Many investors are reluctant or unable to purchase property because of the scarcity of credit, high mortgage rates and anxiety about developer-imposed service fees. However, falling prices have created an abundance of good deals on quality units that offer decent rental yields, despite the economic downturn. To maximise rental returns, investors must focus on quality of fit-outs, desirable locations, smaller units (which can be rented out faster) and units built by developers that have better bank financing arrangements. Investors must evaluate their priorities when considering certain trade-offs. For example, cheaper properties are easier to acquire, easier to let-out, and often offer better rental yields, but more expensive properties in better locations will often provide higher capital growth.
When opting for capital growth, investors should also carefully consider the macro-economic factors affecting residential real estate investment. Capital growth is harder to predict in a young market like Dubai. It is, therefore, essential that potential investors structure their priorities and plan realistic investment horizons. Ideally, investors should devise scenarios for different investment horizons and understand the necessary commitments and trade-offs of each scenario.
Best areas for buy-to-let investors
Right now, Al Reef Villas in Abu Dhabi are the best option for buy-to-let investors targeting villas. Net rental yields in Al Reef are likely to average around 12%, making it an attractive investment. However, capital growth may be threatened by competition from units built closer to the city centre. Mitigating this risk is Abu Dhabi's short- to medium-term supply deficit, which will keep rental yields in Al Reef above 9% to 10%, even if rent levels decline significantly.
In Dubai, villas in The Springs are an attractive investment due to the high level of interest shown by potential renters. Villas in this area give renters a 'villa-living' lifestyle, well-integrated community features, and minimal nuisance from surrounding construction. The average gross rental yield is 8% to 9%. After taking maintenance into account, the net yield is roughly 6% to 7%. These yields are growing, as sale prices continue to fall. However, investors have to monitor the rate of falling rents in this area.
In terms of apartments, studios and one-bedroom units in Dubai Marina are attractive investments with gross rental yields up to 14% (net of approximately 12%). While this is based on transactional data, these figures are the upper limit of the market. Such opportunities are obtainable, but it's critical to do your research and understand the market (not just listed prices, but actual transaction prices) in order to optimise your investment.
Isolating areas
Before deciding to buy and let a property, speak to an industry expert to learn more about what areas and assets will maximise your returns. In general, research multiple areas, not just the ones you know about or live in. Location and community features are increasingly driving demand, so find out where renters want to live and why. Always keep those factors in mind when choosing a location. Also, run the numbers: figure out your yields (both net and gross) and monthly costs, and remember to account for financing costs.
Develop a clear investment strategy by defining specific goals, including the type of tenant you want to attract. Be prepared to hold property long-term, but know your exit strategy to achieve capital growth.
Carefully consider your financing options and shop around for attractive rates to facilitate better returns on your investment.
Stay current with market trends, which in Dubai are always changing. Regularly update your strategy and improve your asset's value with routine maintenance. Also, consider refinancing if rate conditions improve.
Apartments worth considering
Dubai Marina is a good buy, due to its proximity to quality developments, like The Walk at JBR, Dubai Marina Mall and Marina Walk. Dubai Marina is a more integrated master development with less peripheral construction than areas like JLT. The average rental yield is 6%, including maintenance fees. Falling prices may improve the yield, but rent declines will have the opposite effect. In Abu Dhabi, Marina Square (Reem Island) boasts similar features. Based on today's rents and sale prices, a 12% yield is likely upon completion. As Abu Dhabi's first new high-end handover, its proximity to the city centre will maximise absorption and promote high rents. The high-end units will attract end-users who were paying high rents for low quality units.
Capital gains and covering re-payments
Debt management is critical. With the criminalisation of debt, investors can face criminal charges if they are unable to pay. Asset depreciation, mortgage scarcity, mounting job-cuts and anxiety about future demand have led investors to prioritise cash flows above all else. If an investor has short- to medium-term income security and can cover monthly payments, then he/she can reap long-term capital gains. Yet the answer ultimately depends on the time of purchase. If an investor buys now, or in Q4 2009, he/she will likely reap capital gains within a few years, assuming the market is bottoming out now. Investors who bought in Q4 2008, however, will fare worse.
Dubai vs Abu Dhabi
Dubai has plenty of completed properties that can be purchased and immediately leased out. Dubai caters to a set of lifestyle preferences that is in strong demand. The declining cost of housing in Dubai amplifies the demand from residents working in Abu Dhabi. Transportation infrastructure and educational facilities are also more advanced. Abu Dhabi's master developments are still in the nascent stage, Dubai's are either completed or nearing completion. Finally, there are numerous property laws already in place in Dubai to protect owners, renters and investors.
Turning to the cons, Abu Dhabi has some short- to medium-term advantages over Dubai, namely the combination of persistent demand surplus, acute end-user appetite for new high-end properties and better economic fundamentals. So, there is an opportunity to own high-end property in a market where end-users already pay high rents for low-end units. Also, investors willing to buy off-plan can do so at significant discounts.
Lack of quality housing in Abu Dhabi will guarantee higher returns in the nearly completed developments closer to the city centre. Rent levels for upcoming developments are unlikely to decrease significantly. Abu Dhabi's blanket 5% rent-cap allows for greater market transparency than the Dubai Real Estate and Regulatory Authority's arbitrary rental index. Finally, Abu Dhabi is positioning itself as a world arts centre, which is likely to generate buzz internationally.
* The projections, opinions, assumptions and estimates in this article are based on observed market performance at the time of publication. While Landmark Advisory is confident in their accuracy, it does not guarantee the results of actions taken based upon these recommendations. It is the reader's responsibility to confirm the accuracy of the information.
