Of property appraisals and securing home loans

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Estimating value of property considered biggest eligibility criterion for home financing

Parallel to the growth of the UAE’s realty sector is the growth of its home finance sector. Home financing is a crucial part of the realty market since property appraisal is the biggest eligibility criterion for it.

The financier, which is either a bank or a money lender, establishes the security value of the house to be purchased for the buyer to secure a home loan and for the property to serve as mortgage collateral. The lender’s objective is to obtain an estimated selling price of the house in the market in case an immediate sale deed takes place, like repossession.

The lender can assess the value of the property in two different ways. The financier can either send a surveyor to physically inspect the property, or use modern methods like online evaluation.

Online valuation is carried out by utilizing online data such as land registry, information on comparable properties in the area, house price indices and Google maps to arrive at a probable market value. Along with online data, a visual inspection of the property may also be performed. Online assessments work for simple residential properties only. However, for quantitative residential purchases or commercial property, physical assessment is the best approach.

The physical assessment of a house includes recording details like the number and type of rooms, the absence and presence of fixture and fittings, and changes required, among others. In addition, the location of the house, its accessibility to public transport, the availability of parking space or garage facilities, the condition or structure of the building or villa, structural faults, fit outs and local council zoning are significant factors in assessing a property.

Once all facts are accumulated, with the latest comparable sales figures in the neighboring area and current market rates, a comprehensive valuation report is prepared to determine the worth of the property.

Property valuation fees are part of the home loan process and can vary depending on the bank or lender, or it can be waived off.

 

Reference: Industry Insight – Gulf News Freehold

Massive investments put Dubai in forefront

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The city has many development projects that attract foreign investors an important stop on the global sea-air trade and commerce, within an eight-hour flight between Europe and Asia and hosting the 2020, Dubai has exhibited a tremendous transformation over the years.

Large-scale developments have spurred business and investment opportunities, putting the city in the global property market map. To provide city-wide accessibility and promote city as a top economic and tourist hub, developments in Dubai center on airports, transportation networks, canal projects and a lot more.

With an estimate cost of 6.45 billion euros, the Dubai Trade Centre Jebel Ali will be the venue of the Expo2020. It will have Al Wasl Plaza nestled among theme pavilions, entertainment venues, soaks and a housing village. In close quarters the Jebel Ali Port and the Al Maktoum International Airport which will spend Dh120 billion on expansion.

The proposed Dubai Metro 40 kilometer track expansion will add 23 new stations including Al Maktoum International Airport, Mirdif City Centre and a possibility to connect to the Meydan Station of the Etihad Rail. Also, the Dubai Tram, which is expected to start operation this month, will whisk passengers comfortably to the Dubai Metro and the Palm Monorail. Additionally, the RTA Sky Buses, which have large baggage Compartments and catering services on board, will ferry passengers from the Dubai International Airport to 26 hotels across the city.

The colossal Mall of the World will be the world’s first temperature controlled shopping complex. It will have a promenade lined with retail shops, an indoor family theme park and wellness resorts. The Dubai Water Canal project will provide various points with a link to the Arabian Gulf. It will feature footbridges, walkways, hotels, restaurants, shopping centers and marine transit stations for water taxis. Dubai holds a formidable record of development projects. No wonder it takes the lead in attracting investors to the country.

Reference: Industry Insight – Gulf News Freehold

Ask the Agent

 

mrmohanadWhy should I hire a property manager and what are the advantages?

A proficient and professional property manager will make your investment work harder for you and the additional returns you receive will outweigh any fees he might charge. The property manager should be able to provide you with a complete and realistic property assessment, strategy and activity plan designed to harness the true financial potential of your property. Considerations start with your objectives and requirements and will include history, current and projected future market factors and risk factors. The scope of consideration should be global, regional and local in nature, and your property manager should have a good understanding of economic factors, societal trends, industry knowledge extending to policy and regulation, finance and market dynamics. Choose your property manager carefully. Ask for referrals and call some existing clients. It is your investment, and you need to ensure it is in good hands.

 Can I buy property anywhere in Dubai and can you describe the difference between freehold and leasehold?

N0, you cannot buy property just anywhere m Dubai. As with most real estate markets, the development of land in Dubai is “zoned” or subject to plans depicting intended usage so there are stipulations as to where you can purchase and what you can construct. In Dubai, the two most fundamental and important forms legal property ownership are freehold and leasehold. If you own a property “freehold,” you essentially  own any buildings or structures and I stands on outright. You are registered as “freehold” owner with the Dubai Land Department and you will own the property you decide to dispose of it, either through commercial transaction or by transfer of ownership. Leasehold, on the other hand, means you acquire the rights to occupy a property for a fixed period  courtesy of a lease contract treated with the owner. The leases are usually germ, and allow the leaseholder to make d “cations, improvements or additions.

I am considering purchasing a property.The seller told me he was about to construct a well on the property to access water for his garden and fountain. Is this legal?

This is certainly not legal without express permission from the authorities. The restrictions placed upon drilling wells are governed by Law No. (15) of 2008 on Protection of Groundwater in the Emirate of Dubai.

Ownership of groundwater within the emirate is considered to belong to the emirate, and that groundwater may only be extracted or exploited by obtaining a license from the Dubai Municipality and an approval from DEWA.

Water is a necessary yet scarce resource in the emirate, and the objective of Law No. (15) of 2008 IS to protect the groundwater of the emirate of Dubai from pollution, depletion and salinization  in order to save it as a strategic reserve for emergency use. I suggest you use the tap.

I am an investor. Should I invest in commercial or residential real estate?

A lot will depend on what investments you are currently holding. I believe that the next untapped opportunity is commercial property, specifically office space. There is no doubt that there has been a strong focus on the residential market; however, despite Dubai’s strengthening economy, Investors have been slow to consider office space despite values having bottomed out early in the middle of 2013. Things are looking very promising for new business in Dubai and opportunities exist for commercial real estate investors to benefit accordingly. While office rental returns are in the very early stages of recovery, Dubai office space is still cheap. With a high, albeit shrinking, vacancy rate of around 30%, there are definitely opportunities for value purchases providing strong cash flows increasing with Dubai’s economic momentum over the longer term. Already, there is a relative shortage of Grade A.large floor plate, Single-owner space favored by multinational companies. As Dubai seeks to grow economically, readily available office space is one the factors that new enterprises will consider.

Question of the Week 

I have been operating operating my business in Dubai for eight years now. I am in a position to buy my office space, but this will require relocation. Should i do this or continue renting?

The old cliche of “Location, location, location”is critical. It is all about proximity and the convenience and prestige that a well-chosen location can bring to your potential customers, staff and business associates. You will find great value, very affordable and well-constructed office space in Business Bay, which will cost you anywhere between Dh95 and Dh150 per square foot, but it will be pointless if the location is a hindrance to conducting your business. You need to choose your location first and work from there.

Definitely think about purchasing your premises. Do a complete analysis to see if this option will work for you. If you are a business committed to operating long term in Dubai, it makes sense to own your office space, particularly if it is a well- negotiated purchase. There are still excellent deals to be had, but as Dubai’s economy continues to grow, they are getting harder to find.

If you decide to lease your premises, try to get the best deal possible and lock it in for at least three to five years. Lease rates in Dubai will be on the increase going forward and make sure you take advantage of the current rates.

 

Expert Eye

 

111Real estate bubble still some way off

Current upswing has some way to run yet before a broad-based bubble appears

Whether we like it or not, cycles will always exist in our industry because humans are involved and humans tend to make decisions based on history and are not necessarily adept at predicting future events.

Dubai’s property scene is undergoing a cyclical event as I write. A correction, neatly timed, to allow the market to sit back and review the landscape, was certainly due. With it comes a promise of growth as the market plans its next foray.

Although cycles are accepted as inevitable, their nature in terms of length,levels of volatility or catalytic events can be difficult identify and predict. The er to the magic ques-n “When does a cyclical upswing in real estate es become a real estate bubble?” is an elusive one.We need to understand the everything causes of growth the characteristics of a e to gauge when sustainable growth becomes unrealistic over exuberance.

Upsurge in real estate demand is typically fuelled belief regarding positive future outcomes usually formulated in reference to a past event(s}. Assuming there is a sufficient and continual level of funding, a cyclical upswing will start and gather momentum.

In Dubai’s instance, the recent upsurge in demand was created by many market factors and catalytic events. Its well-publicized debt solution, booming tourism industry, relatively affordable dirham and asset affordability all drove a new level of confidence in the emirate. If you add to that a geopolitical position, which provides a prime destination for billions in capital fleeing troubled regimes around the region, you can see why demand would be accelerating.

Housing bubbles usually start when demand driven by speculative exuberance and short-term investor focus is driven to a point where the market no longer associates price levels as being representative of a realistic valuation of the underlying asset. Investors, particularly those with the short-term focus of speculators, divest their property holdings and prices start to slide. The bubble, as they say, will have burst.

So, where is Dubai relative to its cycle? There is no doubt that it has made a remarkable recovery and, if a broad -based “bubble” were to form in its property industry, it is still some way off.

The key is sustainable economic growth of around 5% through 2020 and the 5%-7% annual population increase expected to come with it. The amount of infrastructural, development and economic initiatives, culminating in the hosting of the World Expo in 2020, is indicative of the government’s determination to outpace the rest of the world in terms of emerging from recession. Progress will always attract those seeking opportunities and the potential of prosperity; in effect, people needing somewhere to live, work and conduct business.

So, how is the real estate industry poised to capitalize on the population growth that will accompany and support this economic expansion? There have been cries for a greater proportion of Dubai’s property inventory to be in the more affordable category. The good news is, the residential inventory pipeline coming on stream in 2014 and 2015 is mainly comprised of units situated on the outskirts of Dubai with projects being handed over or about to be completed. This inflow of affordable property removes a barrier to population growth and business expansion as one of the main contributors to the cost of living in Dubai, accommodation, is being addressed.

Yet, this is not to say that real estate bubbles will never occur. The market can fall victim to the shortcomings of human nature. However, after conducting a rational appraisal of where the market is relative to its cycle, identifying the risks and estimating the cause and effect of potential catalytic events, we conclude that the current cyclical upswing has some way to run yet before a broad-based bubble appears on the horizon.

Expert Eye

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Mortgages and other tools- keys to growth 

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

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

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

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

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

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

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

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

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

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

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

ASK THE AGENT

mrmohanad

Why should I use a broker instead of directly approaching the end-users or developers?

A broker or property consultant can help you determine what you are really seeking or require. Once your requirements are determined, he can help set your expectations with regard to availability and affordability. Setting a realistic budget based on disposable income, lifestyle expectations and willingness to take on debt is an important part of the process as is explaining how you can get the most for your budget. Any good property consultant will have extensive market intelligence on asset type availability, configuration, developer or contractor reputation, price, finance availability, etc. There is also the process of negotiation and finalizing a purchase. You will pay a consultant to add value by finding the property you require, saving you money, minimizing your risk, ensuring you are legally compliant and providing you with peace of mind.

Should I use my cash money to buy property or to seek a finance provider?

If your cash is currently employed in other assets, earning more than the current mortgage rates on offer, I recommend you borrow to finance the purchase of your property as long as you have the option of using your cash to pay down the mortgage once your mortgage interest rates start exceeding the return of your other investments. Property finance has been cheap for some time now but the opportunity to take advantage of today’s low mortgage rates will probably not be around in two or three years. We have been encouraging clients to buy as soon as possible and benefit from lower interest rates. Even where they had not found their perfect home, some of them settled for a less-than-perfect choice and plan to upgrade to their dream abode in the future. With careful planning, they will benefit from low interest rates in the ensuing few years, enabling them to grow their equity more quickly to a point where they can more easily afford their true dream home.

Should I assign a finance advisor when purchasing my first home, or should I do that myself?

I always recommend that clients consult with a financial advisor prior to purchasing property as this requires careful planning and a clear understanding of what it will entail, the effects it will have on lifestyle, the risks it may pose and the benefits of generating wealth through ownership. Sometimes it is difficult for clients to take an objective and realistic view because of emotions surrounding the purchase. A financial advisor can help you assess all these elements by helping you determine what you actually require, what you can afford, how best to use available finance and current assets, and how owning a home is going to enable you to grow your wealth. The financial advisor will view your property purchase as one part of your overall financial landscape and guide you into committing the right type and amount of resources to acquiring that dream home. I plan to invest in real estate.

Would you recommend investing in villas or apartments?

Villas provide lower rental yields but higher capital appreciation and vice versa for apartments. But 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. In today’s market. I am recommending to my clients to invest in affordable apartments, or construct a portfolio of affordable apartments and villas. Projects such as those located within Dubailand Residence Complex including Queue Point in Uwan, Skycourts, Sarah Ajmal and Windsor Residence are filling the affordable housing void and, if you wish to diversify asset types, I suggest you consider Pacific Village as this project offers high quality, affordable and extremely spacious modern villas and townhouses. All provide affordable solutions with little compromise and have the potential of providing excellent returns.

Question of the Week

What are the steps in buying property in Dubai?

There are a series of checks and requirements to be completed to ensure an issue-free transaction. The first step is to consult a financial advisor who can help you determine what you can afford. You should then obtain a pre-approved mortgage if required.

Then you select a registered broker or agent, who can add value by allowing you to make the best decision.

Searching for the property of your dreams can be a frustrating and time-consuming experience. While you can delegate this to your appointed property broker, I recommend you conduct your own search as well. It will assist you in gaining an appreciation of what is available for your budget.

Once you have a property that is of interest to you, your broker must complete the necessary background checks to ensure there are no impediments to a sale.

If all is in order, you proceed to make an offer. If your offer has been accepted you need to sign an MOU which details the terms and responsibilities of both parties. You then provide a 10% deposit.

If you have applied for a mortgage, your bank will be informed of your intentions and carry out a property valuation. When the bank gives the go-ahead, the seller applies for an NOC from the developer.

An appointment is then made with the DLD to complete the transfer. The seller, buyer, respective agents and bank representatives attend to formalize the transfer. When all documents and transactions have been completed, you will receive the title deed.

ASK THE AGENT

mrmohanad

There seems to be no doubt that real estate in Dubai is slowing. Do you see this as an opportunity or a long-term trend?

I do believe there is a price correction underway but we are far removed from experiencing a long- term trend. The pace of growth is falling back to what We might describe as being sustainable, not slipping into a period of across-the-board price contraction. We expect the market to achieve an average price growth of around 7% for the remainder of 2014 and maintain this average growth rate through to the end of 2015. The market in the first six months was still 4′.6% higher than the corresponding period a year earlier, despite the Dh52 billion worth of transactions conducted in Q2 being 15 down on the Dh61 billion that was written in Q1. There will definitely be value opportunities arising from this. faking a five-year view, executing a purchase during this period will provide greater ROI.

I am planning to invest in apartments to provide me with an income stream in the next 10 years.! have become aware of a lot of tenant-landlord disputes which make me reconsider. What are your thoughts?

As with all contractual relationships, the operation of the contract will always be effective if each party understands and accepts both parties’ rights and obligations according to the wording, provisions and clauses included in the lease agreement. All parties should also have a fundamental understanding of the law. The rental laws of Dubai are succinct and straightforward a d are difficult to be misinterpreted. Then there is what I call the “doctrine of reason.” A commitment or willingness to resolve disputes ugh arbitration and reconciliation will resolve issues before they escalate to a point where they require official intervention. Finally, I recommend you to have a professional manage your portfolio. He will handle issues and make your investment work harder for you.

There are a lot of opportunities to buy off-plan at the moment. How can I protect myself against buying an apartment of inferior quality?

Make sure you deal with a reputable developer. One positive effect of the financial crisis was that a lot of poor developers were exposed and are no longer in business. Ask around or seek professional guidance as those in the industry have a good appreciation of who the reputable developers are. Make sure you know what proactive measures are taken to ensure the end product has been built to acceptable standards, and take the time to inspect buildings already completed. Warranties and any quality assurance policies should be discussed in detail. Have the sales and purchase agreement reviewed by a professional to ensure you have legal recourse should any quality issues arise. Upon completion, you have the right to inspect (snag) your apartment and report any legitimate issues.

I have been looking for an apartment around the Dubailand area where! think we can get more value for money. How do the properties there stack up?

As the Dubai real estate has moved through the recovery phase of its cycle, demand for more affordable developments has been rising rapidly due to a strong “trickle down” effect. This is because areas that were leading the recovery have become too expensive and people began seeking more affordable accommodation. This has resulted in developments such as Skycourts and now Queue Point overtaking the more established areas in terms of rental yield and capital appreciation. Apartments in Skycourts have seen excellent capital growth with some apartments growing by 15 to 20% over the past year. Demand for this type of affordable accommodation has been growing steadily and we expect Queue Point to benefit as well, especially as Dubai’s population swells in the run- up to the Expo and the demand for affordable housing increases.

Question of the Week

I own an apartment in Dubai Marina bought in 2012. i increased the rent six months ago with a new tenant. According to the RERA rent index, I cannot raise it any further. The market seems to have peaked. Should I sell it ?

Real estate anywhere is cyclical and Dubai Marina has performed very well since you purchased the property.

While the market may appear to have peaked, we believe it is part of the normal cyclical pattern of real estate markets.

Looking over the next five years, we expect the market to achieve an average price growth of around 7%. Bear in the mind that we are talking averages here, and Dubai Marina has a habit of outperforming the average.

So, it really comes down to alternatives. 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 five years from your apartment. then the right decision may be to sell.

However, if you have not identified a better alternative, I recommend you hold on to the property as I believe that you will continue to receive at least a 5 to 7% net rental return and achieve around 7% P.A. capital growth for the foreseeable future. These types of returns are not easy to find.

Ask the agent

mrmohanadAround 60% of the occupants in our building are members of the OA, and I am being persuaded to join. Are they fully functional in representing the interests of homeowners?

The effectiveness of owners associations (OAs) will vary greatly depending on the commitment and expertise of the owners. I suggest you attend the meetings and see how you can contribute.An OA is comprised of and represents all of the owners of a jointly-owned property development which is registered as an official entity with RERA.

Its purpose is to manage, operate and maintain the common areas. The OA is also empowered to select and appoint suppliers and companies. A functioning OA will go a long way to ensuring that owners get what they pay for. Property owners should actively participate in the operation of their A. Neglecting to do so is to ignore the maintenance of their own property asset and live with the consequences.

We keep hearing that the market is cooling off. Do you think that there will be a major correction or dip in the market?

I believe a minor price correction is underway.

The price/demand correlation is definitely in play as the latest figures from the Dubai Land Department have confirmed what we have all been surmising, that despite being 4.6% higher than the corresponding period in 2013, the property market in Dubai in the first six months of 2014 has been slowing, with the second quarter producing Dh52 billion worth of transactions, down 15% on the Dh61 billion that was written in he first quarter.

However,l must reiterate that the pace of growth s falling back to what we might describe as being sustainable, not slipping into a period of deep, across-the-board price contraction. We expect e market to achieve an average price growth Of around 7% for the remainder of 2014 and maintain this average growth rate through to the end of 2015.

I heard about a new project called Ajmal Sarah which is located at Dubailand Residence. Do you advise me to invest there and why?

The Ajmal Sarah Tower is one of the latest additions to a hive of activity in Dubailand. lt is the flagship real estate project for the renowned Ajmal brand of perfumes. It has been designed and constructed to a very high standard and features high levels of quality and luxury elements from some world-leading luxury brands. It offers spacious units with a choice of studio,l B/R,2 B/R and 3 B/R apartments, and provides state-of-the-art facilities and amenities. Being located in the Dubailand Residence, it enjoys a location surrounded by leisure, shopping and entertainment options. With prices starting from around Dh530K and an in-house payment plan, the property provides excellent value for the astute investor. I would recommend it.

What is the difference between freehold and leasehold?

This is a very important question to resolve when considering the acquisition of a property as it determines whether you own your property outright or whether you have a landlord for the duration of your “leasehold.” If you own a freehold property, you essentially own any buildings or structures and the land it stands on outright.

You are registered as the freehold owner with the Dubai Land Department and you will own the property until you decide to dispose of it. Leasehold, on the other hand, means that you acquire the rights to occupy a property for a fixed period courtesy of a lease contract created with the owner. The leases are usually long term, often 99 years and frequently allow the lease holder to make modifications. However, they must do so recognizant that they do not actually own the property and must vacate eventually if the leasehold is not renewed

 Question of the week

What is REIT and do you advise me to invest in one?

A Real Estate Investment Trust (REIT) is a trust company that accumulates a pool of money through an initial public offering (lPO) which is then used to buy, develop, manage and sell assets in real estate. The IPO is identical to any other security offerings with many of the same rules regarding disclosure and reporting requirements and regulations. The investor, instead of purchasing stock in a single company, is buying a unit which is actually a portion of a managed pool of real estate. This pool of real estate then generates income through renting, leasing, selling and financing of property and distributes it directly to the REIT holder on a regular basis.

Units held in a REIT can be bought like a stock on a stock exchange. The REIT invests in real estate directly either by buying, selling or leasing properties or .by investing in property mortgages. Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in REITs that are listed on the stock exchange. Among other things, REITs invest in shopping malls, office buildings, apartments, warehouses and hotels.

Investing in REITs is a liquid, dividend-paying means of participating in the real estate market. REITS allow the average investor 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.