of at least 7% not uncommon. Demand for this type of affordable accommodation continues to grow especially as Dubai’s population swells in the run-up to the Expo. invest in an apartment and retain ownership for at least five years as you will benefit from superior capital growth and enjoy a healthy net annual rental return.

Question of the week

Q5) Recent reports have suggested that the current property correction in dubai has bottomed. Would you agree with this and is it a good time to buy?

It is always difficult to pick peaks and troughs in real estate cycles.
Having said that, there are definitely opportunities available and advantages to be gained from purchasing now as the next few years are expected to see strong economic growth. Start your property search immediately as a property investment requires the same approach regardless of the state of the market. lf you have the cash, pay for it outright, but do consider taking out a mortgage as long as you understand the impact of interest rate rises in the future. Think carefully about location, surrounding infrastructure, construction quality, and developer reputation and building amenities. Properties with attractive views, close to the beach, with golfing facilities, are part of an iconic development and have close access to the Metro generally provide good returns. You also need to consider the effectivity of the owners association, the service charges and the quality of maintenance services as these will affect the long-term value of your investment. Be purposeful, patient and pragmatic and you are well on the way to making a very good investment decision.

When your property yield is not enough

Post-recession, investors take greater risks to generate goal-satisfying yields

Dubai’s property rental yields have always been strong when compared to countries where rental income is taxed at high rates. With a market that boasts an average gross yield of around 7.0%, it has stood as a beacon for those who appreciate the structural and regulatory developments it has undertaken which decrease the risk perception associated with investing in the market.

What is gross yield? It is the income of an investment prior to deduction of expenses expressed as a percentage. It only measures the income as a percentage of the original purchase price and does not reflect the significant effects of underlying fluctuations in underlying asset values.

The ratio can reveal how accurately market factors were comprehended, analysed, forecasted and modelled when planning a particular development. It can highlight inefficient and costly construction methods and techniques, future price/revenue adjustment opportunities, and new segment or geographic concentration opportunities. It can reveal superior (or inferior) sales, branding and marketing techniques, or superior product attributes. It can highlight impending revenue and eventual margin pressure where yields appear a little too extravagant when compared to the market, or even highlight where an industry is with regard to its cycle.

The expectations of net yield will pressure gross yield and the cost of resources required to generate that gross yield. In times of tight supply, inefficiencies in construction, administration, maintenance and operating methodologies are hidden because elevated gross yields driven by excessive market demand are likely to drive acceptable net yields. But the real test of an effective yield management is when supply exceeds demand.

The capitalisation rate (or cap rate) of a property also comes into play. It is the rate of return on a property based on the income that the property is expected to generate. It is used to estimate the potential return of an investment. It may be calculated by dividing the net operating income (NOI) of the investment by its current market value, where NOI is the total revenue derived from renting or leasing the property, less all operating costs.

Put simply, cap rate = net operating income / current market value.

Given that the capital values of properties in Dubai have shown greater volatility than the income being derived from them, we need to look at the NOI being generated from the properties at today’s value. This allows us to see whether a certain property’s wealth-generating performance is improving or declining by referring to the cap rate. If the cap rate is declining, it may lead us to conclude that selling the property and reinvesting elsewhere will generate greater income even if the gross or net yield still looks very impressive.

Cap rates are used when establishing a client’s property portfolio. Real estate firms determine the lowest cap rate that the client should accept to make the investment worthwhile. Typically, they suggest a cap rate of between 5% and 10% depending on expectations of asset value fluctuations. As revenues are typically locked in courtesy of rental contracts for at least 12 months or up to five years for commercial leases, the ability to accurately forecast the potential and likely shifts in property asset values will be essential to establish realistic cap rates and form longerterm portfolio strategies.
There is another useful application of the cap rate. When you divide 100 by the estimated cap rate, you arrive at an estimate, expressed in years, which will provide an indication of the payback period of the investment. Caution must, however, be used when using this ratio, and it must be reviewed periodically as the underlying asset value and the revenues generated from the asset will always exhibit different rates of volatility

Reletting property to a new tenant

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Entering a unit vacated by an absconding tenant could be illegal without obtaining court approval

I think the tenant of my property has left the country without paying several months’ rent. What do I need to do to re-let the property to a new tenant?

If you have determined that the tenant has left the country, you will need to send him a 30 days official written notice for non-renewal/ payment of rent. As you are unlikely to receive a reply from your absent tenant, you should also ale a case against him at the Rent Disputes Committee. It will hear your concern and help you to gain legal access to your property by sending a representative to open the property. (You will have to arrange and pay for any locksmith charges).

You must not enter the property prior to legal access being granted as you will be in violation of the law. This is an important point to note as many landlords feel that, because they own the property, they have automatic right of entry. This is not the case when there is a current tenancy agreement in place.

The representative will make a schedule of belongings which have been left by the absconding tenant and you will have to store these at your cost for three months upon which time they can be auctioned and the revenues can be paid to cover your expenses and any shortfalls in compensation.

As soon as the apartment is ready for rent to a new tenant, you’ll have to settle any outstanding utilities and prepare it for re-renting. The case against the tenant will remain on ale and, if he should return to the UAE, you can pursue him through legal channels and claim all your losses.

As always, we recommend you engage professionals to help you deal with recalcitrant tenants and any claims you may have against them.

I plan on investing-in a property within the next four months to take advantage of the current lower prices. Can you advise on where I should invest?

There is no doubt that the affordable segment in Dubai is showing lots of promise as these properties will be in high demand as Dubai’s population growth gains momentum on the back of a period of expected strong economic growth leading up to the end of the decade.

Properties located in non-prime areas such as Dubailand continue to do very well and represent great value at today’s prices. With the current market correction in full swing we have witnessed the more affordable or secondary areas of the market continue to provide superior total returns for investors.

Examples of affordable projects that are providing good rental returns and expected capital appreciation are the Sky courts project and the adjacent QPoint project. An apartment in Sky courts have proven to be very popular with tenants and investors alike and has historically seen excellent capital growth with some apartments growing by 20 to 25 per cent over the past 24 months with rental premiums of at least 7 percent not uncommon. Purchasing an apartment at Sky courts has been made even been made more affordable with the developer offering units, some with existing and reliable tenants, with a very attractive easy payment plan.

QPoint, although recently released is also attracting rental yields of 6 per cent to 7 per cent. At the moment, apartments in Q Point are being valued between Dh685-Dh750 per square foot, representing fantastic value for this new development.

Demand for this type of affordable accommodation will continue to grow as Dubai’s population swells in the run up to the Expo and the demand for well located affordable housing increases.

There is no doubt that real estate values have been declining for some time now. Has the market reached the bottom and do you think now is the time to buy?

If you are considering purchasing a property, there are definitely opportunities available and advantages to be gained from purchasing now. The market has been cooling for around a year now, but is expected to pick up again in 2016 as the next five years are expected to see strong economic growth in the Dubai. Picking the exact timing is always difficult but it is better to be early rather than late.

Start your property search immediately as a property investment requires the same approach and set of considerations regardless of the state of the market and proper due diligence can take time.

Know what you can afford. If you have the cash, I suggest you pay for it outright. However, don’t be afraid to take out a mortgage. Make sure that you consider the many and varied easy payment plans that are currently on offer as many of these plans will save you considerable amounts of money.

Think carefully about location, surrounding infrastructure, construction quality, and developer reputation 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 usually provide good returns. If you have close access to the metro, even better.

You also need to consider the effectiviness of the Owners Association, service charges and the quality of maintenance services as these will have an effect on the long term value of your investment. Finally, be purposeful, persistent, patient and pragmatic in your approach and you are well on the way to making a very sound decision.