Property Times

Property portfolio resilience through diversification

By Mohanad Alwadiya
CEO, Harbor Real Estate
Advisor & Instructor, Dubai Real Estate Institute (DREI)
Published in Property Weekly

It’s true, when people say “the world keeps getting smaller every day.”

Communication and information sharing across great distances and involving large amounts of data take place in a matter of seconds, and the devices we use and ways by which we transmit data keep evolving as we speak. Indeed, many human activities have become highly mechanized and are being performed at supersonic speed; though sadly, life is no less complicated. And economics, no less.

Even with the development of sophisticated software intended to calculate risk, analyze data or predict the impact of policies and economic decisions, e.g. ADePT, Minsky, PI+, SAS/ETS, etc., mankind is still at the mercy of structural or systemic shifts that continue to shape and reshape the global geo-political and economic ecosystems.

So, even with all scientific and technological innovations on hand, we continue to face uncertainty. How, then, does real estate investment – a major economic sector affected by such changes – figure? How do investors protect themselves from financial obscurity when the trade winds start to blow in a less-than-favorable direction?

The answer – portfolio diversification.

The advantages of diversifying your investment portfolio across a variety of asset classes such as stocks, bonds, property and cash has been well-chronicled. What most investors don’t understand that diversification within each asset class can also provide significant benefits.

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

So, why consider investing in commercial property?

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

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

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

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

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

However, there are some possible downsides that the investor should consider.

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

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

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

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

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

Portfolio diversification is a time-tested way of recession-proofing your investments by ensuring that not all of your wealth is invested in the exact same asset types, as cyclical economic shifts impact different asset types in varying degrees.

THE BEST INVESTMENT IS CLOSE TO HOME …

For investors, 2016 has arrived with a bang or, as some may argue, a dull thud that has been felt around the world. Since the New Year’s eve celebrations were wound down and hopes for a better year in 2016 were dialled up, The Dow Jones has fallen 7%, the S+P 500 8%, and the NASDAQ a nerve jangling 13%. Every other major financial market in the world reveals similar performances with Japan, China, London and Germany all showing significant declines during the same period. The Dubai Financial Market has recovered in recent weeks but is still 4% in arrears when compared to the start of the year.

So, what should an investor do? … How does todays investor make some progress towards increasing his or her wealth in 2016?

Investing in Dubai Real Estate remains a realistic and lucrative alternative which has significant potential to satisfy the appetite for investment returns. The fundamental reasoning is compelling.

From a macro level, Dubai needs people to support an economy that is expected to grow at an estimated 2.5%+ in 2016 but increasing exponentially as the end of the decade draws near. The reason for this growth trajectory is the commitment and determination to deliver on initiatives such as the 2020 World Expo and much of the city’s planning comprehends the number of people living in the emirate to grow to 3.4million people by 2020, a 7% annual increase from today’s population of 2.25million.

Dubai has managed to develop a level of diversification that will allow it to weather the current global oversupply of oil. With oil representing only about 4% of Dubai’s GDP, the effect of the decline in oil prices is not as drastic as some may think. While a reduction in public spending is to be expected, Dubai’s economy is being driven by fundamentals such as tourism and trade and the focus of spending will be on new projects to grow these important revenue generating economic segments and further diversification. Dubai’s attracted over 14 million visitors in 2015, continuing a growth trend of approximately 10% per annum since 2010 and is well on track to attracting over 20 million visitors in 2020.

And the 277,000 extra jobs that are generated to ensure the estimated 20 million visitors to the Expo see Dubai in its most favourable light is a significant statistic. The Dubai economy has an advantage over many western economies in that, looking forward, there is a requirement for intellectual and human capital which is not residing dormant and unutilised in the economy and attracting this critical resource can only result adding to economic growth, providing additional impetus for Dubai’s Real Estate industry.

Interest rates in the US will continue to rise and the AED will continue to get stronger. To invest in a market that nearing the end of a 20% correction and in a currency that certain to appreciate over the coming 3 to 4 years can only make sense, especially when finance is still relatively affordableand when considering the availability of off-plan purchases with highly lucrative payment plans.

And the market itself is becoming more efficient. Developers have learnt from the past and are continually revising projects still in the feasibility stages after carefully analysing future demand. This prudence in managing supply will help preserve values and confidence in how the market is operating going forward and is yet another indication of the markets rapid progress towards full maturity.

The structural shift towards more affordable housing in 2015 will serve as an important factor in the development of the Dubai economy overall. Every emerging economy needs to develop a strong middle class as its expansion is critical to growing a sustainable economy and developing resilience in the face of external financial and economic shocks. In addition, for Dubai to compete effectively on a regional and global basis, the cost of doing business in the emirate must be competitive when entrepreneurs or corporations are considering alternatives for their operations.

For a superior investment yield and strong return on your investment, the total returns that Dubai Real Estate provides will be hard to beat over the next 5 years. Properties in the burgeoning affordable segment continue to provide Gross Rental returns of 8% with 10% rental yields not uncommon and, because of the recent price correction in the market and the slew of financial incentives that have been introduced, accessing the yields and returns can be done with comparatively minimal capital outlay. And the good news is, and both rental yields and property values are expected to increase as the 2020 World Expo draws nearer so capital appreciation is expected to average 7% per annum between now and 2020

But returns are only one side of the equation… what about the risk? 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, reveals a mature and balanced approach to shaping an industry which exhibits sustainable growth over the long term. The industry is much more resilient in 2016 and investors have benefitted enormously from the developments in this area.

There is no doubt that the past year has been challenging for equity investors, frustrating for fixed income investors and costly for investors who saw the valuations of their mutual funds, many leveraged with cheap finance, lose 20% to 30% of their value.

An investment in Dubai’s Real Estate cannot be ignored as an alternative, whether as a primary source of returns or as a contributing participant of a broader investment portfolio, to successfully generating wealth.

Time to hold on, or let go?

By Mohanad Alwadiya

The year 2016 has certainly made its entrance with a bang.

By mid-January, the Royal Bank of Scotland’s dire warning to “sell everything except high quality bonds” had everyone’s tongues wagging, with some analysts saying that yes, 2016 could lead the US and European markets down a substantial plunge. On the other hand, a few critics of RBS’s dismal pronouncement have advised investors to stay calm but keep a close watch on events as they unfold.

Reflecting the property market slowdown which became more marked in 2015, some distress sales had already begun creeping into the market which left me a little intrigued. It reminded me of a meeting I had with one of our most loyal clients.

As the owner of a portfolio of apartments purchased in early 2011, the past few years had been an extremely lucrative time for this client, and his success has been a result of his astuteness, objectivity, and well-developed analytical and decision-making skills refined by years of experience in an exciting albeit sometimes-risky market.

The topic of our conversation was whether or not to sell his property assets as the market has certainly slowed. I was surprised by the question as he had always held the view that owning property was an important part of his overall investment portfolio, and the assets he is holding are of excellent quality located in some of Dubai’s well-established or iconic areas. Rather than make a hasty decision that might be regrettable, I conducted a thorough review and constructed a recommendation for his consideration and eventual decision.

When reviewing the portfolio, it became apparent to me that now, more than ever, property portfolios require very careful management. While on the face of it, an easy decision would be to sell our client’s entire portfolio – not for a substantial profit, but simply for a “return of investment,” to quote RBS. But the question remained, if he were to sell part of his property portfolio, where should the money be invested? There was no answer as there was no plan.

As part of our analysis, we found that by retaining his portfolio, our client would continue to receive an average of 6.8 percent net rental returns per annum on the adjusted value of his properties over the next 5 years. In addition, notwithstanding the recent cooling of the market, we estimated that he could expect, on average, a capital growth of at least 6 percent per annum over the next five years for an estimated net total return of 12 percent per annum, a return we considered conservative.

The review included careful analysis of current maintenance requirements, future capital works, market factors, regulatory developments, industry forecasts and trends, alternative opportunities, risk factors, and the likelihood of relevant future events, whether they be economic, political, regulatory or financial in nature.

When I asked our client what alternative investment could provide the same return without taking on greater or excessive levels of risk or incurring new investment transaction costs, none could be identified.

The example of our loyal client clearly illustrates that now, more than ever, property portfolios require very careful management. We all know the market has cooled, but this is hardly a reason to make rash decisions without looking forward and doing some proper analysis.

Wherever you look around the globe, yield and total returns are getting harder to find, and the value of established property portfolios with good occupancy levels and good projected tenant retention are increasing in comparative value all the time.

Those investors who hold and nurture their existing property asset portfolios will do very well over the next 5 years, particularly those who have diversified their holdings to include some of the more affordable asset types as well. Conversely, rather than selling existing assets, the opportunity to use existing equity to take advantage of the current market slowdown and finance new acquisitions and expand portfolios is one strategy that we are working on with several clients now.

Not everybody has the time or is comfortable with managing a property portfolio, especially in times of change. 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 portfolio strategy to be realized.

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 ensure your business is in capable hands – providing you with the returns you expect with as little hassle as possible.

And even as other prominent financial institutions like Standard Chartered and JP Morgan have expressed somewhat similar sentiments in terms of oil prices and stocks respectively, those investors with sufficient liquidity, and who already enjoy ownership of a varied stock of high quality performing real estate assets may want to consider acquiring more property after proper due diligence.

All knowledgeable investors know that, when all else fails, real estate is one type of asset that increases in value over time (capital appreciation)… even after being subjected to market highs and lows.

In sum, if you have what it takes to hold on to a good quality real estate portfolio, do not even consider selling at this stage. If market prices give you good reason to acquire more, why not? Remember the market cycle – right now, if you can still afford to purchase property, go right ahead and buy – but, as always, with eyes wide open.

2015 a year to remember!

The year 2015 will be remembered as the most important periods in Dubai’s real estate history. It demonstrated to the world that the real estate industry in the emirate has achieved a level of maturity that enabled it to successfully manage the significant challenges associated with being the hottest real estate market in the world without succumbing to what would have been an inevitable and resounding crash.

But crash it didn’t. The market in 2015 saw a slowdown which was managed and welcomed by all those who wished to see a market which enjoys healthy and sustainable growth rates.

So, what will 2015 be remembered for?

Well, the headlines that made continual references to the fact that there was a Real Estate correction will not be forgotten. Those who possess a more tactical, less strategic and shorter term point of view will view the year through a negative yet narrow lens while those who are taking the long term perspective, will view the year as one that saw the elimination of many systemic issues, addressing fundamental market imbalances and the implementation of necessary adjustments to deal with impacts of external issues on the efficient operation of the real estate market itself.

2015 will be remembered as the year that the mortgage rules implemented by the Central Bank and the increase in registration fees by the DLD really had full effect in helping to cool the market. It will also be remembered as the year that developers went to the “ideas bin” to create a myriad of different easy payment plans that, not only offered potential customers with an immediate and easier way to pay for off-plan properties, but also assisted in establishing new values for finished properties as well.

2015 saw a slew of new projects being launched, each one adding to the rapidly increasing on liquidity levels and, eventually, prices market-wide. Each additional launch added to the competition for the investor dirham intensified leading to a gradual reduction in prices for off plan units making the risk reward equation more palatable for off-plan units versus completed units. In addition, the shift of developer focus in response to the call for more affordable housing also meant that investors gravitated towards this, perhaps the most important structural correction in the market to date.

Which means that 2015 will also be remembered as the year when the market got serious about building affordable properties, mainly because of the rapid growth in Real Estate prices in preceding years, a dirham that was rapidly appreciating versus most major currencies due to geo-political issues in Russia, tanking of commodity (including oil of course) prices, unprecedented quantitative easing in Europe, surprise downward revaluations of the Chinese Yen along with the imposition of capital controls and the imminent and the most talked about interest rate rise in US history. With global growth slowing and the strength economic recovery being questioned everywhere except for the US, Dubai faced the reality of simply being too expensive for its residents and too costly for its businesses. The cost of acquiring, owning and managing Real Estate plays a large role in determining the fiscal viability of both individuals and businesses in the emirate.

But 2015 will also be remembered as the year that was critical to the growth expected to be experienced in 2016. The price correction that was so much a part of 2015 in Dubai will bottom out in the early part of the year before the market starts to recalibrate. Population growth will drive demand going forward as, put simply, Dubai needs people to support an economy that is expected to grow at an estimated 4-5% annually for the remainder of the decade and to deliver initiatives such as the 2020 World Expo. The Expo alone is expected to generate an additional 270,000 jobs and drive demand for housing and commercial facilities that, by and large, don’t currently exist. Much of the city’s planning comprehends the number of people living in the emirate to grow to 3.4million people by 2020, a 7% annual increase from today’s population of 2.25million.

There is no doubt that the market gyrations of 2015 will result in more stable real estate market will provide a much better launch pad for what will be a period of significant economic and commercial activity over the next 5 to 7 years. The structural shift towards more affordable housing will not only serve to accommodate the expected rapid population growth associated with the 2020 expo, but also serve as an important factor in the development of the Dubai economy overall. Every emerging economy needs to develop a strong middle class as its expansion is critical to growing a sustainable economy and developing resilience in the face of external financial and economic shocks. In addition, for Dubai to compete effectively on a regional and global basis, it needs to ensure that the cost of doing business in the emirate does not position it as an outlier when entrepreneurs or corporations are considering alternatives for their operations.

When taking this perspective, 2015 will be seen as being at the forefront of the next period of growth for Dubai and will not be recalled as a year of stagnation, but rather as a year of laying the foundations for what may well be the most prosperous decade in the emirates history to date.

Beyond promises, Dubai brings trangible benefits

The emirate has a lot going for it that make it attractive to investors from India and other countries

I was reading with interest an online article recently that underlined the top reasons why Dubai’s property was so popular with Indian nationals. The reasons offered are not really surprising and essentially summarize why investing in property in the emirate has had signiﬁcant appeal for not just Indian investors, but those from every corner of the world.

Dubai is easy

Compared to many countries in the world, investing in Dubai’s real estate sector is relatively easy. Enlist a reputable brokerage, select your desired property, negotiate a price, write the necessary cheques and the property will be yours. Bureaucracy, which makes investing in other countries a pain, is virtually nonexistent and, as long as you follow procedural requirements, your property transaction will be processed efficiently and without undue delay.

Dubai provides superior value for money

When compared to the major Indian cities or big cities around the world, Dubai offers increasingly better value. A modern infrastructure that is continually being developed, a renewed focus on affordable housing, world-leading rental yields and finance rates that have been at historic lows for some time now, the value that is inherent in Dubai property is hard to beat in India or any other country in the world.

Dubai provides superior, tax-free rental yields

put simply, there are not many real estate markets in the world where an investor can enjoy an average 7 percent yield Without paying any local taxes. So, net of service charges, maintenance costs and property management fees, the rent that you charge your tenants goes straight into your wallet without the taxman taking his share. And with the cost of ﬁnance remaining at near historic lows, the interest on any borrowings you may have is easily covered by the rent that is being yielded by your property, leaving more free cash ﬂow to pay down your principal.

Dubai doesn’t impose a capital gains tax

In addition, capital gains are not taxed upon disposal of the asset, which makes investing in Dubai property a very lucrative addition to any investment portfolio – when taken with a long-term view, a Dubai property investment will provide handsome returns. So from a total return point of view, there are few real estate investments that are better than Dubai.

World-best infrastructure and security

Many times, investments that provide such lucrative returns are normally associated vvith excessive risks or poor infrastructure. This is not the case in Dubai. Dubai’s focus has been on developing a World-leading infrastructure for the beneﬁt of commerce, trade, tourism and habitation. The remarkable improvement that has been made in opening Dubai up for business, implementing the physical, digital and logistical infrastructures, legal framework and economic policies in the post—recession period

has been impressive. There is no doubt that Dubai’s future is looking very bright and investors globally continue to monitor its progress very closely.

Dubai’s brand value has never been stronger

There is no doubt that Dubai has captured the imagination of the world and there is no better barometer of this than its burgeoning tourism industry. Investments in revenue-generating sectors such as entertainment and hospitality have ensured that Dubai is increasingly being included on travellers’ bucket lists all over the world.

Dubai excels at economic entrepreneurialism

Dubai is excelling in an area I call economic entrepreneurialism. Already known for conducting world renowned exhibitions, there is no greater example than the upcoming World Expo, which Dubai will be hosting in 2020. Dubai is committed to making it the best ever.

Dubai is close to India and many countries

There is no doubt that Dubai is well placed geographically. With one-third of the world’s population within a four-hour ﬂight and two-thirds within an eight-hour ﬂight, existing emerging, economies such as Russia, India and China, and soon-to-be emerging economies on the African and South Asian continents will soon all share Dubai as a central hub. No wonder investors are so excited about the emirates prospects.

A multicultural and cosmopolitan society

Long a haven for expats that fulﬁlled employment contracts of limited duration, more and more people have decided to settle down and call Dubai home. This change in outlook has had a dramatic effect on the stability of the property market and the development of a society that, while incredibly diverse, is also less transient and more committed to developing the emirate as a long-term lifestyle solution. As a result, while there has always been a vibrant and strong Indian community; communities representing other nationalities are developing rapidly making it easier for new expats to make a decision to make Dubai their new home. History has proven that strong nations were built upon such diversity.

TIME TO REVISIT THE PRACTICABILITY OF REITS

Mohanad Alwadiya, MD of Harbor Real Estate & Instructor at the Dubai Real Estate institute, the official training 81 cortication arm of the Dubai Land Department

The UAE property market slowdown aside, it is great to know that the country’s real estate landscape has gone a long way from its humble beginnings. Aside from the landmark development in 2002, when UAE property (speciﬁcally in Dubai) was initially offered to be sold on freehold basis to expatriates by the Dubai government, another important milestone and sign of industry maturity, though relatively untapped, was the introduction of real estate investment trusts (REITs) into the country, with the ﬁrst REIT entity, Arabian Real Estate Investment Trust (Areit) established in 2006.

And as people continue to agonize over the current market state of affairs, l would advise ambitious though ﬁnancially limited would-be investors to look into the viability of investing in REITs rather than sitting and waiting for chance to buy property they can actually afford. But what differentiates a REIT-owned property from traditional property out for sale in the market? Before moving any further, let us try to understand what REITs are ﬁrst and foremost, beyond the words that make up the acronym itself a REIT is a trust company which accumulates a pool of money through an initial public offering (/PO) and buys, develops, manages and sells real estate assets. REIT5 allow both small and large investors the ability to invest in real estate without investing large amounts of capital or devoting a lot of time in directly managing a property portfolio. Investors have the opportunity to buy a unit in a REIT which is actually a portion of a managed pool of real estate; this pool of real estate then generates income through the renting, leasing, selling and ﬁnancing of property and distributes it directly to the REIT investor on a regular basis. Investors in REITs can expect returns without having to deal with the headaches of maintaining, managing and marketing their real estate assets. Units held in a REIT can be bought and sold like a stock on a stock exchange so investors also have the option to make a safe exit from the property marketplace whenever they decide to do so. There are three types of REITs: equity REITs, mortgage REITs, and hybrid REITs. Equity REITs invest in and own properties and, therefore, are focused on increasing the value of those properties while also accumulating revenues from their properties’ rents. Mortgage REITs deal in the investment and ownership of property mortgages while hybrid REITs combine the investment strategies of equity REITs

And mortgage REITs by investing in both properties and mortgages. A REIT can provide portfolio diversiﬁcation because of the large amounts of pooled funds available to the REIT management team which, in turn, enables the accumulation and operation of different types of property assets in different locales. This provides the REIT management greater flexibility to minimize the effects of any cyclical downturn by enabling them to focus on opportunities that always exist and emerge from any correctional period to provide a superior return. If you are a landlord or building owner,

the advantages of getting into business with a REIT are manifold; because, in effect, property owners become “shareholders” in a single real estate company, landlords can reasonably expect a safer, more secure and regular source of income in the form of rent through an easy, fuss-less, flexible, liquid and maintenance-free investment. For tenants, REIT—owned buildings, whether they are malls, business parks or towers, are usually well maintained and professionally managed, so being part of or being under a REIT establishment is a win-win for both landlords and building tenants.

Capitalization rate… why it’s important

In the post-GFC period, yields from any type of investments became increasingly harder to find and, without a 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 7.0 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.

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 past 5 years.

Nevertheless, the ration has its uses. It can provide a retrospective view or learning opportunity by revealing how accurately market factors were comprehended, analyzed, forecasted and modelled when planning a particular development; it can highlight inefficient and costly construction methods and techniques; it can highlight future price / revenue adjustment opportunities, 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 regards to its cycle. Gross yields can also highlight inefficiencies because inefficiencies, unless corrected, must be eventually supported by either gross yield or margin reduction.

Logically, 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.

At Harbor, we are also interested in the capitalization rate (or cap rate) of an existing property. Capitalization rate is the rate of return on a real estate investment property based on the income that the property is expected to generate. The capitalization rate is used to estimate the investor’s potential return on his or her investment. The capitalization rate of an investment 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 renting or leasing the property less all operating costs. Put simply, 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.

We also use a cap rates as part of our suite of objectives 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 worthwhile. Typically, we will suggest a cap rate of between 5 percent and 10 percent depending on expectations of asset value fluctuations going forward. As revenues are typically locked in courtesy of rental contracts for at least 12 months or, in the case of Commercial leases anywhere up to 5 years, the ability to accurately forecast the potential and likely shifts in property asset values will be essential to establishing realistic and achievable cap rates and forming long-term property 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. For example, an investment with a cap rate of 7 percent 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.

Property Times – June 2015

I have been lucky in my professional life to have met and worked with some very successful investors. While I have found each to be different in personality, style and even investment philosophy, there are some attitudes, traits and perspectives that are shared among the most successful investors I have had the privilege to have met. Thinking back to many interesting discussions I have had with these people… some of whom are my most loyal and respected clients… there are several statements that we often hear in our everyday professional lives which I have not heard from this group of achievers. This is what separates them from the rest.

“I hate (insert anything) … “

I have rarely heard my successful investors project a negative stance about anything in their professional life. This is not to say that they support every philosophy, concept or idea and they will also not accept an occurrence which is contrary to what they think should have happened. But instead of expressing such a negative emotion as hate, they continue to think positively and seek positives from a situation or take a positive approach to remedying that which they do not agree with. As a result, the dialogue is always positive, creating an environment positivity, proactivity and energy directed towards progress. Taking this approach also helps to create a pleasant, purposeful and fruitful environment in which to work and helps to maintain or even build esteem and confidence among those that can contribute to achieving exceptional results. It promotes objectivity, focus and decisiveness.

“That’s not fair”

The world is not a fair place never has been and never will be, and successful investors understand, embrace and accept that. This allows them to be immune from the negativity that can arise when an individual feels hard done by or cheated. It also allows them to plan, create contingencies and maintain a positive attitude when a seemingly unfair occurrence occurs resulting in a greater chance to respond to a situation rapidly and appropriately rather than dwelling on the fact that an occurrence was “unfair”.

“That’s not how it’s done here”

An open mind is essential to develop, progress and eventual success. Successful investors will embrace new ideas and innovation. To not realise that progress is created from ingredients consisting of past experience and innovation is to rely too heavily on tried and true practices that gradually lose relevance over time. This form of decay has destroyed entrepreneurs, global corporations and even whole economies and societies. With globalization, the world has become a much smaller place. To not embrace, improve and implement world’s best practice and only holding close what you are comfortable is the biggest threat to creating continued success.

“I am a self-made man”

Nobody has ever made it on their own. It was once thought that the iconic, independent, totally self-sufficient, unchallengeable, silent-type, hard-nosed entrepreneur who left metaphorical bodies in his wake as he doggedly climbed the mountain of success was the role model that should be emulated by all who craved achievement. Many have tried and they all failed. No-one can achieve success on their own. As a matter of fact, the most successful people I have met have surrounded themselves with successful people and ensured that those people shared in their success. They seek opinions, listen carefully, discuss intelligently, consider alternatives and have their decisions reviewed. They reward those who contribute to their achievements and help them succeed as well for this is also a valuable way to learn and build momentum at the same time.

“That’s impossible”

Successful people know that nothing is impossible and hold the belief that every problem has a solution, some of which just haven’t been thought of yet. Anything is possible as long as there is a willingness to explore, question and challenge and imagination is intensely applied and ingenuity is rewarded. Achievers do not complain about obstacles. They embrace them so as to gain an understanding as to how they can be overcome for they truly believe that nothing is insurmountable. Negative words like “can’t,” “won’t,” and “impossible” are never heard from the mouths of successful individuals. They know complaining will not help them, but actually doing something about the issue at hand will.

“I could have”

Could have… would have … should have. We have all heard these expressions of retrospective folly. Experts in hindsight have no place at the table of successful people and regret is a fruitless and pointless emotion. Successful people thrive on opportunities not lost opportunities. If they cannot make one opportunity work to their satisfaction, they move on and find another opportunity. Regret simply slows down the effective pursuit of the next great opportunity.

“I have no choice”

Victims have no choice. Successful investors create alternative solutions to every problem and will carefully consider all of them. In this way, successful investors are never victims for they create an environment filled with choices. Then it’s just a matter of deciding which choice represents the best way forward. Successful investors know how to create opportunities where normal people think none seemingly exist. Successful investors believe that opportunities always will exist, but they are hidden in the recesses of our individual and collective imaginations. The reason why they are successful is largely due to their determination and ability to extract those opportunities, while others are stagnating in the belief that they don’t exist!!

Property Times

Now that the market has entered its correction phase, the time has come to consider whether you should take advantage of value opportunities that are starting to appear and benefit from the capital appreciation that is likely to accumulate over the coming five to seven years. For those who don’t have the cash readily available, the first step is to organise a pre-approved home mortgage. It’s always best to be in a position to make an offer for a house with your mortgage pre-approval in place rather than expect to arrange your mortgage once heavily involved in a negotiation process.

So, how to go about selecting the right mortgage for you?

You must first envisage your economic circumstances at least two years into the future and ask yourself the question … “Given my projected earning capability and desired lifestyle, what mortgage payment will be financially feasible and acceptable to me in two years’ time?”

Why two years’ time?… because most mortgages interest rates on offer at the moment are locked in for two years, after which you will be subject to likely interest rate increases as after an initial two year period of fixed interest rates, the mortgage reverts to a variable rate.

First of all, estimate your projected earning capability. Be real. 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, notwithstanding the latest reports of 5% salary increases for Dubai employees in 2015, history has shown that salary increases generally tend to lag cost of living increases so conservatism in estimating future cash-flows 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 decrease the financial flexibility to address interest rate shocks. And finally, what is financially feasible may not be acceptable to you or your spouse. 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 correcting markets, value opportunities and cheap finance, cautious financial planning based upon realism and self-honesty is key when planning the purchase of your dream home. Your future happiness could well depend on it. As a general guide, we recommend that not more than 40% of your household disposable income be devoted towards paying down your mortgage. So once you have determined what type of repayment you are willing to commit to, then it’s a case of determining the mortgage amount you can actually afford. This will be determined by the Loan to Value ratio (LTV) you are prepared to accept, the amount of your own cash savings you are prepared to put towards the property, the tenure of the loan and the interest rate that you expect to be paying initially and well into the future.

When talking to mortgage providers, they will help you assess what mortgage is best for you by looking at a number of specific factors such as other debts (including credit cards) you may have, reliability of current and future income streams, the Loan to Value ratio that you would be seeking, the type of mortgage you prefer, your true disposable income and what other assets that you may own. Don’t be surprised if different mortgage providers suggest significantly different mortgage solutions for your requirements including repayment options. These will include the most common type of mortgage known as the Capital and Interest (Reducible Balance) Repayment Mortgage but you may also consider interest-only payments, part repayment and part interest-only mortgages although these types of mortgages are usually used for very specific investment purposes. Then it’s a case of deciding if you wish to undertake a fixed rate, variable rate or fixed/variable combination mortgage. Once again you need to think long term. If you think that mortgage rates are likely to rise and you would like to lock in a fixed rate of interest for the foreseeable future as long as you understand that once the fixed interest rate term comes to an end, a variable interest rate will apply. In many cases, the variable rate will be greater so planning is essential. If however, you expect interest rates to fall in the near future, a variable interest rate mortgage would make better financial sense as long as you have the flexibility to handle an increase in mortgage payments if interest rates do not follow your predictions and unexpectedly rise. There are a number of items which you should pursue as part of your mortgage negotiations. Try and have the mortgage establishment fees waived. Depending on the institution, this may save you up to AED3, 000. Also request that you are not penalised 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 AED10, 000, but you should try to have this stipulation dropped from your mortgage contract.

And finally, make sure your mortgage provider will allow you to utilise the equity being built up in your home as you diligently pay down your mortgage. This equity will compound if the value of your property is increasing due to favourable economic or market factors. Some lenders will allow you to use this equity as security for further borrowing. This can be very handy if you want to make some major home improvements, buy a new car or perhaps invest in another property. When selecting a mortgage, the key is to know what you need and pick the one that best suits you over the long term.