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50 Gulf Property

Dubai offers healthierreturn on investmentDubai offers healthierreturn on investment

Real estate market inDubai offers an av-erage yields of 7 percent, about 2-3 percent above the aver-

age yield in internationalproperty markets, especiallywhen compared to the mod-est yields that mature mar-kets like London, Paris orNew York offer.

Traditionally, investorshave been attracted by thepossibility of high returnsfrom properties in Dubai, inaddition to the absence ofproperty tax unlike in otherparts of the world.

Although of late there has

been a slowdown in sales ofluxury residential unitsacross the emirate, the con-stant rise of the expatriateworkforce has essentiallymeant that more people arenow looking for rented apart-ments to live in. Rental yieldsfrom the affordable housingsegment in Dubai – wheremultiple projects werelaunched during the first halfof 2015 – remain higher thanthe average yield, expertssay.

“The average yields atwhich we have seen transac-tions happening in the Dubaireal estate sector during thefirst half of 2015 is between7 to 8.5 per cent. Analysingthe two components of returnon investment (RoI), i.e.yields and capital apprecia-

tion, over a long term period,we observe the yields to bein the range of 6 to 9 per centper annum and average cap-ital appreciation in the rangeof 10 to 20 per cent perannum, making the effectiveRoI in the range of 15 to 30per cent per annum,” AyshaSawhney, Director of Max-Growth Consulting, told GulfProperty.

“However, given the highlydynamic nature of the Dubaimarket and the fact that it islargely a sentiment-drivenone, depending upon an in-vestor's exact timing of entryand exit from a property,his/her specific RoI could besignificantly higher or lowerthan the average RoI,” sheadded.

Rentals stablein Q1 2015The first quarter of the yearcontinued to see subduedactivity in Dubai’s real estatemarket. While residentialrents remained relatively flat,sale prices saw a marginaldecline across both apart-ments and villas.

The first quarter of the yearsaw the delivery of approxi-mately 730 residential unitsacross Dubai. An additional22,000 are expected to enterthe market by the end of2015, global real estate advi-sory Jones Lang LaSalle(JLL) predicts.

“This downward trend isexpected to continuethroughout 2015, as we fore-

By Indrajit SenSenior Reporter

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Residences (JBR) recordeda total transaction value ofDh1.08 billion, spread across512 deals, which equates toan average deal value ofDh2.11 million. During thesame period Emirates Livingrecorded total sales ofDh808 million, from 245transactions.

“The residential leasingmarket has remained broadlystable for a third consecutivequarter, with only minorchanges in rental ratesrecorded. The market’s rela-tive stability during the pastnine months is reflected inthe huge swing in growth fig-ures from 27 per cent in theyear to Q1 2014 versus 3 percent in the year to Q1 2015,”Matthew Green, Head of Re-search and Consultancy

UAE, CBRE Middle East,said.

He feels that with residen-tial sales prices expected todecline faster than rents inthe coming months, saying,“We may start to see yieldsmove out as we progressthrough the year.”

Return onInvestmentThe overall growth of theDubai market, supported byfactors such as security, atax-free haven and a safe in-vestment structure, makesrealtors assure lucrative re-turns. Moreover, Dubaiemerging as a more maturemarket for real estate postthe 2008 recession, has gar-

see prices dropping up to 10per cent by year-end,” JLLstates in its Dubai Q1 2015report.

Sales index issued by aDubai-based Real Estate In-vestment and DevelopmentInformation Network (Reidin)depicts a marginal decline inprices across both apart-ments and villas. This comesas the Reidin rental indexshows growth levels drop-ping to 8 per cent Y-o-Y inFebruary 2015 (from 23 percent Y-o-Y in Q1 2014). Sim-ilarly, the Reidin sale priceindex shows a decline ingrowth levels from 30 percent to 6 per cent over thesame period.

According to the first quar-ter of 2015 figures, DubaiMarina and Jumeirah Beach

CommercialProperty

Dubai’s office marketremained relativelystable over the firstquarter, with JLLsaying that average

rents across the CentralBusiness District (CBD)recording Dh1,880 persquare metre and vacanciesregistering 23 per cent.

Demand for Grade A qual-ity stock continues to be ro-bust, particularly in theDubai International FinancialCentre (DIFC) and its sur-rounding precinct, evidentby the rate of leasing activity,Jones Lang LaSalle says.

In turn, demand for GradeB office space remainsweak, exerting downwardpressure on asking rents.The first quarter saw thehandover of Central Park inDIFC, adding approximately130,000 square metre of of-fice space to the market.This brings the total GrossLeasable Area (GLA) to 7.7million square metres as of

Q1 2015.Office sales transactions in

Q1 remained relatively lim-ited with Business Bay andJumeirah Lake Towers beingthe most transacted areas;these areas rose by 2 percent and 5 per cent respec-tively. Tecom saw the largestyear-on-year increase of 14per cent. DIFC supposedlyoffers rental yields of 6.75per cent for prime offices.

“For commercial invest-ments by institutions or largeindividual investors, transac-tions have slowed due towide bid-ask spreads”,Jesse Downs, Managing Di-rector of Phidar Advisory,told Gulf Property.

“Owners are holding outfor yields that are less attrac-tive to investors now. Inother words, yields based onasking prices are difficult tojustify when compared withother markets. In the com-mercial market asset-spe-cific issues augment thesegaps. For example, in officebuilding, tenancy is oftendominated by one year re-newable contracts. This in-

creases the risk profile of theasset.

“Another common issue ispoor asset maintenance,which accelerates deprecia-tion. We’ve seen many own-ers opting for inexpensiveproperties,” she explains.

Optimistic industry playersbelieve Dubai has seen ex-pansion in several majorsectors, particularly finance,pharmaceutical and technol-ogy, and such an expansioncreates jobs and stimulatesdemand for office space.

David Godchaux, CEO ofCore Savills brokerage firm,gives a modest estimatesaying that quality office av-erage yields in Dubai will bebetween 6 and 7.5 per cent.

“This year will see a verymild softening due to largelyexternal factors such as theappreciating US dollar. Weforesee increase in pricesand rents in prime officeareas, such as Downtown,DIFC that generally see veryhigh level of occupancy andstrong resilient demand forquality office space,” hesays. g

Matthew Green, CBRE

Jesse Downs, Phidar Advisory

nered investors’ confidence.Maya Whiteley, Director -

Transaction Real Estate atErnst and Young MENA,says developers often priceunits at rates that wouldachieve profits higher thantheir targeted returns. Thisenables them to offer rebatesin the form of guaranteed re-turns to buyers for a limitednumber of years.

The return on a propertygenerally depends on its lo-cation, surrounding infra-structure, quality ofconstruction and of coursethe developer’s repute. How-ever, in certain cases devel-opers/brokers promiseambitious yields based ontheir knowledge of the mar-ket, which at times can belower than the average mar-

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an illusion for buyers. “Thereis a double loss here for thebuyer,” David Godchaux,Chief Executive Officer ofCore Savills brokerage firm,explains.

“Firstly, he will overpay forthe property as the sub-sidised guaranteed rent hasbeen factored in by the de-veloper and added to theprice. Secondly, when theguaranteed period is over,very often the owner will findout that market rents are notanywhere close to the sub-sided rent he was gettingduring the guaranteed pe-riod, and he will have toreadjust the asking rent inorder to get the propertyleased (with of course a neg-ative impact on the propertyprice should he decide toexit).

“Initial yields are an impor-tant instrument when acquir-ing real estate, but investorsshould also follow a holisticapproach to their investment,not stopping their analysis atthe first few years return(guaranteed or not). Thereare several other basic toolslike NPV [Net Present Value],IRR /modified IRR [InternalRate of Return] that shouldalways complete the picture.”

Kalpesh Sampat, Directorat the Dubai-based broker-age firm SPF Realty says re-altors mostly guaranteereturns on ‘hospitality relatedassets’, such as hotel apart-ments, as they compute RoIassuming returns based oncurrent room rates and occu-pancy levels. However, hesays, the returns can some-time be lower than these es-

timates, as the current roomrates vary based on the loca-tion and rating of the project/asset, while a newhotel/asset may not be ableto achieve the same rate/oc-cupancy levels.

“The prices of many ofthese assets are on thehigher side to offset lowerroom rates or occupancy lev-els. And that means a buyeris buying at higher then mar-ket price. We urge buyers todo their due diligence whenpurchasing assets with guar-anteed returns,” Sampat ad-vises.

Better yieldsDevelopers have beenlaunching projects in Dubaisince the start of the year.Major builders, the likes of

David Godchaux, Core Savills

Clementine Malim, Ascot & Co

ket RoI rate.Experts advise buyers not

to fall for the illusion of in-vesting in a high-return prop-erty and make informeddecisions. Aysha Sawhneysays that in Dubai the guar-anteed ROI concept is moreoften than not a ‘marketinggimmick’. “Once you gothrough their detailed termsand conditions, you will findso many caveats in theirguaranteed return claimsthat covers them up in theevent of actual returns fromthese properties being lesserthan what they were suppos-edly guaranteeing at the timeof sale of the property,” shecomments.

It is not uncommon forsome developers to factor ina guaranteed yield in thesale price, which can create

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launch projects. Places likeDWC, DIP, Sports City, MotorCity, International Media Pro-duction Zone (IMPZ) andMohammed Bin Rashid Cityhave attracted the attentionof investors and end-usersalike, mostly due to the factthat returns from propertiesin such locations would behandsome. The Springscommunity is reportedlyproving to be a high-yieldinginvestment as rentals havegone up by up to 10 per cent,while prices have gone downby 25 per cent on an aver-age, in the last 12 months.

“Upcoming areas such asSports City and Dubai SiliconOasis offer highest yieldsfrom 13 per cent upwards.Although less desirablelifestyle options, these prop-erties rent quickly and most

landlords bought off plan andare reaping the benefitsnow,” claims ClementineMalim, Client Manager, Ascotand Co – a Dubai-based bro-kerage company.

Rental rates, on average,remained unchanged in Q12015. However, certain ad-justments, either upwards ordownwards, were witnessedacross select areas, with lessdesirable properties loweringtheir asking rates to attracttenants.

“Some increases were wit-nessed in newer communi-ties, such as JumeriahVillage (+4 per cent year-on-year) and Dubai Sports City,as these are better estab-lished and vacancy levelsare low. The highest year-year-on-year apartmentrental increases were found

Emaar, Nakheel, DubaiProperties and wasl, are fo-cussing equally on the oldareas of the city by launchingredevelopment ventures,along with building projectsin prime locations. Majorproject announcements inold areas like Dubai Creek,Deira, Naif, Ras Al Khor andKarama have created ripplesin the market.

Prime locations in Dubai,such as the Downtown,DIFC, Business Bay andDubai Marina have shownsigns of maturity and havewitnessed fewer projectlaunches. Developments inthese prime locations nowmostly comprise single build-ings. However it is the up-coming areas, with goodavailability of land, where de-velopers are rushing to

Kalpesh Sampat, SPF Realty

Maya Whiteley, Ernst & Young

in Palm Jumeirah (+16 percent),” John Stevens, Man-aging Director of Asteco, toldGulf Property.

Luxury VsAffordableThe high demand for budgethousing in Dubai has ledboth existing and new devel-opers to plunge into this seg-ment.

Multiple affordable housingprojects were launched in H12015 in various locations ofthe emirate. Although end-users are apparently thehighest buyers of budgetproperties, investors toohave begun cashing in onthis segment, as such unitscome at low prices but prom-ise great returns. The RoI fora developer is higher on lux-

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ury properties just due to thefact that the higher sellingprice of the unit, experts say.

“Affordable property al-ways sees better yields.Prime real estate typicallyshows lower yields and bet-ter long term capital preser-vation or appreciation,”Godchaux predicts.

Affordable developments,such as International Cityand Discovery Gardens,offer high RoI, as these twocommunities are among thefew recognised locations of-fering budget housing andhave been addressing thegap for low-cost housing inDubai for a number of years.

“The yields are higher incase of an affordable prop-erty, but the capital apprecia-tion can be higher in case ofluxury properties, providedentry and exit are made atthe right time,” Sawhneyopines. “However, the down-side risk in case of affordableproperties in good locationsis much lower than that ofluxury properties. Accord-ingly, if the investor consid-ers RoI in conjuction with therisk reward ratio, affordableproperties in good locationswill be better off compared toluxury properties.”

Affordable housing projectshave enabled the mid-seg-ment in Dubai to now ownproperties, rather than live onrent. Thus as property-own-ers in Dubai grow, there is achance that the number ofrenters will shrink. So ‘willpeople buying more going toimpact rental yields?’ is aquestion that an investorwould probably ask.

“Not really. As much asDubai builds more housing toaccommodate the growthhundreds of thousands of ex-patriates arrive and stillchose to live in Prime areassuch as The Marina andDowntown for both lifestyleand comment,” Malim says.

As long as Dubai's popula-tion keeps growing at a rapidpace and the demand-supplyequilibrium for rental proper-ties is maintained, the yieldsmay still be maintained at thecurrent levels, as the rentaldemand reduced due tosome of the residents buyingthese affordable housingproperties would be substi-tuted by rental demand fromthese new residents movinginto Dubai.

“The key to maintain therental yields at their currentlevels is the continuousgrowth of Dubai's populationthrough creation of morebusiness and employmentopportunities,” Sawhneyopines.

Global marketsDubai fares incredibly well interms of average yields com-pared to more traditional in-

ternational markets such asLondon. In prime centralLondon one would be ex-pecting to see returns ofmaximum 4 per cent. How-ever in the prime propertysector in Dubai, one couldexpect returns between 5 to8 per cent on villas and 8 to11 per cent on apartments.

Although the Dubai real es-tate market has been matur-ing over the past few years,it is still very much an emerg-ing market in many regards.The risk factor plays an im-portant role in determiningyields, and investors lookingat much deeper marketssuch as London, New York orParis will continue to acceptlower yields compared toDubai for years to come.

“In Dubai, property yieldsfor individual residential unitsare often higher than in mar-kets like London or NewYork. However, the yields

should be higher in Dubaibecause it has a higher riskprofile. Volatility is commonlyused as a measure of riskand Dubai is a highly volatilemarket. Markets like Londonand New York have a long,stable track record and arelocated in developed coun-tries with low risk profilesbacked by legal systems thatbalance investor and tenantrights. Generally, there is apositive correlation betweenyields and risk – higher riskshould generate higheryields,” Downs says.

Sampat also believes thatone of the key reasons whyDubai offers high RoI onproperty is because of itstax-free characteristic, whichputs it at a significant advan-tage when compared to amarket like Mumbai.

However, as Dubai contin-ues to become a global hub,yields however will be com-

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new supply and the impact oflow global oil prices on keysource markets such as CISand GCC countries.

As an emerging market,Dubai is affected by macro-economic changes in otherparts of the world and in-vestors’ behaviour is reflec-tive of this influence. Globalstability and global growthare both important for Dubai,which market itself as aglobal hub.

Exogenous shocks like thefall of the Russian Ruble andthe difficulties faced by theRussian economy had andwill continue to have a cer-tain impact on the Dubaieconomy. Instability in theEurozone, and sustainabilityof China's GDP growth arealso potential threats to theglobal economy, and hencethe Dubai real estate market.

On another note, as the In-dian real estate market de-

there too, and creating de-mand for retailers, and retailspace.”

Knight Frank also offers apositive investor outlook in itsreport saying: “Against abackdrop of low interestrates globally and relativelyvolatile financial markets re-gionally, the flow of capitalinto real estate has contin-ued. Demand for institutionalquality assets across Dubaiand other key GCC centreshas been rising, assisted bynumerous factors, includingthe fact that yields remainrelatively high in context ofother global cities.”

Local factors most impor-tantly dictate market dynam-ics. The UAE-wide FederalMortgage Cap and Dubai’sdoubling of Property Regis-tration Fees last year havetogether gradually and suc-cessfully contained the mar-ket, with a decrease inspeculative activity from in-vestors.

“The upward creep of proj-ect completions, coupledwith the slow motion impactof new real estate regula-tions and the general dent tosentiment as a result of theslowing rate of house pricegrowth, in a sentiment-drivenmarket has weighed heavilyon the emirates residentialmarket, with the 2015 out-look remaining somewhatmute, with villas expected tobear the brunt of price de-clines,” Richard Paul, Direc-tor – Head of ResidentialValuations, Cluttons MiddleEast, told Gulf Property.

Analysts believe that de-spite investors still remainingas the dominant force in theDubai real estate market,end-users today also havesignificant sway over themarket’s movements. Abuyer today makes a muchcautious and informed prop-erty purchase decision, thanthe pre-recession times. g

pressed. Moreover, rentalyields in Dubai have comeunder pressure consistentlyover the last few years.While it was common toachieve up to 10 per cent de-pending on the asset classabout seven years ago, in-vestors quickly recognisedthe value and relative stabil-ity of this market whichpushed property yields to the7 per cent level by 2013.Since 2014, yields haveceased their descent andhave remained stable at 7per cent owing to cautious in-vestor sentiment.

Following two years ofstrong growth for Dubai’sresidential sales, 2014 was ayear of stabilisation withmoderate growth during thefirst half of the year followedby a decline in H2. The slow-down in activity for the sec-ond half of the year can beattributed to the delivery of

John Stevens, Asteco

Ayesha Sawhney, MaxGrowth

velops and continues to offerquality properties, Non-Resi-dent Indians (NRIs), who arethe largest buyers of propertyin Dubai, are now gettinglured by the similar proper-ties back home.

Paradoxically, sustainedlow oil prices, which typicallysupport growth in most partsof the world could also havea long term negative impacton Dubai because of the re-gional instability it may trig-ger, and the high mid-termdependence of Abu Dhabi onhigher oil prices.

However, Godchaux saysinvestor sentiment will behigh in Dubai, “As long as therest of the world steadilygrows, global and regionalcorporate investors in Dubaisupport prices and rents onthe office market, create jobswhich translate into renterson the residential market,supporting prices and rents

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