investors

Capitalization rate card for investment

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

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

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

Property Weekly

Escrow law protection

With the recent ﬂurry of new developments in Dubai, investors and potential owner-occupiers have been asking me how much protection is provided for the funds they are paying developers in advance. The conversation invariably turns to the concept of escrow and how this legally binding arrangement provides substantial protection for investors.

In its simplest form, an escrow can be described as a legally recognised ﬁnancial instrument held by a third party (typically a bank) on behalf of two other parties (typically a buyer and a seller) who have agreed to conduct a particular transaction in accordance with certain conditions. Funds are provided by the buyer and held by the party (bank) providing the escrow service until it receives formal advice that certain previously agreed obligations of the seller have been fulﬁlled, upon which time the seller can receive an amount speciﬁed in the agreement between the seller and buyer.

The use of escrow accounts by Dubai developers has now been mandated by law for the speciﬁc purpose of protecting the prepayments made by buyers for properties that are bought off-plan. This limits developers from gaining access to funds until certain construction milestones are completed, helping ensure developers are not misappropriating funds provided in advance for purposes other than which they are intended for.

Anybody can open an escrow account but a developer must ﬁrst be registered with the Real Estate Regulatory Agency (Rera), which involves providing an expansive array of documents, ranging from details of its officers and solvency, title deeds proving ownership of the land to be developed, and no-objection certiﬁcates (NOCs) from relevant parties such as the master developer, to performance guarantees backed by a ﬁnancial institution and all planning and details about the project.

Rera requires the land subject to development to be fully paid for and a title deed issued in the name of the owner. Where the owner of the land cannot register as a developer, Rera permits the owner to enter into a property development contract with an existing registered developer to develop the project on behalf of the land owner. The development contract, however, must be approved by the senior legal adviser of the Dubai Land Department to be accepted by Rera. Only when a developer is registered with Rera can it apply to open an escrow account. When selling off-plan, the developer must ensure all proceeds of the sale of the units are deposited into the escrow account and are used solely for the construction of the project. Failure to comply with the escrow law can lead to hefty ﬁnes or criminal charges, which may result in prison sentences.

Once a developer has submitted all the required documents to Rera and is granted the authority to sell units off-plan, Rera will issue an NOC to allow the developer to open an escrow account with an authorised UAE bank.

The bank that will be providing the escrow service needs to understand all the details of the underlying agreement to ensure that it acts in accordance with its provisions. In this way, the bank can help protect the buyers’ prepaid funds by referring and strictly adhering to the conditions of the agreement.

But while the introduction of escrow as a legal requirement for developers has helped safeguard the funds of off-plan investors, there are other steps that investors must take to provide additional protection.

Buyers need to make sure they are dealing with a reputable developer, regardless if it is registered with Rera. One positive effect of the global ﬁnancial crisis was that many suspect developers were exposed and forced out of business. Seek professional guidance, as those in the industry know who the reputable developers are. Ask the opinion of those who have transacted business with the developer.

Ask the developer what measures have been taken to ensure the end product is built to an acceptable standard and inspect buildings already completed by the developer. Warranties and 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 your apartment and report any legitimate issues to the developer for rectiﬁcation. Items that can be remedied in the short term should be ﬁxed immediately. Remember: once you have taken possession of the apartment, the developer is obliged to ﬁx any issues that would arise 12 months following the transfer of ownership.

آثار قريبة وبعيدة المدى تتحقق عند التطبيق

آثار قريبة وبعيدة المدى تتحقق عند التطبيق
السوق العقاري يتفاعل إيجاباً مع خطوة “إعادة الهيكلة”

أوضحت مصادر أن السوق العقاري والعاملين فيه قد تفاعلوا بايجابية مع مقترح كل من “دبي العالمية” و”نخيل” لاعادة جدولة ديونهما، الأمر الذي سينعكس على مستقبل القطاع بشكل مباشر وغير مباشر في الوقت ذاته على المديين القصر والبعيد .

وأضافت المصادر أن الآثار الحقيقية على القطاع ستتبلور مع اعلان الجهات الدائنة قبولها للمقترح وما سيتبعه من مراحل التنفيذ، مشيرة الى أن النتائج الأولية للمقترح تنحصر في محيط دائرة عودة الثقة والتفاؤل للجهات العاملة في مختلف المجالات العقارية، أما فيما يختص بمنحنى الأسعار فترى المصادر أنه لن يتفاعل بنفس الوتيرة مع هذه التطورات، حيث إن المسألة هي عامل زمني يرتبط ارتباطا وثيقا بمعادلة العرض والطلب، وهذا ينطبق في الوقت ذاته على مشاريع “نخيل” أيضا .

وأوضح فادي موصلي، المدير الاقليمي في “جونز لانغ لاسال”، أن الاعلان عن تفاصيل الخطة الشاملة لاعادة الهيكلة التي تشمل كل من “دبي العالمية” و”نخيل” كل على حدة، من شأنها أن تعطي دفعة قوية عنوانها الثقة والتفاؤل لجميع العاملين في السوق العقاري في الامارة من جهة وحركة البيع والشراء من جهة أخرى على المدى البعيد وليس القصير .

وأضاف موصلي أن تطبيق هذا المقترح، الذي تقدمت به كلتا الشركتين، سيدفع بصورة أقوى في اطار اكتساب دبي المزيد من المصداقية والشفافية التي كانت قد تأثرت في الفترة السابقة، وليبدأ العاملون في السوق باختلاف قطاعاتهم باعادة ترتيب أوراقهم وخططهم المستقبلية بناء عليه .

وأفاد موصلي أنه من الواضح أن السوق والمستثمرين قد استقبلوا هذا الخبر بايجابية، الأمر الذي انعكس بنفس الاطار على أداء الأسواق المالية، وأسعار الفائدة الائتمانية على ديون دبي، الا أننا نرى أن هذا التأثير يكمن على المدى القصير، أما البعيد فيرتبط بالمزيد من الوضوح والشفافية بشأن هذا المقترح الذي جاء أفضل من المتوقع، وننتظر رد الجهات المقابلة من الدائنين لقبوله .

وعلى صعيد نتائج هذا المقترح على السوق العقاري، يقول موصلي أنه من المرجح أنه يحتاج لكفايته من الوقت لحين أن يلمس نوعا من التحسن، في الوقت الذي بدأ المستثمرون التعامل بفعالية بعد طول انتظار لحل المشكلة الأولى في السوق المحلي بدبي .

أما مشاريع نخيل العقارية التي تعد ذات الصلة الأولى بهذا المقترح، فنجد أنها شأنها شأن جميع المشاريع في الامارة والتي تخضع لقاعدة العرض والطلب، فلن تتحسن أسعارها أكثر من غيرها، الا أن المعنى العام يصب في الشعور الايجابي للمقترح ككل من شتى القطاعات .

من جهته أوضح عمر عايش، رئيس مجلس ادارة “نوبلز” القابضة، أن اعلان كل من دبي العالمية ونخيل عن خطتهما الشاملة لاعادة هيكلة الديون ستؤثر بشكل ايجابي وبطريقة مباشرة في بعض القطاعات وغير مباشرة على قطاعات أخرى، والتي ستصب في النهاية في تحريك العجلة الاقتصادية من دائرة التباطؤ الى التسارع .

وأضاف عايش أن المقترح الذي تقدمت به الشركتان كل على حدة سيخلق دفعة معنوية على صعيد هامش الثقة لكافة العاملين في السوق المحلي بدبي من خلال ضخ مياه الحيوية والنشاط على مستوى شتى القطاعات الاقتصادية .

وأشار رئيس مجلس ادارة “نوبلز”، الى أن دبي كانت ولا تزال تتبوأ مركزا متقدما كبيئة استثمارية جاذبة لرؤوس الأموال وكبرى الشركات، وها هي تفاجئنا بقرارها الصريح الذي يعد من أفضل الأخبار التي نسمعها على الرغم من الظروف الحالية التي تشهدها كافة الأسواق العالمية في ظل الأزمة المالية العالمية، بأن يأخذ كل ذي حق حقه وهذا يزيدنا ايمانا بقدرة الامارة على تجاوز أسوأ التحديات والمصاعب .

أما مهند الوادية، المدير الاداري في شركة هاربور للوساطة العقارية فقال من جانبه: “ان هذا الالتزام الجديد التي قدمته “دبي العالمية” يعد خطوة ايجابية نحو التزامات عديدة في المستقبل، فهو بالتأكيد يعزز الثقة بالبيئة الاقتصادية والاستثمارية في مدينة دبي وفي قطاع العقارات بشكل خاص . فدفع المبالغ المستحقة سيخلق أثرا ايجابيا مضاعفا على جميع أصحاب المصالح وسيساعد على تخفيف حدة التوتر القائم” .

وأضاف الوادية أن هذا الخبر الجيد يؤكد مرة أخرى أن دبي تتمتع ببنية تحتية اقتصادية متينة وقادرة على الصمود في وجه العاصفة الاقتصادية بثقة ومرونة، ووفرت من خلاله شعورا بالتفاؤل تفاعلت معه الأوساط العقارية لما له من الأثر الكبير والواضح على جاذبية الامارة على الصعيد العالمي .

عبدالمجيد اسماعيل الفهيم، رئيس مجلس ادارة دبي بيرل “لؤلؤة دبي”، قال من جهته عبر اتصال هاتفي خلال جولة ترويجية لمشروع لؤلؤة دبي في الصين وبعض دول آسيا، انه لا شك أن قيام حكومة دبي بتقديم دعم مالي لاعادة هيكلة ديون مجموعة دبي العالمية ونخيل، سيكون له أثره المباشر على ازدياد معدلات الثقة في الأداء الاقتصادي لدبي على المدى المتوسط والبعيد، ويضفي حالة من الاستقرار والاطمئنان على أداء كافة القطاعات الاقتصادية ليس على مستوى امارة دبي فحسب وانما على مستوى دولة الامارات بشكل عام .

وأضاف بعد لقاء مع شركاء أعمال في شنغهاي: “لقد كان لهذا القرار أثره الفوري على أداء أسواق المال في الدولة والتي استقبلته بفرحة عارمة ترجمها ارتفاع مؤشرات التدوال بشكل سريع، وأقفلت الأسواق على ارتفاع طالما اشتاقت اليه الأسواق، وبعث السرور والسكينة في نفوس جميع المتعاملين . كما أن هذا القرار ستكون له انعكاساته المباشرة على القطاع العقاري الذي هو بحاجة ماسة لمثل هذه المحفزات” .

وقال ان هذه الخطوة تمثل رسالة واضحة الى كافة أسواق العالم أن دبي قادرة على الايفاء بالتزاماتها برغم أي ظروف، وأن نهجها الاقتصادي التطويري ماض الى ما لا نهاية، وأن على الجميع أن يتعامل معها على هذا الأساس، وألا يراوده أي شك في أن المستقبل المشرق مازال فاتحاً ذراعيه لدولة الامارات لتحقق المزيد من الانجازات على سلم التطور الحضاري طالما أن قيادتها قادرون على توجيه الخطى الى الأمام بصدق ويقين وعزيمة .

Stable prices push sales up at Springs, Meadows

Communities have highest sales and leasing activity due to stable prices and rentals, say agents.

Prices of villas in Emirates Hills range between Dh10 million and Dh25m. (SATISH KUMAR)

The Springs and The Meadows have seen the highest sales and leasing activity within Emirates Living since the beginning of this year owing to stable prices and rentals, according to real estate agents.

Vineet Kumar, Head of Sales, Dubai, Asteco Property Management, said: “The Springs and The Meadows have seen increased sales and leasing activity since the beginning of this year as ongoing sales prices and rental rates for these properties have been stable for the past two months.”

According to Mohanad Alwadiya, Managing Director, Harbor Real Estate, between January 1 and March 18, The Springs and The Meadows recorded 66 sales transactions, marking a 50 per cent increase for the corresponding period in 2009.

He said between January 1 and March 18 last year, The Springs and The Meadows saw 44 sales transactions and during October 1 to Dec 31, 2009, 89 sales transactions were recorded.

Sales transactions up

Alwadiya disclosed that The Greens, The Lakes and The Views recorded 79 sales transactions between January 1 and March 18 this year, marking a 103 per cent increase over the corresponding period last year. “The Greens, The Lakes and The Views recorded 39 sales transactions between January 1 and March 18 last year and a total of 109 sales transactions in these communities between October 1 and December 31, 2009,” he said.

Paul Musson, Residential Sales Consultant, Better Homes, said current sale prices for a two-bedroom and three-bedroom apartment with study and maid’s room in The Springs were at Dh1.1 million and Dh2.2m, respectively. “In The Meadows, current sale prices for a three-bedroom and five-bedroom villa with a study and maid’s room are around Dh2.8m and Dh5.4m,” he said.

“In The Lakes, prices are currently at Dh3m and Dh4.5m for a three-bedroom villa with a study and maid’s room and for a five-bedroom villa with a study and maid’s room, respectively,” he added. In Emirates Hills, prices of villas range between Dh10m and Dh25m, but Musson said the villas are not selling at Dh25m. In The Greens, a one-bedroom apartment is currently selling for Dh680,000 while a three-bedroom apartment is selling for about Dh2.8m.

Musson said the bottom-end of the apartment market is still falling slightly in the studios and one-bedroom apartment segments. “The two-bedroom apartments are still holding up.”

He said demand from buyers in the market today was largely for villas and was no longer just price-driven. “Villas are what buyers want now and not just at the best price. Early this year, buyers were only looking for the best price, now however, end-users want the best unit for the best price.”

Rentals on a slide

Tamara Stubbs, Residential Leasing Consultant for Better Homes, said: “Annual rentals in The Springs range from Dh90,000 for a two-bedroom villa to Dh150,000 for a full lake-view three-bedroom villa.”

She said in The Meadows, rents ranged from Dh180,000 per annum for a standard three-bedroom villa to Dh375,000 per annum for a five-bedroom to six-bedroom villa. In The Lakes, annual rents for a three-bedroom townhouse were at Dh130,000 while for an upgraded three-bedroom villa, rents were at Dh160,000.

In Emirates Hills, annual rents are at Dh280,000 for a four-bedroom villa and at Dh400,000 for a four-bedroom to five-bedroom villa. In Dubai Marina, annual rents are at Dh60,000 for studios to Dh250,000 for a four-bedroom penthouse. In The Greens, annual rents are an approximate Dh40,000 for studios and Dh120,000 for a four-bedroom villa.

Stubbs added: “You can get higher rents for different units depending on the finishing and interiors.”

Alwadiya said the current rental prices within the development are lower than those prevailing six months back by an average of five per cent to 10 per cent. “Sale prices in The Greens and The Views are lower by 13 per cent to 15 per cent. But for villas, prices are slightly higher by around five per cent.”

He added: “Due to the decrease in rental and sale prices by around 35 per cent and 45 per cent that this area witnessed during the past 15 months, we have noticed an increase in demand for all the communities within Emirates Living with a focus on The Greens, The Views and The Springs. This trend was carried over during the first few months of 2010.”

Sahali Saleem, Residential Leasing Consultant, Al Barsha, Better Homes said among the communities, The Greens and The Springs had the lowest number of rentals when compared to the other sub-communities in Emirates Living because of the ongoing road construction.”

Occupancies within the Emirates Living district vary from one community to another. According to Harbor Real Estate, occupancy in The Greens is highest at 85 per cent, followed by The Springs with 80 per cent occupancy levels.

The Views and The Links have about 75 per cent occupancy followed by The Meadows which have 80 per cent occupancy. The Lakes currently has about 60 per cent while Emirates Hills has about 55 per cent occupancy levels.

“The rate of people moving in and out of the development is almost equal. Emirates Living did not witness a sharp drop or a drastic increase in population compared to the same period last year. This was mainly fuelled by the influx of new tenants who upgraded their homes taking advantage of the newly reduced prices,” said Alwadiya.

High occupancy levels

According to Asteco, occupancy levels within Emirates Living have been given a push and currently stand at 75 per cent overall levels as many owners held back selling their properties and instead looked to lease them. “Occupancy is quite high as a majority of inventory has been handed over for more than a year. In our estimate, the occupancy level is above 75 per cent as a lot of inventory has been held back for sale and owners have decided to lease their villas. This has given a push to occupancy levels,” said Kumar.

The villas only pay community fees for the use of common facilities such as parks, pool, landscaping, use and upkeep of roads. “This fee ranges from Dh7,500 to Dh16,000 a year. Maintenance of villas, like any other property, is on the owners’ account,” added Kumar.

Alwadiya said: “The community service fee charges for villas and townhouses are more or less the same. For The Greens, service charges continue to increase. However, the option of payment over four instalments was highly appreciated by many owners in the development.”

Asteco said the overall buyer profile of Emirates Living was a mix of families from all over the world. “The development has a strong presence of clients from Europe, Asia, the GCC, Lebanon and Iran,” said Kumar. “The community is ready and offers convenience for occupants. Villas of two-bedrooms to five-bedrooms are popular for family living.”

Alwadiya said: “For The Lakes, The Meadows and The Springs you cannot define a buyer profile. Nowadays we see different nationalities with different professional and income profiles moving into these areas.”

In Emirates Hills, high demand continues from wealthy South Asian, Russian and GCC nationals. “All of these buyers come with very high budgets and ready cash to pay for their luxury dream homes,” he said.

Master plan overview

Emirates Living comprises The Springs, The Meadows, The Lakes, Hattan, Ghadeer, Montgomery and Emirates Hills. The Emirates Living district also comprises The Views and The Greens.

The Greens are mid-rise apartment blocks comprising nine projects in all – Al Sidr, Al Jaz, Al Nakheel, Al Ghaf, Al Samar, Al Dhafrah, Al Arta, Al Thayyal and Al Ghozlan.

The Views are apartment buildings comprising eight projects in all – Arno, Travo, Turia, Una, The Fairways, The Links, Golf Towers and Mosela.
The Springs comprises townhouses built around man-made lakes. The properties in The Springs range from two-bedroom to four-bedroom townhouses and are located close to The Greens, The Lakes and The Meadows.

The Meadows are detached villas offering double-storeyed villas from three to seven rooms, each surrounded by a garden and garage.

The Lakes are detached villas and townhouses comprising Deema, Furat, Maeen, Zulal and The Ghadeer which was the last to be handed over recently. The Lakes has been built around a lake, located near the Emirates Golf Club and The Greens development. Initially, properties in The Lakes were only for rent, but in 2007, Emaar offered freehold titles to the properties, with first refusal granted to the then existing tenants.

Emirates Hills are luxury-detached villas that have been sold as plots to investor to build their properties on.

The community also includes schools such as the Dubai International Academy, Emirates International School, Dubai British School, Regents School, a community centre, restaurants and supermarkets, children’s playgrounds, and communal swimming pools

Emirates Living residents also have access to the Emirates Hills’ Montgomerie Golf Course and its Golf Academy which includes a clubhouse and other facilities.

Sales show improvement in key realty projects

Downtown Dubai has the highest number of listings by most realty agents.

Downtown Dubai, Emirates Living, Dubai Marina and Dubailand top the listing chart for sales and leasing queries, according to agents.

“Downtown Dubai has the highest number of listings by most realty agents in Dubai. The second popular area is Dubai Marina with a large focus on Jumeirah Beach Residence (JBR),” said Mohanad Al Wadiya, Managing Director, Harbor Real Estate.

For Harbor Real Estate, the number of listings in these areas has increased by 20 per cent to 25 per cent in 2010. “Business Bay with a larger focus on the recently launched Executive Towers comes third, according to us,” he added.

Al Wadiya said Downtown Dubai and Dubai Marina have always been ranked high and are one of the most sought-after areas in Dubai.

“The location of both these areas is good, which is the most important decision investors take while investing. Further, the current price points have also made these two districts more attractive as they have became more affordable.

“Another key reason for this increased attention and demand is the fact that both these areas include popular attractions such as The Dubai Mall, The Marina Mall, The JBR walk, The Marina walk, the free beach in JBR and Burj Khalifa.”

Better Homes’ Liz O’Connor, Director – Residential Sales and Leasing, said: “Our top-selling districts between November 2009 and February 2010 have been The Emirates Living District, Marina District, Downtown District and the Dubailand districts.”

“For us, between November 2009 and February 2010, we received the most listings for the Emirates Living District, such as The Greens, Emirates Living, Jumeirah Village, Jumeirah Lake Tower (JLT), followed by Dubai Marina, Dubailand and Downtown Dubai districts,” said O’Connor.

Vineet Kumar, Head of Leasing and Sales – Dubai, Asteco Property Management, said: “Majority of listings we received in the past two months are for recently handed over projects such as the Loft apartments in Downtown Dubai and the Executive Towers in Business Bay.

“Other areas, which have received good level of listings are Dubai Marina and JLT, villas in Emirates Living such as Springs and Palm Jumeirah.

“Also, Sheikh Zayed Road continues to draw interest from tenants looking for quality residential buildings.

“Listings are always linked to the status of handed-over projects. As more projects have been handed over, or are nearing completion, we have seen a growth in the number of listings in these select locations,” he added.

Handover

Real estate agents said the main reason for these areas recording the highest listings has been due to recent handover within these areas and the fact that these communities offer a complete lifestyle with lesser construction happening in these areas.

Al Wadiya said: “The overall market condition in Dubai is stabilising and the appetite of all the stakeholders in the property market is improving as there is a general consensus that the prices have bottomed out and if there is any further decline, it will be very marginal and will not affect areas or developments that are completed.”

O’Connor said: “For residential real estate, location plays a big role in the demand for these areas. People want to live in popular areas that provide them with a good lifestyle and one which are easily accessible.

“Our customers are increasingly looking for The Emirates Living district, followed by Dubai Marina, Dubailand and Downtown districts,” she added.

Kumar said: “Buyers will show interest in master-plans that are developed and offer convenience of living and at rates which are attractive. Further those buyers who receive handover of their property and do not wish to occupy them for self-use will often offer these for sale or leasing.”

Meanwhile, listings for properties (sales and rentals) in JLT and Discovery Gardens has dropped due to buyers looking at other value for money investments in other parts of Dubai.

Al Wadiya said: “During the second half of 2009, we were seeing more listings for JLT and Discovery Gardens. The listings have been reduced in these areas mainly because of the shift of focus to the more popular areas of Dubai such as Downtown Dubai and Dubai Marina.

“Prices are more affordable in these areas, hence buyers especially end-users and investors are shifting to these areas. In addition, Downtown Dubai and Dubai Marina offer a more established community lifestyle with less construction going on in the area,” he added.

He said the number of transactions in these areas could have fallen during 2010. According to Better Homes, no significant drop in listings has been noted in any particular areas.

“There are always shortages of a particular type of properties within a certain area for the right price which leads to a shortage in particular communities. Certain communities in Dubai, particularly those with villas, do not have many units becoming available as they have end users living in them who are there for the long term.

“The villas in Phase I Green Community are an example,” said O’Connor.

“Further, not having listings in a particular area could mean a number of things, such as a shortage of property within these areas for the right price.

“It could also mean that property owners are leasing rather then selling in these places,” she added.

Harbor Real Estate said the company does not remove any particular area from its listings.

“However, we focus more on the areas that have more demand. Having said that, we continue to provide minimum support to off-plan projects as the demand for these projects is still very low,” said Alwadiya.

Kumar said: “We have identified certain locations and focus on those areas alone. However, we have not removed any areas.

“You may find we do not have a presence in certain areas such as Downtown Jebel Ali and Dubai Waterfront. We will revisit these locations once we believe the market will be interested from a price-point which is agreeable to the sellers.”

Real estate agents said delivery of new properties in Dubai is likely to increase the number of distress sales.

O’Connor said: “Delivery of new properties in Dubai are likely to see a number of ‘distress sales’ coming into the market. In fact this is already happening. In all situations the reasons to sell are unique; however, we generally expect to see distress sales coming from areas where projects are not expected to be completed or cancelled.”

She added that in the case of a property with mortgage attached, the extent to which a seller is willing to sell his property would depend on the mortgage finance, as the final selling price must cover the bank’s finance amount. In the case of cash sales, however, there is no limit to which a seller may sell.

Kumar said: “As more inventory gets delivered there will be sellers who will prefer to exit from the purchase but the value will be linked to quality of project, status of the master community etc.

From the buyers perspective, this is a good time to buy a piece of real estate at realistic value with the aim of holding the property for the mid to long-term.”
He added that the term, “distress sales” should never be used, as selling a property is a seller’s personal decision.

“The reasons for selling the property at the value they deem right is the seller’s choice. We might use the term ‘motivated seller’ but not distress. Quite often such sales are at lower than market price and could translate into a financial loss for the seller. However, market conditions may be only one reason for such sales.”

According to Harbor Real Estate, the term ‘distressed sale’ emerged during the early days of the crisis during the last quarter of 2008 and has soon become a common property jargon.

“Few people really know what it means and how to qualify a property as a genuine distress sale,” said Al Wadiya. “The global credit crunch has hit the property industry hard. Developers find themselves in the position of having built projects which now have no buyers or the people who bought off-plan are now trying to pull out and recoup their deposits,” he said.

He said that distressed properties are properties that are in danger of facing foreclosure proceedings or that have already been scheduled for sale as a result of default on the part of the owner.

“A property is said to be distressed when an owner gets behind on mortgage payments or a direct payment to a developer and the lender or appropriate debt collector begins to start the necessary proceedings to sell the home in order to collect the outstanding debt.

Distressed properties can cover any kind of real estate, from commercial spaces to apartments. It’s a great chance to save, often ranging anywhere from 40 per cent to 60 per cent off their actual market value or buying price, but it’s also a great chance for making a good investment, since purchasing for a discount often means creating a huge margin for future profits,” he said. O’Connor said: “It is important to understand that a ‘distress’ sale is really only where the seller is willing to sell for less than he paid for, particularly if the property is off-plan.

“Some sellers are willing to sell for the original price of the property or less, but many sellers – in particular those with ready properties rather than off-plan – are unable to emotionally ‘let go’ for less than they think it should be worth.”

She said that many sellers will describe themselves as ‘distress’ sellers, even though they may expect to receive quite a bit more than they paid for the property.

“However, in the case of investors off-loading their off-plan properties, those that are prepared to incur a loss will generally accept up to 40 per cent less than the original price in order to just get some of their investment back,” she said.

“Owners looking to sell are increasingly twitchy about moving their properties off the market and banks have large numbers of repossessed property stock effectively sitting on their balance sheets when what they really need is liquid cash sitting in the coffers. All of this adds up to something that buyers love more than almost anything else – the opportunity for a bargain,” said O’Connor.

O’Connor said the situation occurs mainly with cash buyers. “This is a worse situation for a finance buyer, because he has to pay the bank and pay the difference directly from his pocket; in many of the finance distress sales, the client will walk away.”

“It is important to say that using the term ‘distress sale’ without the permission of the owner is considered a breach of the agents code of ethics introduced under by-law No 85 of 2006 because agents are supposed to be trusties for the owners and they should not disclose the owner’s financial status under any circumstances,” she said.

The real estate agents said some properties like JLT, Greens, Dubai Marina, Downtown Dubai are providing some good value for money investments for buyers.
“Some of the apartments in JLT are value for money and will prove to be a good investment when the infrastructure of the community is complete and the metro is fully operational. However, investors need to choose carefully. Those towers on Sheikh Zayed Road side of the community are proving to have the most popular locations,” said Al Wadiya.

“Greens is due to shortly handover and many investors are anxious to off-load their property at original price and in some cases for less,” said Al Wadiya.

High service charges hit rental yields

Service charges for some properties in Dubai range between 18 per cent and 48 per cent of annual rents, according to a recent report by Investment Boutique (iB). Further, falling rents coupled with high service charges are contributing to lower rental yields for an investor in Dubai.

Real estate analysts also said that developers in Dubai were not necessarily following the service charges set out by the Real Estate Regulatory Agency (Rera). “We don’t see all the developers abiding by the service charges set out by Rera. For example, the rate for luxury-serviced apartments should be around Dh50 per square foot yet some luxury projects in Downtown Dubai are charging Dh63 per square foot,” said Mohanad Alwadiya, Managing Director, Harbor Real Estate.

Meanwhile, iB in its latest fourth-quarter report – Market Pulse – said developers of some properties in Dubai continue to charge high service fees despite the Rera regulating service charges in the emirate.

“A 1,000 square feet one-bedroom unit in Discovery Gardens at Dh24 per square foot amounted to service charges of around Dh24,000. Current average rents are Dh52,300, which means that service charges constitute an exorbitant 46 per cent of rents. What this does to an investor’s rental yield is but obvious,” said Heather Wipperman Amiji, CEO, Investment Boutique.

According to Alwadiya, high service charges coupled with falling rents can reduce the rental yields for an investor. “High service charges can burn up the capital appreciation and annual rental yields for end-users and investment buyers.”

Elaine Jones, CEO, Asteco Property Management said: “Currently Although we have seen rents stabilise over the past three months, it is also possible that as developments settle and the true level of maintenance and upkeep is determined that service charges will soften. Different owner occupiers also have varying levels of expectation with regards to security, common area cleaning, landscaping etc. and whilst initially the most cost effective route is chosen in the medium to long term a recognition of the added value that a well cared for and maintained property can bring or add to the sale or rent value is significant.”

She said that property in New Dubai is subject to master community charges in addition to local community service charges and property maintenance.

The impact of service charges has been felt throughout Dubai with developers facing concerns from property owners on the high service charges and perceived low quality of service.

In the case of apartments, service charges constituted between 15 per cent and 32 per cent of rents in the first quarter of 2008. Downtown Dubai and The Green Community charge the highest service fees in the apartment and villa category respectively, with Jumeirah Lake Tower (JLT), Arabian Ranches and Emirates Living being the cheapest.

According to the report, service charges also vary substantially from community to community with JLT currently the most attractive to investors as service charges are between 21 and 23 per cent of rents. Developments such as Dubai Marina, Palm Jumeirah and Burj Khalifa have relatively higher service charges.

With charges remaining more or less stable and rents declining substantially, service charges now constitute between 18 per cent and 48 per cent of annual rents.

Discovery Gardens, a mid-end development with modest facilities called into question the rationale behind high service charges. Owners organised themselves in an effort to force the master developer to reduce the charge. However, they met with limited success as the final rate was reduced by Dh5 per square foot.

Previously in 2008, there were increases across the board with Emaar’s Arabian Ranches doubling, Union Properties’ Green Community also witnessing a 50 per cent rise. The reasons cited included initially subsidised charges, rising labour costs, increasing costs of utilities, such as electricity and water, and inflationary pressures on raw materials.

In December 2008, Salwan, a subsidiary of Dubai Properties and the property management company for Jumeirah Beach Residence, upped service charges at the beachfront community by 129 per cent from Dh9.5 per square foot to Dh21.75 per square foot. In February 2009, Salwan reduced the service charges to Dh15.32 per square foot. Soon after this, owners of units in Nakheel’s Discovery Gardens also realised that their own service charges were well above market rates at Dh29 per square foot, almost double of Jumeirah Beach Residence, with fewer facilities.

Lack of clarity

According Investment Boutique, there continues to be a lack of clarity and solutions with respect to service charges in Dubai. The Strata Law has yet to be ratified, owners’ associations are slow to set up, developers and property management companies continue to charge unjustified rates even with Rera trying to control the increases. Owners and tenants continue to be dissatisfied with the level of service received.

The iB report said some MEP (mechanical, electrical and plumbing) and facilities management professionals speculate without reference to any specific project that the high service fees quoted may be the actual cost of the service provided, but they are unnecessarily high due to poor selection of equipment and materials at project inception as well as a poor maintenance programme.

FM consultants

Including facilities management (FM) consultants at the design stage helps save substantial costs over the life of a building. As the market begins to open to investors, more are interested in the rental yield than capital appreciation. These buyers should also invest in FM advisory services to ensure that running costs to date have not been kept artificially low.

Analysts outlined the various reasons for service charges for villas to be higher than those of the apartments. According to Harbor, service charges for villas are low mainly due to the fact that service charges for villas are calculated based on the plot area of the villa. “In addition, villa communities have less MEP and other common elements in villas compared to apartments,” said Alwadiya.

Jones said: “District cooling, housing tax and Dubai Electricity & Water Authority (Dewa) costs are usually borne by the occupier. Traditional Dubai property that we have managed as full block management will have cost between 20 per cent to 30 per cent of rent income, dependent on air-conditioning, age of building etc. New Dubai property is a little higher due the additional Master Community Charge.”

“Rera reviews and approves the service charge assessed by the home owners association. Rera is also involved in the apportionment of area charges where there is a mixed-use development. The costs that make up the service charges are transparent and the home owners association will usually collect three quotes for each service line so as to ensure that the most competitive rate is secured – bearing in mind always that cheapest is not always best.”

Utility costs will be estimated in the first year based on advice from consultants. The second year’s service charge may well be more accurate than the first as the level of service required and the actual consumable costs are defined. “Service charges are for the common areas of which villas have far less of. Most villa plot and property maintenance costs are individual costs and not shared. The roads, street lighting, landscaping, garbage collection are the only shared amounts,” said Jones.

In case of villas, the service charges are charged on the basis of the plot size. The case of villa service charges differ completely from the fees, accounting for between three and nine per cent of rents, except for The Green Community, which is relatively more expensive. The huge difference in the service charges between apartments and villas is due to a typical building budget.

Villa service charges are substantially lower when compared to apartments as there are fewer common areas to maintain. Security, landscaping and the upkeep of pools and lakes are covered by the service charges, but municipality fees are paid separately and maintenance of the individual villa is the owner’s responsibility.

Chilled water for common areas accounts for a third of maintenance costs, other utilities account for one-sixth and the master community charge accounts for one-tenth for the average property.

A typical breakdown of other costs includes soft services such as pest control, façade cleaning and swimming pool cleaning and treatment, while subcontractor services and repairs cover the emergency lighting system, aviation warning lights, water tank cleaning, automated doors, building management unit (cradle) and its certification, building management system (BMS), fire alarm system, fire protection system, generator, CCTV, access control system, apartment intercom, public address system, lighting control system and gym equipment.

Majority of expenses are specific to apartment blocks and not to villas, which explains the difference. Variations in service charges needs to be taken into consideration by investors choosing between apartments and villas as this could impact both rental yields and capital appreciation. The report also called for more clarity from the developers and property management companies with respect to the manner in which funds are used. It is hoped that once the Strata Law is introduced, owners’ associations will have a say in the matter and the resulting transparency will only benefit the Dubai property sector.

The last quarter of 2009 was when the optimists had predicted that recovery would happen.

“According to our analysis of the market, we still have some time to go before we see recovery in the UAE property sector, especially in Dubai,” said Amiji.

Transactional activity

The majority of transactional activity in 2009 occurred in the completed property sector. The off-plan market has seen very little transactional activity at all during this time period and as such has not effectively been re-priced.

If off-plan projects are completed and enter the market en masse there will need to be an asset re-pricing in terms of rental values and capital values, which will also have an impact on the local market. However, by the end of 2010, we expect some stabilisation as there will likely be more certainty in global markets and local exposure to bad loans. Over the course of the year, project stakeholders are likely to take stock of their situation and either cancel projects with little economic value in the new market of 2010 and absorb the write-offs or allow the supply to come on stream and let the market adjust accordingly.

Residential affordability is key

While rents and sale prices have suffered considerably in Dubai, declining by more than 50 per cent, Abu Dhabi has proven more resilient with rents estimated to have fallen by 23 per cent between the first and last quarters of 2009. Even though Abu Dhabi faces an undersupply, rents have fallen due to factors such as redundancies and job insecurity, the substitution effect of Dubai’s more affordable housing market, and limited selection of high quality or easily accessible units due to the abundance of construction and infrastructure activity.

While sale prices have also been moving downward, properties close to completion on Al Raha Beach and on Al Reem Island have managed to trade at premiums to opening prices although these have fallen between 30 per cent and 46 per cent respectively from their 2008 peaks.

Downward pressure on rents

The greatest contributing factor to the downward pressure on rents in the Abu Dhabi market has been the mismatch between Abu Dhabi income levels and rental values.

There is a lack of affordable property for the majority of people in the emirate. Prices and rents will continue to fall until they reach the level at which the average middle income or upper income end-user can comfortably rent property, assuming an international benchmark of 25 per cent of income on housing expense, or comfortably purchase property assuming a benchmark of 30-40 per cent of income spent on mortgage payments.

As such, excluding the last two categories, which account for 29 per cent of Abu Dhabi’s population, rents in Abu Dhabi are not affordable to the majority 71 per cent of the population, and thus there is a downward pressure on rents in Abu Dhabi given Dubai’s substitution effect.

According to the analysis, affordable unit prices average around the Dh1,000 mark. While prices were reduced substantially in 2009, a further decline is required to bring prices in line with income levels, especially given the fact that average prices in the neighbouring Dubai are currently lower than the Dh1,000 mark.

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Oil field should boost sector

The discovery of a new offshore oil field is likely to boost Dubai’s economy, although its impact is hard to gauge until its volume is determined, say real estate executives.

With production to begin in 2011, they think the resulting hike in revenue could boost infrastructure development.

“It is hard to tell what impact this will have until we get more information on this,” says Charles Neil, CFO of Landmark Properties. “Then we can judge the impact it will have on finances and infrastructure. More money flowing into the economy will be a positive development. There would be an increase in people to work in production and housing, and revenue flowing in for infrastructure but without barrels per day it’s hard to say.”

Mohanad Alwadiya, managing director of Harbor Real Estate, says the discovery should boost investor confidence, but adds this largely depends on the oil field’s output.”This positive effect will surely rub off on the property market,” he adds.

“Irrespective of the capacity, it can only add to Dubai’s income stream,” says Aditya Awtani of Fine and Country. “The mantra ‘buy on the rumour and sell on the news’ has worked well for many equity traders. However, in the real estate market, especially one that has dropped significantly, investors naturally shall remain on the sidelines until there’s concrete data.”

As the oil field’s production picks up, it will have a positive effect on the property market as well, says Aditya.

“Experts are predicting approximately 10,000 barrels could potentially be pumped via the Al Jalila oil field. If this is to be believed, that would imply, at today’s oil prices, an additional $270 million for Dubai.” This would help reduce the emirate’s budget deficit, he adds.

Abu Dhabi villa prices expected to slide further

Sale prices and rentals of villas in Abu Dhabi are likely to drop as fresh supplies are entering the market and a number of people are shifting to live on the outskirts of Dubai due to its “affordable rates”, said real estate officials.

Already villa prices have dropped in various projects. “We expect this trend to continue during 2010 as more units are expected to be handed over and the number of people relocating from Abu Dhabi to ‘more affordable’ Dubai continue in the short- and medium-terms,” said Mohanad Alwadiya, Managing Director, Harbor Real Estate.

Currently, in Al Reef Villas a two-bedroom villa goes for Dh1.1 million, a three-bedroom villa for Dh1.6m, a four-bedroom villa for Dh1.7m and a five-bedroom unit for Dh2.3m.

“Villa prices in Abu Dhabi are starting to soften as more units start to flow into the market. This trend has affected the attitude of landlords and sellers and has forced them to be more flexible when it comes to price points and payment terms,” said Alwadiya.

Harbor Real Estate’s first Cedre Villas open house generated great demand

Demand for Villas and Townhouses is still very strong despite the current economic situation

Harbor Real Estate’s first Cedre Villas open house generated great demand

Harbor Real Estate, an integrated Real Estate Service Provider in Dubai, promoted several fully decorated units in the exclusive Cedre Villas in Dubai Silicon Oasis last Saturday. The open house day paraded Twin villas and Townhouses for sale and rent, and welcomed a large number of clients on the premises.

Clients who visited the project were excited about the quality of the finishing, layouts and architecture, the vast spaces, the overall serenity of the community and vigorously the attractive prices.

Mohanad Alwadiya, Managing Director of Harbor Real Estate, said: “Seeing is believing, presenting an open house is a great promotional methodology to attract potential clients, especially that the advantage is for the buyer nowadays. What we are witnessing here is a sign that economy have stabilized and individuals are confident to invest in well established properties that offer them real value for money”

“The project attracted buyers due to its potential when it comes to offering stable capital gains and above average annual rental yields. The attendees of the open house event included a diverse mix of nationalities. Due to the great results and high demand, we have decided to run another open house event on the 30th of January, where we will continue to offer our special added value package to the Harbor Real Estate clients” Added Alwadiya

Open house buyers will enjoy free maintenance for the first year in addition to 90% pre-approved financing up to 25 years and the option of 1 year in-house payment plan which will be offered to owner-occupiers.

The Cedre Villas project provides its residents uncompromised quality and 40% more space than any other villa in Dubai of the same type. The units entertain all tastes with 3 and 4 bedrooms contributing to multi-vibrant lifestyle amenities and smart homes facilities that answer everyone’s wishes.

Harbor Real Estate services have evolved from traditional real estate brokerage of merely bringing buyers and sellers together to innovative world class end-to-end real estate services. The company services include, Real Estate Tailored Research Services, Integrated Marketing Services, Sales, Leasing & Conversion Management Services, Real Estate Investment Portfolio Management Services and, Holistic Real Estate Legal Services.

For more information about Harbor and the special added value offers on Cedre Villas, please contact Harbor on: info@harbordubai.com