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 enjoy a 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 second 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 pressed 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 of the four BRIC economies ,and on a major tourist route between East and West, and the Northern Hemisphere and the Southern Hemisphere. The market for such a wonderful attraction is enormous and, as recent years 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 market. 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 increases in property values , I am considering selling my 2BR 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 to give you a better income stream and capital return than what you expect to receive in the next two years, then the right decision maybe 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 least a 6 to 7 percent net rental return and achieve at least a 7 percent per annum capital growth in the next two years.

Expert Eye – Minding the interest rate trap

The mortgage supposed to make things easier for you should not become a burden

I read an interesting advertisement some time ago which I couldn’t forget. On offer was a mortgage with an interest rate of 3.99% fixed for two years, no exit fees, no bank arranging fees and, not surprisingly, claiming to be the best deal in the market. From the looks of it, it was a good deal indeed.

However, it begs the question that every prospective mortgagor needs to ask, that is, what type of interest rate will they be paying in the future? There is no doubt
that paying 3.99% interest for two years is an attractive proposition, but given
that most mortgagors will be paying off their home for at least 20 years, careful
thought must be given as to the effects of rising interest rates, inflation, lifestyle changes, and changing personal expenditure patterns.

It is not a question of whether or not interest rates will rise, but when. As the world slowly returns to a semblance of reasonable economic growth, inflation, important for economic growth and sought by every economy, will become a factor. A modicum of inflation is desirable (the US Federal Reserve is targeting 2%); however, as inflationary momentum accelerates,interest rates also increase to keep inflation under control as excessive inflation is highly undesirable for all of us.

This eventuality needs to be understood by mortgagors as the attractive 3.99% interest rate enjoyed today will, in all probability, be replaced with a significantly higher rate in two years’ time, requiring increased mortgage payments to cover the interest rate hike.

Consider the following simple example. A 20-year mortgage for Dh2 million with an interest rate of 3.99% will require a monthly payment of Dh12,109. An increase in interest rates to 5.99% on the same mortgage would require a significant increase of approximately 18% on the monthly payment. For the purpose of reflection, this is what happened to many mortgages in the United States leading up to 2008. The inevitable rapid growth in mortgagor defaults became a major factor in the bursting of their real estate bubble that had developed over the preceding six years, and the eventual onset of the global financial crisis.

So careful analysis is required by the mortgagor who needs to envisage his or her economic circumstances at least two years into the future. The question to be answered is: “Given my projected earning capability and desired lifestyle, what mortgage payment increase will be financially feasible and acceptable to me in two years’ time?”

There are several factors at play here. First of all, estimating a projected earning capability can be a little daunting. We all hope to progress rapidly in our professional (a.k.a. financial) pursuits, but there are generally more people disappointed than delighted with their achievements. And as history has shown, salary increases generally tend to lag behind cost of living increases so conservatism in estimating future cash flow is a must.

Then there is lifestyle. Is there a new baby planned in the near future? A new car perhaps? What effect will significant family or lifestyle events have on disposable income? Are there existing children who will need to start school in that time frame? All these events will have an effect on disposable income and, thereby,will decrease one’s financial flexibility to address interest rate shocks.

And finally, what is financially feasible may not be acceptable. How much sacrifice are you and your partner willing to make to service your mortgage? What are you willing to do without, and what lifestyle changes are you prepared to make? Once again, being honest with oneself is paramount.

So, notwithstanding economic recoveries and resurgent markets, cautious financial planning based upon realism and honest self reflection is key when planning the purchase of your dream home. Your future depends on it.

I am looking at investing in a flat in Dubai for the long term. Can you advise me on the factors I should be concerned with?

As always, we must be thinking location, quality of the building and the completion status and quality of infrastructure and building amenities.

Anything which is close to the beach (especially with a sea view), a golf course view or situated somewhere close downtown is a good place to start. If you can also have close access to the metro, even better, and you will virtually be assured of renting your new property relatively easily at a rate which will provide a tax-free ROI of at least 5% net. These locations are mot likely to provide superior appreciation in capital value as well.

You also need to consider the effectiveness of the owners association (OA), service charges and the quality of maintenance services. Facility management is becoming increasingly more important to determining the value of buildings as it will,have an effect on the long-term value of your investment.

With a lot of new developments being offered, what do you think about buying off-plan vs.completed properties?

By buying off-plan, you can benefit from capital appreciation exceeding the market average in the period just prior to launch, and over the ensuing 12 months. However, remember that in purchasing a completed property, you will benefit
from the cash flow immediately providing you with an immediate yield on your investment.

To help you estimate which option will work best for you, seek the advice of a reputable real estate professional. They should be able to help you define your investment objectives, identify suitable investments and conduct a complete financial analysis.

Look for certain property types which you believe will be keenly sought in the future, and try to buy properties from developers who have a strong and stable track record.

Do you think that there are too many new projects being introduced too soon?

There have been projects unveiled with an estimated value of at least US$40 billion in the recent past. They include the world’s biggest Ferris wheel, a new “city within a city” , and a range of theme parks.

These types of developments are a little different to the random, unfettered developments of the pre-recession era in that they are tapping into what actually drives Dubai’s economic growth.

One reason why the economy is growing at a very healthy rate is because of a booming tourism industry. If you add to that a location which is one of the best cities for young professionals globally, you’ll see why investment in developing, and expanding an economic capability to satisfy a growing demand for tourism and entertainment makes sense.

It is ideal for the real estate industry to grow as a result of population growth driven by economic development. Many of the newly announced projects are aimed at doing just that.

With the recent uptick in prices, is real estate still providing real value?

Definitely. Remember, regardless of where the capital comes from, the market ultimately determines a broadly representative perception of value, and we believe that there is some way to go before the Dubai real estate industry is considered overpriced.

Of course, it varies by asset type. For example, the reason areas such as Emirates Living, The Villa Project, Arabian Ranches and the Palm Jumeirah have been appreciating so strongly is because of the superior value they are providing prospective owner-occupiers and investors to whatever exists elsewhere.

There are different types of buyers driving the demand. The first buyer type is taking the opportunity to upgrade from apartment-style to villa-style living. The second buyer type is upgrading villa type, style, size and location, and from a pure investment point of view.

Whether owning or renting. value will always attract interest and activity.

Question of the Week

There has been a lot written about the new investor Protection Law. Is it a case of too little too late , and how will people who have been disadvantaged during the financial crisis benefit from its implementation ?

In essence, The Real Estate Investor Protection Law is yet another step in the maturation of the Dubai Real Estate industry. We have always said that a viable and robust real estate industry requires three important elements which we call the 3Cs: Confidence, Capital and Clarity.

The law will go a long way to boosting the level of confidence of investors by protecting them from contract breaches or fraudulent activities by developers, and add clarity as to what legal protection they may draw upon’ if needed. In addition,it is expected that owners’ associations will be further strengthened by strengthening their legal status. All this is good news for the industry, going forward.

However, the degree to which the law may be applied retrospectively is likely to be limited. Already, those investors who have been disadvantaged by developers cancelling projects can take their case to a special committee set up specifically to handle these matters; while it is still not clear as to whether those investors experiencing delays in projects commenced prior to the new law’s introduction will be entitled to relief under its provisions.

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 all 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, we have a booming tourism industry, and a geo-political position which has been a prime attraction to capital fleeing troubled regimes around the region. Seeing this, you will understand why demand would be accelerating in 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 (DLD), 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.

Economic recovery, including in UAE, is definitely gathering steam globally

As many of us have gotten into the rhythm of life in 2014, it’s time to look at what opportunities exist to ensure that we continue to improve our financial situation this year.

While financial advisors will have opinions on which equities, funds or fixed income instruments in which markets around the world will offer the best returns, most people need look no further than their own neighborhood to spot some pretty interesting wealth – creating opportunities.

There are a number of reasons .to invest in Dubai real estate in 2014, but I will focus on just five of them.

First: The market is ben­efitting  from a bow wave of demand as the broader economy stages a strong recovery. Granted, prices have been growing generally at around 20 + % YoY, more in some areas, and there is renewed concerns regarding asset values. But remember, some areas lost around 60% of their values from the highs of 2008. The recovery has been underway for two years now, and the market is still around 22%, shy of the highs reached five years ago.This would suggest the market still has some way to go before a broad-based major correction occurs.

Second: it is not just Dubai which is recovering. The global economic recovery is definitely gathering steam bolstered, of course, by ever-increasing confidence that the long-awaited US economic recovery is well underway. One side effect of the inevitable reduction in quantitative easing in the US has been the strengthening of the US dollar and, therefore, the U.A.E dirham. For expat investors, the opportunity of a nice currency hedge emerges while local investors will benefit when looking to invest abroad with a strengthened dirham.

Third: When you invest in real estate, you are really investing into an economy, and the effect of the 2020 Expo on the U.A.E economy cannot be underrated. For real estate, hosting the World Expo will provide additional impetus for the industry to enjoy continued growth. The last city to host a World Expo was Shanghai in 2010. Despite being held during the worst global recession in history, property values grew in excess of 60% in the 12 months before the event was held. While Dubai is unlikely to achieve such stellar value growth, the predictable surge in demand for accommodation and commercial space of all types, from labor camps to offices, to warehouses to apartments to executive villas, is sure to have a significant effect on property values.

Fourth: The increasing levels of governance, oversight and scrutiny that the industry is experiencing are driving confidence back into the industry. The ongoing development of the industry’s regulatory framework and implementation of laws and regulations to safeguard both consumer and investor interests, the overall industry and the economy at large from rampant and irresponsible speculative, predatory or unethical practices, reveal a mature and balanced approach to shaping an industry which exhibits sustainable growth over the long term. The free-for-all days of the past are long gone; and investor, not speculator, confidence has been making a big comeback.

Fifth: And finally, if it’s superior yield with minimal capital outlay that you are after, it is hard to ignore Dubai real estate. Affordable properties in developments such as Dubai’s Skycourts, International City, Dubai Sports City, Discovery Gar­dens and JLT are all benefit­ting from Dubai’s recovering economy, and you can expect a rental return in these areas of at least 7% with 10°% rental yields not uncommon. Demand is being driven mainly by first home buyers and investors seeking the increasing yields on offer and both rental yields and property values are expected to increase as the 2020 World Expo draws nearer. Given the relatively low cost of entry, the opportunities that reside in the more affordable end of the market are becoming more lucrative every day.