Short-term capital appreciation has often been the sole consideration of real estate investors in Dubai. However, the calmer property market of recent times means that capital gains are now harder to find and yield becomes of increased importance to buyers seeking a return on investment.
Real estate investors in search of higher yields in Dubai should make wider consideration of different locations and various alternative asset classes.
Location
ValuStrat’s analysis of the Dubai residential market for the last two years reveals that in some districts yields have risen on foot of broadly stable rents, coupled with lower sales prices. Our research shows indicative gross yields as shown in Table 1. Conversely, an examination of other locations shows yields have softened (Table 2).
The breakdown suggests that residential investors looking for better yield, particularly those carrying monthly mortgage repayments, should check out middle-market locations such as Remraam, Dubai Sports City, Discovery Gardens and International City.
It is noteworthy that some of the highest gross residential yields currently in Dubai are in some of the more affordable foreign-ownership neighbourhoods.
Asset class
Property investors in the UAE are very familiar with the residential segment of the market — it is a sector that many understand from personal experience. However, there are now opportunities in other asset classes for those with budgets of at least Dh1 million. Foreigners can now own single commercial properties such as retail, offices and warehouse units.
Purchasers have a choice of buying offices in areas such as Business Bay or Jumeirah Lakes Towers, shop units in community retail offerings at Jumeirah Village Circle and International City, or industrial premises in Jebel Ali Free Zone or Dubai Investments Park (leasehold). For gross yields of typical property types in these locations, see Table 3.
Commercial real estate provides several benefits to investors over residential property. Generally, dealings with the tenant are more business-like and less emotive. Also, the lease may be for a longer term and usually passes more responsibility for the upkeep and maintenance of the property to the tenant. Commercial real estate also offers portfolio diversification to residential investors.
In more mature property markets in the West, specialised asset segments such as car parking, self-storage, student accommodation and retirement villages have evolved as developers and investors seek out investment opportunities and better yield. These property types are generally not yet available in the UAE, but will probably emerge in time.
Internationally, development in these segments is often encouraged by way of government incentives on acquisition, holding or disposal costs.
In our analysis, we have considered gross yields, i.e. return before any allowance is made for outgoings such as acquisition costs, management fees, service payments, finance charges, etc. These expenses can be considerable. A buyer should identify such costs in advance to arrive at a reasonable estimation of the net yield. Investors should note that increased service charges, protracted void periods and higher mortgage rates can all have a significant impact on returns.
If you are considering to invest in Dubai real estate, you may find it beneficial to look for yield in specific locations or in a completely different asset class.
