Long-term prospects for investors in the Burj Dubai tower are relatively solid if they have paid a fair price, with expected appreciation of 10 to 15 per cent per annum over the time, believe realty experts.

In a survey conducted by Emirates Business, Mike Atwell, Head of Middle East Operations, Cushman & Wakefield; Matthew Green, Associate Director, CB Richard Ellis (CBRE), Middle East; Adel Hamaizia, Sales and Marketing Director, RE/MAX Abu Dhabi, Mohanad Alwadiya, Managing Director, Harbor Real Estate; Chet Riley, Equity Research, Middle East, Nomura International, and Venkateshwaran Ramadoss, Senior Research Analyst, Real Estate Department, Kuwait Financial Centre, said iconic buildings are attractive to both investors and occupiers, but the building’s success depends on the supply and demand dynamics in the market.

Emaar Chairman Mohammed Alabbar has said Burj Dubai will open on January 4, 2010 to coincide with the four-year anniversary of accession to power by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai.

Experts said returns on quality assets have always been there. However, investors have to take a long-term view on property and move away from the speculative model that has evolved in Dubai.

Is buying commercial or residential units in Burj Dubai a wise choice today since prices have bottomed out?

Atwell: Although the property market within Dubai has witnessed a significant price correction this year, we believe it is still too early to say whether prices have bottomed out. A degree of uncertainty remains in the market, caused by a number of factors including lack of available debt financing, potential over-supply and quantifying end-user demand.

Green: If we look in isolation at current prices over 2008 levels, then it certainly looks an attractive investment. However, we must remember that the market has changed significantly over the last 12 months and investors can no longer assume double-digit annual growth rates. During the period demand has weakened substantially, pushing vacancy rates higher and adding to the risk of unit voids. Investment decisions within the current market climate will thus vary, dependant on the overriding driver. Those looking for buy-to-let properties are likely to be more cautious considering weaker demand levels, while those looking at owner occupier assets are likely to be more bullish.

Hamaizia: Yes, as the saying goes “what goes up must come down”, and in this context vice-versa. Major cities of the world (mostly now mature) have all seen cycles of which crazy, semi or mini booms witnessed crazy prices that came down substantially. For example, half or less/50 per cent down –London in the early 90s, Singapore more recently… but subsequently observed a stable recovery, typically reaching at least 75-85 per cent of peak times.

Alwadiya: Investment recommendations are unique for each client and are directly linked to the structure of returns that an investor is seeking in a project. In reality, those clients who paid extremely high prices for Burj properties in 2008 will not enjoy initial healthy return on investment (RoI) per annum – as rental prices continue to drop as a result of the global economic crisis. Some may receive as little as two per cent return on investment in their first year or two. However, those investors who are instead seeking the benefits of long-term capital appreciation and are able to wait for 10 years, enduring lower RoI per annum, will be handsomely rewarded for their patience. I personally believe the price of the Burj will continue to grow at a promising rate over the next 10 years making it an extremely worthwhile investment over other projects.

We were against the investment in the Burj last year due to the rapid price escalation that was seen in the project in 2008 but we will definitely recommend investing currently to capitalise on the excellent prices that are currently on offer and the expected capital appreciation that will be generated as soon as the tower is launched.

Riley: The Burj Dubai is already, and will remain, an iconic building and the focal point for the downtown area. As such residential space should normally have additional intrinsic value and demand but we still believe any investment in real estate should be undertaken for the long term. The choice to buy (or lease) commercial space has to be made considering a number of different variables depending on use. For example, rental levels and potential yields, service charges, tenant demand and expected occupancy, which all ultimately drive capital values. We believe in the long-term prospects of Dubai considering the positioning and infrastructure spend to date. This gives the emirate a lead over regional counterparts, so we believe there will always be a long-term demand for high quality property.

Ramadoss: An analysis of Colliers International’s Q3 2009 foreign ownership house price index suggests prices for properties under construction in Downtown Burj Dubai increased by 15 per cent, while excluding this, the index contracts. This is essentially the premium assigned to the development approaching completion which got captured. While prices appeared to have bottomed out in general, these are not clear signals of a complete turnaround as prices could track down should there be a market- wide contraction. Hence, it would be appropriate to buy if the intention is to have a stable income potential or to bet on the extent of premium that is still left to be priced.

Do you believe the tower offers a good investment proposition for long-term inventors?

Atwell: The Burj Dubai is well located, being within close proximity of the existing and future key CBD areas – DIFC, Sheikh Zayed Road and Business Bay. It is also well serviced by other amenities, including surrounding hotels, Souk Al Bahar and Dubai Mall. The Burj Dubai is an iconic building and will be the tallest man-made structure ever built. It is in a prime location and forms the centrepiece of Downtown Dubai, a large-scale masterplan development that will include more than 30,000 residential units, Dubai Mall, nine hotels and commercial space. The building itself will contain 175-key Armani hotel plus Armani Apartments, an additional 700 apartments and office space, although how much remains unclear. Iconic buildings are attractive to both investors and occupiers. However, the building’s success will ultimately depend on the supply and demand dynamics in the market, pricing and the underlying property fundamentals. Other key factors will include the operational efficiency of the building, which is dependent on but not limited to the building management system, lifts, parking, accessibility, public transport and how the strata management company is run.

Green: Returns on quality assets are there to be had, but investors need to start taking a more long-term view on property and move away from the speculative model that has evolved in Dubai. When choosing an asset to invest in, it is important to select a product that has a genuine lasting prospect for returns. The Burj Dubai will offer a prestigious address within the world’s tallest tower, a superior product quality, world-class facilities, and, importantly, it should also be well managed. All these factors would suggest the long-term prospects for investors are relatively solid, assuming a fair price is paid.

Hamaizia: Prices of property situated in proximity to, or that are a part of any signature or world famous building tend to hold value (long term) or are semi-immune to economics or exogenous shocks… be it London, Paris, New York or Dubai for that matter (due to views, footfall/tourism, shopping or financial districts or interest in that structure from an arts or architectural perspective).

Alwadiya: The Burj Dubai tower has all the factors that will set it for success: iconic design, excellent location, exceptional finishes, first-rate facilities, fantastic mix of assets. Any investment in a tower of this calibre is viable now and will continue to be well into the future.

Riley: Investors with long-term investment horizons have generally done well from property across most international markets, but as we have recently seen both residential and commercial property markets are subject to cycles, which can have some large swings. As the market becomes more established in Dubai, cycles should start to stretch longer and become less volatile. Previously speculative gains were driving the market, but we expect to see investment returns at much lower levels than those seen during the construction phase. One of the core tenets of property investment is its lower risk nature, but ultimately this equates to lower returns. Good quality property should deliver stable investment income with some capital appreciation, which is what long-term investors are generally looking for.

Ramadoss: Such towers often get a prestige value attached to them and would be a low-risk/low-return investment option as they tend to be pricey. The advantage is in its lower volatility as prices tend to contract at a smaller multiple relative to the market, as is the case with a typical ultra high-end developments. However, one needs to assess the extent of premium by comparing it with peer developments across the globe as in the current scenario, it could attract speculative interests as well.

What kind of appreciation can one expect in the long term, say five to 10 years?

Atwell: Capital growth is dependent on both rents and yields, which are in turn affected by numerous other factors. We cannot forecast anticipated appreciation over the long term. However, we would anticipate yields will sharpen from the double digit expected returns that we see today.

Green: If we consider the rapid change in Dubai over the last five years, then you can see the pitfalls of predicting the future in such an un-transparent environment. The Dubai market needs a period of stability so that investors can start to regain some of the confidence lost as a result of the downturn. Only after this is achieved can we really start to look for any level of price growth.

Hamaizia: As aforementioned, real estate history of the New Yorks, Singapores and Londons of this world, have always seen a stable recovery (back to at least 75-85 per cent of peak times within five years), when infrastructure, employment, investment and other city value-adding activities are taking place, supporting or present.

Alwadiya: The Burj is by far one of the best investments currently available for those investors who are able to wait for capital growth as opposed to initial return on investment per annum. It is likely that we will see a significant increase in the amount of unit trading following the tower launch in January. The Burj will continue to retain its value after its launch, and will increase its financial value/appreciate over time with an estimated rate of 10-15 per cent per annum. If you compare its price to the different towers around the world that once held the title of “the tallest”, you will see that they still today command an average price of over Dh10,000 per square foot. This is a far cry from what we are experiencing in today’s market where we are seeing the Burj command a price of less than half that amount.

Riley: We expect the level of capital appreciation to be relatively moderate in the short term. Over a five to 10 year horizon, we would normally expect moderate capital appreciation of perhaps five per cent per annum for this type of property, but this also depends on economic factors and conditions such as inflation. Generally speaking, Dubai’s residential and commercial properties are both linked to the economic cycle, perhaps more so than established markets, because the population base is more transitory. So this is a consideration for investors. Ultimately the ‘buy to let’ investor group will determine the market value so rents should establish the valuation floor.

Ramadoss: Longer-term price appreciation would tend to reflect the market level price appreciation. However, the price behaviour would be similar to the performance of a low beta stock comparedto the market average price change.