Dubai: For overseas investors, now may be as good a time as any to renew their interest in Dubai realty. After suffering declines for the better part of two years, yields that can be generated from freehold property assets here are showing signs of picking up.
In the 12 months to July, yields have shot up to an average 7.42 per cent on “mainstream” residential properties in the city, according to Knight Frank's estimates.
Matters have been helped by the sharp decline — by 12.2 per cent — in home values during the period, as well as the relatively lower — by 1.2 per cent — drop in rentals. (Gross yields are calculated by dividing annual rental income a property can generate by the property’s value and then multiplying by 100. For net yields, factor in associated expenses such as any mortgage or property maintenance payments as well.)
Yields had taken a hit after the precipitous climb that Dubai’s rental values have had in the last two years and more. And if there is anything that overseas investors dislike, it is uncertainty over which way values are headed.
So, are the healthier yields available now enough to bring back overseas investors to Dubai realty? Or will the ongoing global currency volatility force them to push the “pause” button?
“For an income-seeking investor … yields are already high compared to other relative safe havens (for e.g. London),” according to a Knight Frank analysis.
“With prices in Dubai now about 24 per cent below their 2008 peak, yields have risen — 7 per cent gross returns are realistic — meaning investment activity has been healthy despite recent capital value falls.’
But the currency situation will need careful watching. With the global economy passing through a strong-dollar default setting, the dirham’s peg will make any purchase of UAE assets that much more dearer.
Oil prices
More so, for “three of the most important international buyer groups — Indians, Pakistanis and the British — to purchase property,” the analysis notes.
“The sharp drop in oil prices has also hit regional demand. Add a surfeit of newbuild delivery into this mix, and the net impact has been a 12 per cent fall in mainstream property prices over the past year.”
Investor-favoured locations of the past have suffered as a consequence. “Over the course of the last six months, there has been a noticeable drop in interest for our resale portfolio in [Dubai] Marina,” said Adam Price, Global Sales Director at Select Property.
“But we have definitely seen an improvement over the last six weeks ... We’ve also had a surge in interest in the Downtown area as buyers see its huge potential in terms of location and infrastructure as the Dubai Canal nears completion.
“With the Canal revolutionising the area into true waterfront living, Downtown is becoming one of Dubai’s most sought after locations. We will not only see a surge in popularity in the rental market, but an increase in property values once the canal is completed.”
Indeed, investors looking at the bigger picture can tap multiple factors, both in the short- and long-term.
“Economic activity and property demand is likely to benefit from the proposed lifting of sanctions on Iran, which will increase demand as the country’s economic linkages with Dubai grow,” the Knight Frank analysis reckons.
As for the longer term, “The port at Jebel Ali is expected to become the world’s largest in the next 15 years, reflecting Dubai’s emergence as China’s logistical hub for the Middle East and Africa. Its airport already serves 70 million travellers a year with capacity set to rise to 200 million.
“Buyers are looking to lock into the potential for economic growth in both markets [Dubai and Abu Dhabi] — led by the headline forecast for a 20 per cent rise in the population of the UAE by 2030.”
New projects
This is the very prognosis that local developers will want to hear. It gives them the rationale to commit to new projects now rather than wait for a definite upturn in demand to emerge at some point.
But they are well-advised not to take too long to mull over their plans — “Speculating long term improvement is not wise in a region where cold and hot spells occur frequently, and in no real pattern,” said Sofia Underabi, Head of Residential Valuation at Cavendish Maxwell. “These are impacted by many factors such as political movements and instability in the region, the price of oil, the crisis in Europe, the Chinese economy or a simple change in domestic regulations — although these are often in favour of developers.
“Having said that, the majority of new developments were launched in 2014 and the cold spells occurred thereafter. Time value of money will have to be considered by cash-rich developers, who may not have the comfort to wait.”
For investors and developers alike, getting their timing right in whatever they plan to do next assumes ever greater significance.
