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In UAE's office and commercial real estate space, the returns are outpacing the US Treasury by quite a margin. Image Credit: Shutterstock

When it comes to real estate markets and rental yields, one heavily used comparison metric is analyzing the spread between the US 10-year sovereign rates and rental yield numbers.

Currently, the UAE prime office space and industrial/logistics sector are yielding 6.75-7.5 per cent. For specific high-grade properties, the yields are even higher in the 8-8.5 per cent range. Even in the residential and luxury hotel space, the overall outlook is stable, with an average yield range of 6.25-7.75 per cent.

With the US 10-year treasury yield currently at 4.52 per cent, the spread between UAE investment yields and US 10-year rates is positive. Compare this with London, where rental yields are, on average, 4-5.5 per cent. For Asia, Shanghai’s Grade A property space offers higher rental yield, with some sections even offering in the 9-11 per cent.

It should be noted that this is based on the ongoing economic housing market stress with expectations of an uncertain outlook.

In London, although rents are forecast to rise over the next 2-3 year period, they are not expected to outpace the home selling price. In the UAE, the case is almost reversed. For instance, Dubai’s rental prices are increasing at nearly 1.5- to 2x the actual property price appreciation growth rate.

While Dubai initially witnessed huge demand and appreciation in the prime luxury villa and apartment sector, this has now spread to almost most of the real estate sector. For Abu Dhabi, which typically has an active rental market in the commercial industrial and logistical space, prime space rents in the Grade A to C segments have grown by an average of 20 per cent.

While the overall apartment growth rate seems to have moderated, the villa segment continues to command a premium and is driving growth. One crucial distinction between Dubai and Abu Dhabi villa segments is that the latter has also witnessed growth in the mid-segment villas.

Expected future spread

A further rise in US Treasury yields will reduce the gap between prime office yields and the risk-free rate. UAE, including other major economies, is witnessing high interest rates and there is also the uncertain geopolitical outlook.

Despite these, the latest market reports show healthy sales enquiries and buyer leads for industrial warehouses and other commercial segments. Investor-friendly policies are a massive boon for the establishment of new businesses as well as further prospective increases in the resident expat population.

The UAE’s status as the de-facto tourist hub suggests travellers are looking to repeat their trips and, in turn, support the local real estate market.