The Brent crude price recovery, an increase in government spending and the upcoming World Expo is hugely positive for UAE economic growth in 2018. Abu Dhabi’s 100 billion barrels of proven oil reserves and Dubai’s role as the Gulf’s financial, logistics, aviation, tourism, education, shopping and services hub raise global optimism about UAE’s financial future.
The emirate of Dubai attracts property investors from around the world as residential rental yields in some areas are higher than other global investment destinations. The Dubai real estate assets returned close to 120 per cent in the form of rents and capital gains over the last ten years, compared to 75 per cent in London and 63 in New York.
However, some investments are able to generate higher returns than others depending on the timing of the purchase as well as property’s location, size, quality, and other factors that define or constrain return on investment.
1. Which locations offer highest gross yields in Dubai?
Dubai has become more attractive market for property buyers due to lower sale prices and stable returns on real estate investment. Bayut.com’s 2017 report indicates a seven per cent average return on investment on apartments in Dubai. The report also suggests that Dubai International City remained the most affordable well-known area for both renting and buying apartments.
Affordable freehold communities offer the best gross yields in town — Dubai International City at 9.16 per cent due to being in high demand for for tenants in any season of the year and global economic situation. This is because affordable housing is the smallest segment in residential real estate market of Dubai and it will continue to yield higher returns throughout 2018.
According to Cavendish Maxwell data non-prime areas tend to have higher gross yields, while prime areas have the lowest gross yields due to high service charge, operating and maintenance costs:
Dubai International City 9.16%
Downtown Dubai 5.62%
Business Bay 5.85%
Mohammed Bin Rashid City 5.10%
Jumeirah Golf Estates 4.87%
Palm Jumeirah 4.68%
Jumeirah Islands 3.67%
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Affordable freehold communities offer the best gross yields in town
2. How can the government of Dubai help property buyers increase the return on investment?
Government has increased spending on infrastructure more than 40 per cent last year which will carry a positive multiplier effect across different sectors of the economy, especially in the real estate market. It provides an opportunity for investors to capitalise on new areas as the infrastructure develops.
When choosing property, it is worth considering new master communities such as Dubai South or extension of existing communities such as Dubai International City (Phase 3). These tend to offer higher return of investment in the form of capital gains as well as rents due to lower price points. As the area develops in terms of infrastructure the perceived price goes up, resulting in higher capital appreciation.
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New master communities and community extensions offer higher return on investment in the form of capital gains as well as rents
3. Is it safe to invest in the off-plan projects?
The UAE’s real estate market has become more ‘real’ in its true sense – full of real buyers, real brokers, real developers and real money in 2017. Continued vigilance by the Dubai Land Department (DLD) and the sound regulatory environment steered by the Real Estate Regulatory Agency (Rera) helped Dubai’s real estate market to become more mature and stable over the last few years making investment an absolutely safe proposition regardless of which location you invest in. It is no surprise that off-plan projects now account for nearly 80 per cent of total real estate market transactions in Dubai with off-plan property sales hitting a 9-year high.
However, it may not always be easy to identify genuine property developers. Credibility, transparency and commitment to customer happiness is important when choosing a developer. Rely on information from credible sources and avoid marginal, non-transparent, hard selling, undercapitalised, ethically challenged private developers and retail brokers.
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Avoid marginal, non-transparent, hard selling, undercapitalised, ethically challenged private developers and retail brokers
4. A number of developers seem to offer affordable housing options, what are the risks associated with that segment?
Most of the top Dubai real estate developers have identified affordable housing as a leading growth segment and are are said to be participating in that segment and reporting double-digit sales growth. The government is supporting the growth of the affordable housing sector and intends to introduce relevant policy recommendations. The DLD has displayed immense support for the affordable housing segment showing initiatives to incentivise developers to build more affordable housing options in central locations, thereby addressing the gap in the market for such offerings.
Developers will be tempted to reduce the size of apartments to make their price tag more affordable in 2018 as finding value for money remains a priority for buyers. Instead of working to build the largest homes possible, companies focus on the quality of every square metre in the living space to provide property end-users with the freedom to enjoy luxury life in Dubai with ease and relax at the end of every workday. Building smaller units will continue next year as this trend will guarantee the property’s affordability tag. In order for developers to keep the ticket prices of residential property at what can be described as affordable to the average person, the actual size of the finished unit will also have to be reduced.
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Expect smaller but smarter floor plans when considering affordable housing options
5. When is the best time to invest?
In recent years, Dubai’s new development market has gone from strength to strength, with a myriad of new projects being announced, as well as delayed projects from the last boom market resuming. Haider Ali Khan of Bayut, said he believes 2018 will present more opportunities for buyers and tenants as more inventory arrives on the market. With the industry getting more competitive, buyers are likely to see more affordable options, sales incentives or attractive payment plans in the new year.
The housing market has been adjusting to account for most of the population over the last two years and long-term residents are taking advantage of that before it’s too late. There has been a rise in end-user buying since many believe that prices have bottomed out. According to the DLD, 2017 land and property transaction value exceeded Dh285 billion – higher than Dh269 billion and Dh276 billion recorded in 2016 and 2015 respectively.
Matthew Gregory, head of property sales, dubizzle, said the Dubai sales market in 2017 appeared to be close to the bottom of its current cycle. Since the prices are not likely to drop further, now is an excellent time to invest. A lot of expatriates are realising that and switching to buy property rather than spend money on rent. A new report from Propertyfinder Group supports that trend. Residents of other emirates also shift towards Dubai as it has become more affordable than ever.
However, there will be less new project announcements in the years to come as many developers may be put off by oversupply and low unit prices. The supply of new projects will also decrease as we approach Expo 2020 as developers may find it hard to complete projects in time for the international event. This may be the best year for off-plan property buyers in Dubai.
Dubai population growth is one of the fastest in the world. The number of residents is expected to grow at an annual rate of five to eight per cent following the rise in job opportunities, created by Expo 2020 as well as the increased government spending and diversification of the economy with growing tourism and education sectors.
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As more people enter into the workforce the demand for properties will increase. A lot of companies will invest in the real estate market to accommodate increased staffing in preparation for Expo 2020 and create an asset for their stakeholders. Standard Chartered expects 300,000 new jobs to be created between 2018 and 2021, resulting from hosting the international event. Insufficient housing supply in Dubai will begin to drive significant price increases to higher than normal levels once the affordable off-plan market adjusts to the new stress test prior to Expo 2020.
The introduction of a five per cent value added tax (VAT) will also secure the future development of the Emirate and increase further confidence in the market. It will not however carry a negative effect on the off-plan property market. On the contrary, the implementation of VAT helps create a more open and clear system which will provide major new incentives for institutional investors to enter the Dubai real estate market. The ten per cent fall in the US Dollar Index has also historically been a reflationary tailwind for the UAE property markets.
TIP 5
2018 is probably the best year for off-plan property buyers in Dubai. It is an excellent time to invest and a lot of expatriates are taking advantage of that before it’s too late.