1. ROUNDUP
50 Gulf Property
Dubai offers healthier
return on investment
Dubai offers healthier
return on investment
R
eal estate market in
Dubai offers an av-
erage yields of 7 per
cent, about 2-3 per
cent above the aver-
age yield in international
property markets, especially
when compared to the mod-
est yields that mature mar-
kets like London, Paris or
New York offer.
Traditionally, investors
have been attracted by the
possibility of high returns
from properties in Dubai, in
addition to the absence of
property tax unlike in other
parts of the world.
Although of late there has
been a slowdown in sales of
luxury residential units
across the emirate, the con-
stant rise of the expatriate
workforce has essentially
meant that more people are
now looking for rented apart-
ments to live in. Rental yields
from the affordable housing
segment in Dubai – where
multiple projects were
launched during the first half
of 2015 – remain higher than
the average yield, experts
say.
“The average yields at
which we have seen transac-
tions happening in the Dubai
real estate sector during the
first half of 2015 is between
7 to 8.5 per cent. Analysing
the two components of return
on investment (RoI), i.e.
yields and capital apprecia-
tion, over a long term period,
we observe the yields to be
in the range of 6 to 9 per cent
per annum and average cap-
ital appreciation in the range
of 10 to 20 per cent per
annum, making the effective
RoI in the range of 15 to 30
per cent per annum,” Aysha
Sawhney, Director of Max-
Growth Consulting, told Gulf
Property.
“However, given the highly
dynamic nature of the Dubai
market and the fact that it is
largely a sentiment-driven
one, depending upon an in-
vestor's exact timing of entry
and exit from a property,
his/her specific RoI could be
significantly higher or lower
than the average RoI,” she
added.
Rentals stable
in Q1 2015
The first quarter of the year
continued to see subdued
activity in Dubai’s real estate
market. While residential
rents remained relatively flat,
sale prices saw a marginal
decline across both apart-
ments and villas.
The first quarter of the year
saw the delivery of approxi-
mately 730 residential units
across Dubai. An additional
22,000 are expected to enter
the market by the end of
2015, global real estate advi-
sory Jones Lang LaSalle
(JLL) predicts.
“This downward trend is
expected to continue
throughout 2015, as we fore-
By Indrajit Sen
Senior Reporter
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2. ROUNDUP
Gulf Property 51
Residences (JBR) recorded
a total transaction value of
Dh1.08 billion, spread across
512 deals, which equates to
an average deal value of
Dh2.11 million. During the
same period Emirates Living
recorded total sales of
Dh808 million, from 245
transactions.
“The residential leasing
market has remained broadly
stable for a third consecutive
quarter, with only minor
changes in rental rates
recorded. The market’s rela-
tive stability during the past
nine months is reflected in
the huge swing in growth fig-
ures from 27 per cent in the
year to Q1 2014 versus 3 per
cent 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 to
decline faster than rents in
the coming months, saying,
“We may start to see yields
move out as we progress
through the year.”
Return on
Investment
The overall growth of the
Dubai market, supported by
factors such as security, a
tax-free haven and a safe in-
vestment structure, makes
realtors assure lucrative re-
turns. Moreover, Dubai
emerging as a more mature
market for real estate post
the 2008 recession, has gar-
see prices dropping up to 10
per cent by year-end,” JLL
states in its Dubai Q1 2015
report.
Sales index issued by a
Dubai-based Real Estate In-
vestment and Development
Information Network (Reidin)
depicts a marginal decline in
prices across both apart-
ments and villas. This comes
as the Reidin rental index
shows growth levels drop-
ping to 8 per cent Y-o-Y in
February 2015 (from 23 per
cent Y-o-Y in Q1 2014). Sim-
ilarly, the Reidin sale price
index shows a decline in
growth levels from 30 per
cent to 6 per cent over the
same period.
According to the first quar-
ter of 2015 figures, Dubai
Marina and Jumeirah Beach
Commercial
Property
D
ubai’s office market
remained relatively
stable over the first
quarter, with JLL
saying that average
rents across the Central
Business District (CBD)
recording Dh1,880 per
square metre and vacancies
registering 23 per cent.
Demand for Grade A qual-
ity stock continues to be ro-
bust, particularly in the
Dubai International Financial
Centre (DIFC) and its sur-
rounding precinct, evident
by the rate of leasing activity,
Jones Lang LaSalle says.
In turn, demand for Grade
B office space remains
weak, exerting downward
pressure on asking rents.
The first quarter saw the
handover of Central Park in
DIFC, adding approximately
130,000 square metre of of-
fice space to the market.
This brings the total Gross
Leasable Area (GLA) to 7.7
million square metres as of
Q1 2015.
Office sales transactions in
Q1 remained relatively lim-
ited with Business Bay and
Jumeirah Lake Towers being
the most transacted areas;
these areas rose by 2 per
cent and 5 per cent respec-
tively. Tecom saw the largest
year-on-year increase of 14
per cent. DIFC supposedly
offers rental yields of 6.75
per cent for prime offices.
“For commercial invest-
ments by institutions or large
individual investors, transac-
tions have slowed due to
wide bid-ask spreads”,
Jesse Downs, Managing Di-
rector of Phidar Advisory,
told Gulf Property.
“Owners are holding out
for yields that are less attrac-
tive to investors now. In
other words, yields based on
asking prices are difficult to
justify when compared with
other markets. In the com-
mercial market asset-spe-
cific issues augment these
gaps. For example, in office
building, tenancy is often
dominated by one year re-
newable contracts. This in-
creases the risk profile of the
asset.
“Another common issue is
poor asset maintenance,
which accelerates deprecia-
tion. We’ve seen many own-
ers opting for inexpensive
properties,” she explains.
Optimistic industry players
believe Dubai has seen ex-
pansion in several major
sectors, particularly finance,
pharmaceutical and technol-
ogy, and such an expansion
creates jobs and stimulates
demand for office space.
David Godchaux, CEO of
Core Savills brokerage firm,
gives a modest estimate
saying that quality office av-
erage yields in Dubai will be
between 6 and 7.5 per cent.
“This year will see a very
mild softening due to largely
external factors such as the
appreciating US dollar. We
foresee increase in prices
and rents in prime office
areas, such as Downtown,
DIFC that generally see very
high level of occupancy and
strong resilient demand for
quality office space,” he
says. g
Matthew Green, CBRE
Jesse Downs, Phidar Advisory
nered investors’ confidence.
Maya Whiteley, Director -
Transaction Real Estate at
Ernst and Young MENA,
says developers often price
units at rates that would
achieve profits higher than
their targeted returns. This
enables them to offer rebates
in the form of guaranteed re-
turns to buyers for a limited
number of years.
The return on a property
generally depends on its lo-
cation, surrounding infra-
structure, quality of
construction and of course
the developer’s repute. How-
ever, in certain cases devel-
opers/brokers promise
ambitious yields based on
their knowledge of the mar-
ket, which at times can be
lower than the average mar-
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3. ROUNDUP
52 Gulf Property
an illusion for buyers. “There
is a double loss here for the
buyer,” David Godchaux,
Chief Executive Officer of
Core Savills brokerage firm,
explains.
“Firstly, he will overpay for
the property as the sub-
sidised guaranteed rent has
been factored in by the de-
veloper and added to the
price. Secondly, when the
guaranteed period is over,
very often the owner will find
out that market rents are not
anywhere close to the sub-
sided rent he was getting
during the guaranteed pe-
riod, and he will have to
readjust the asking rent in
order to get the property
leased (with of course a neg-
ative impact on the property
price should he decide to
exit).
“Initial yields are an impor-
tant instrument when acquir-
ing real estate, but investors
should also follow a holistic
approach to their investment,
not stopping their analysis at
the first few years return
(guaranteed or not). There
are several other basic tools
like NPV [Net Present Value],
IRR /modified IRR [Internal
Rate of Return] that should
always complete the picture.”
Kalpesh Sampat, Director
at the Dubai-based broker-
age firm SPF Realty says re-
altors mostly guarantee
returns on ‘hospitality related
assets’, such as hotel apart-
ments, as they compute RoI
assuming returns based on
current room rates and occu-
pancy levels. However, he
says, the returns can some-
time be lower than these es-
timates, as the current room
rates vary based on the loca-
tion and rating of the project/
asset, while a new
hotel/asset may not be able
to achieve the same rate/oc-
cupancy levels.
“The prices of many of
these assets are on the
higher side to offset lower
room rates or occupancy lev-
els. And that means a buyer
is buying at higher then mar-
ket price. We urge buyers to
do their due diligence when
purchasing assets with guar-
anteed returns,” Sampat ad-
vises.
Better yields
Developers have been
launching projects in Dubai
since 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 informed
decisions. Aysha Sawhney
says that in Dubai the guar-
anteed ROI concept is more
often than not a ‘marketing
gimmick’. “Once you go
through their detailed terms
and conditions, you will find
so many caveats in their
guaranteed return claims
that covers them up in the
event of actual returns from
these properties being lesser
than what they were suppos-
edly guaranteeing at the time
of sale of the property,” she
comments.
It is not uncommon for
some developers to factor in
a guaranteed yield in the
sale price, which can create
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4. ROUNDUP
Gulf Property 53
launch projects. Places like
DWC, DIP, Sports City, Motor
City, International Media Pro-
duction Zone (IMPZ) and
Mohammed Bin Rashid City
have attracted the attention
of investors and end-users
alike, mostly due to the fact
that returns from properties
in such locations would be
handsome. The Springs
community is reportedly
proving to be a high-yielding
investment as rentals have
gone up by up to 10 per cent,
while prices have gone down
by 25 per cent on an aver-
age, in the last 12 months.
“Upcoming areas such as
Sports City and Dubai Silicon
Oasis offer highest yields
from 13 per cent upwards.
Although less desirable
lifestyle options, these prop-
erties rent quickly and most
landlords bought off plan and
are reaping the benefits
now,” claims Clementine
Malim, Client Manager, Ascot
and Co – a Dubai-based bro-
kerage company.
Rental rates, on average,
remained unchanged in Q1
2015. However, certain ad-
justments, either upwards or
downwards, were witnessed
across select areas, with less
desirable properties lowering
their asking rates to attract
tenants.
“Some increases were wit-
nessed in newer communi-
ties, such as Jumeriah
Village (+4 per cent year-on-
year) and Dubai Sports City,
as these are better estab-
lished and vacancy levels
are low. The highest year-
year-on-year apartment
rental increases were found
Emaar, Nakheel, Dubai
Properties and wasl, are fo-
cussing equally on the old
areas of the city by launching
redevelopment ventures,
along with building projects
in prime locations. Major
project announcements in
old areas like Dubai Creek,
Deira, Naif, Ras Al Khor and
Karama have created ripples
in the market.
Prime locations in Dubai,
such as the Downtown,
DIFC, Business Bay and
Dubai Marina have shown
signs of maturity and have
witnessed fewer project
launches. Developments in
these prime locations now
mostly comprise single build-
ings. However it is the up-
coming areas, with good
availability of land, where de-
velopers are rushing to
Kalpesh Sampat, SPF Realty
Maya Whiteley, Ernst & Young
in Palm Jumeirah (+16 per
cent),” John Stevens, Man-
aging Director of Asteco, told
Gulf Property.
Luxury Vs
Affordable
The high demand for budget
housing in Dubai has led
both existing and new devel-
opers to plunge into this seg-
ment.
Multiple affordable housing
projects were launched in H1
2015 in various locations of
the emirate. Although end-
users are apparently the
highest buyers of budget
properties, investors too
have begun cashing in on
this segment, as such units
come at low prices but prom-
ise great returns. The RoI for
a developer is higher on lux-
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5. ROUNDUP
54 Gulf Property
ury properties just due to the
fact that the higher selling
price of the unit, experts say.
“Affordable property al-
ways sees better yields.
Prime real estate typically
shows lower yields and bet-
ter long term capital preser-
vation or appreciation,”
Godchaux predicts.
Affordable developments,
such as International City
and Discovery Gardens,
offer high RoI, as these two
communities are among the
few recognised locations of-
fering budget housing and
have been addressing the
gap for low-cost housing in
Dubai for a number of years.
“The yields are higher in
case of an affordable prop-
erty, but the capital apprecia-
tion can be higher in case of
luxury properties, provided
entry and exit are made at
the right time,” Sawhney
opines. “However, the down-
side risk in case of affordable
properties in good locations
is much lower than that of
luxury properties. Accord-
ingly, if the investor consid-
ers RoI in conjuction with the
risk reward ratio, affordable
properties in good locations
will be better off compared to
luxury properties.”
Affordable housing projects
have enabled the mid-seg-
ment in Dubai to now own
properties, rather than live on
rent. Thus as property-own-
ers in Dubai grow, there is a
chance that the number of
renters will shrink. So ‘will
people buying more going to
impact rental yields?’ is a
question that an investor
would probably ask.
“Not really. As much as
Dubai builds more housing to
accommodate the growth
hundreds of thousands of ex-
patriates arrive and still
chose to live in Prime areas
such as The Marina and
Downtown for both lifestyle
and comment,” Malim says.
As long as Dubai's popula-
tion keeps growing at a rapid
pace and the demand-supply
equilibrium for rental proper-
ties is maintained, the yields
may still be maintained at the
current levels, as the rental
demand reduced due to
some of the residents buying
these affordable housing
properties would be substi-
tuted by rental demand from
these new residents moving
into Dubai.
“The key to maintain the
rental yields at their current
levels is the continuous
growth of Dubai's population
through creation of more
business and employment
opportunities,” Sawhney
opines.
Global markets
Dubai fares incredibly well in
terms of average yields com-
pared to more traditional in-
ternational markets such as
London. In prime central
London one would be ex-
pecting to see returns of
maximum 4 per cent. How-
ever in the prime property
sector in Dubai, one could
expect returns between 5 to
8 per cent on villas and 8 to
11 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 determining
yields, and investors looking
at much deeper markets
such as London, New York or
Paris will continue to accept
lower yields compared to
Dubai for years to come.
“In Dubai, property yields
for individual residential units
are often higher than in mar-
kets like London or New
York. However, the yields
should be higher in Dubai
because it has a higher risk
profile. Volatility is commonly
used as a measure of risk
and Dubai is a highly volatile
market. Markets like London
and New York have a long,
stable track record and are
located in developed coun-
tries with low risk profiles
backed by legal systems that
balance investor and tenant
rights. Generally, there is a
positive correlation between
yields and risk – higher risk
should generate higher
yields,” Downs says.
Sampat also believes that
one of the key reasons why
Dubai offers high RoI on
property is because of its
tax-free characteristic, which
puts it at a significant advan-
tage when compared to a
market like Mumbai.
However, as Dubai contin-
ues to become a global hub,
yields however will be com-
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6. ROUNDUP
Gulf Property 55
new supply and the impact of
low global oil prices on key
source markets such as CIS
and GCC countries.
As an emerging market,
Dubai is affected by macro-
economic changes in other
parts of the world and in-
vestors’ behaviour is reflec-
tive of this influence. Global
stability and global growth
are both important for Dubai,
which market itself as a
global hub.
Exogenous shocks like the
fall of the Russian Ruble and
the difficulties faced by the
Russian economy had and
will continue to have a cer-
tain impact on the Dubai
economy. Instability in the
Eurozone, and sustainability
of China's GDP growth are
also potential threats to the
global economy, and hence
the Dubai real estate market.
On another note, as the In-
dian real estate market de-
there too, and creating de-
mand for retailers, and retail
space.”
Knight Frank also offers a
positive investor outlook in its
report saying: “Against a
backdrop of low interest
rates globally and relatively
volatile financial markets re-
gionally, the flow of capital
into real estate has contin-
ued. Demand for institutional
quality assets across Dubai
and other key GCC centres
has been rising, assisted by
numerous factors, including
the fact that yields remain
relatively high in context of
other global cities.”
Local factors most impor-
tantly dictate market dynam-
ics. The UAE-wide Federal
Mortgage Cap and Dubai’s
doubling of Property Regis-
tration Fees last year have
together gradually and suc-
cessfully contained the mar-
ket, with a decrease in
speculative activity from in-
vestors.
“The upward creep of proj-
ect completions, coupled
with the slow motion impact
of new real estate regula-
tions and the general dent to
sentiment as a result of the
slowing rate of house price
growth, in a sentiment-driven
market has weighed heavily
on the emirates residential
market, with the 2015 out-
look remaining somewhat
mute, with villas expected to
bear the brunt of price de-
clines,” Richard Paul, Direc-
tor – Head of Residential
Valuations, Cluttons Middle
East, told Gulf Property.
Analysts believe that de-
spite investors still remaining
as the dominant force in the
Dubai real estate market,
end-users today also have
significant sway over the
market’s movements. A
buyer today makes a much
cautious and informed prop-
erty purchase decision, than
the pre-recession times. g
pressed. Moreover, rental
yields in Dubai have come
under pressure consistently
over the last few years.
While it was common to
achieve up to 10 per cent de-
pending on the asset class
about seven years ago, in-
vestors quickly recognised
the value and relative stabil-
ity of this market which
pushed property yields to the
7 per cent level by 2013.
Since 2014, yields have
ceased their descent and
have remained stable at 7
per cent owing to cautious in-
vestor sentiment.
Following two years of
strong growth for Dubai’s
residential sales, 2014 was a
year of stabilisation with
moderate growth during the
first half of the year followed
by a decline in H2. The slow-
down in activity for the sec-
ond half of the year can be
attributed to the delivery of
John Stevens, Asteco
Ayesha Sawhney, MaxGrowth
velops and continues to offer
quality properties, Non-Resi-
dent Indians (NRIs), who are
the largest buyers of property
in Dubai, are now getting
lured by the similar proper-
ties back home.
Paradoxically, sustained
low oil prices, which typically
support growth in most parts
of the world could also have
a long term negative impact
on Dubai because of the re-
gional instability it may trig-
ger, and the high mid-term
dependence of Abu Dhabi on
higher oil prices.
However, Godchaux says
investor sentiment will be
high in Dubai, “As long as the
rest of the world steadily
grows, global and regional
corporate investors in Dubai
support prices and rents on
the office market, create jobs
which translate into renters
on the residential market,
supporting prices and rents
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