Back when the freehold phenomena started in Dubai in June of 2002, investors who bought and held initial offerings by master-developers experienced capital gains of between 3.5-5x over a six-year period when prices peaked in 2008.
This applied to two-bedroom Springs townhouses, Greens (one- and two-bedroom apartments), Meadows (three-bedroom villas), Palm Jumeriah (Shoreline’s one- and two-bedroom apartments), Jumeirah Islands (four-bedroom villas) and International City (studios and one-bedrooms).
Since then, through two subsequent boom and bust cycles, these investors experienced between 80-100 per cent of their returns through rental yields, an astounding statistic whichever way you look at it. Remember that for most real estate assets in Dubai, the 2008 levels have not yet been re-achieved.
Solid rental returns
In other words, over the last decade, the ones that have made the money in real estate have done so through rental yields and the principle of compounding (a boring maxim to be sure, but a truism nonetheless). Despite a multitude of new offerings, and the exuberance of intermediaries who urged investors to time the markets, these initial capital gains were followed by more than a decade of rental yields.
As the market matured and end-users dominated the landscape, investors started having less of an impact on the overall direction of market. Nonetheless, the structure of overall returns remained dominantly skewed in favor of cashflow annuity type streams. The results were compiled using data points from over 150 units, where returns were measured from sale prices; rents were measured as actual rents received as opposed to contractual rents; and costs were measured as the summation of service charges plus actual maintenance done within the units.
This kind of granularity is similar to the rigor of the studies conducted in London, New York and Berlin over a 40-year time frame and published in various academic journals. What are we to make of this?
The studies point to three fundamental conclusions:
* Returns in residential real estate are highly volatile, where periods of capital gains are followed by periods of low to even negative returns.
• Capital gains are often exaggerated on average for they do not account for individualized quality differentials in a heterogenous market (when scrutinized, actual capital gains are lower by as much as 33 per cent from the reported stats that feed into index data).
• Over time, rental returns comprise the dominant portion of the total returns for the buy-and-hold investor.
Whatever data that we can get ahold of from any developed market points to the exact same result: rental yields comprise for more than half of overall returns realized in a 10-15 year (and more) timeframe. Compare that to the prevailing zeitgeist where the dominant paradigm has been one of trading in and out, essentially adding to transaction costs (which over time devour as much as half of the overall returns in a portfolio churned over once every five years).
Wealth and excess have a blinding effect on psychology, and they certainly do so even more in the age of social media where the latest record-breaking transaction is reported with a sense of rapturous wonder. It has been this churn mentality that has permeated the investing culture, with most having fallen prey to this mind warp.
Time factor
However, it is prudent to remember that wealth accrues over time, and that regardless of the lure of timing the markets, very few end up on the winning side. Where the opportunity cost of capital is next to nothing (an elongated period of zero interest rates), asset values may get distorted and send the wrong signals. But gravity does exert its pull eventually and when it does, it is always the patient investor that stands out.
Dubai real estate data fundamentally attests to this, and turns the investment decision-making on its head. Capital is to be invested prudently and patiently, with long-term horizons firmly in mind.
In time, someone will develop a name for the era of zero interest rates and the greedfest that came along with it. For now, all we can be sure of is something that we have always known: In investments and capital allocation, the best form of work is to be a respirateur (to breathe) in order to be far from the madding crowd.
