How To Do It: Dangers awaiting realty investor

As the equity markets continue plunging to new lows with no apparent reason for any upturn in consumer confidence, Gulf-based expatriates are increasingly looking at the global real estate sector for financial salvation.

There are myriad opportunities available and some better returns may be found in non-residential investments.

Australian examples indicate that commercial property returns can be almost double that of residential investment.

Always remember that it will take more time to recoup one's initial investment if the property is overpriced and if supply has been added too quickly.

The realtor's bible is full of such examples. Many inner city developments have seen prices five years on at lower levels than the original price, mainly because there was no brake on supply.

The advantages associated with real estate include capital growth potential and regular income.
So long as the investment is in an area where there is demand, its value will appreciate.

However, there will be troughs, but in seven years there will be steady growth. The investment's value will rise further if the property and the location are well selected.

Regular income will arise but the choice of tenant and the amount and timing of rental payments are important. Other advantages of owning property are that it is a tangible asset and the owner can usually exercise control over its usage.

However, ownership does entail drawbacks, the more notable being the usually high entry costs and transaction costs. They are normally considered an illiquid investment and it may not be easy to convert this asset into cash in an emergency.

Investing in property brings the same upsides and problems wherever the investment takes place. Dubai is no exception.

Who in their right mind would not consider Dubai as an ideal place for real-estate investment? The advent of certain property projects, which are open to expatriates, will surely make this one of the most sought after addresses in the world.

The caveat emptor should never be forgotten and buyers are recommended to take extreme caution and legal advice when buying or selling property, wherever in the world.

Another consideration that requires closer analysis is whether the current price explosion is sustainable. Those who consider that this will continue point to the fact that historically low rates have made these higher prices affordable.

This is borne out by the fact that although UK house prices are nearly 65 per cent higher than they were five years ago, borrowers are paying out 15 per cent of their income compared to 17 per cent in 1997 and 37 per cent in the late 80s.

In the near or mid-term future, there doesn't seem too much chance of higher interest rates; indeed further cuts are likely.

But house prices are worryingly high and mortgage borrowings are almost at record levels.
For example, in September, the UK saw monthly borrowings of almost £20 billion, a whopping 43 per cent increase on levels a year earlier.

There are signs that the market is softening with prices in some London boroughs lower than they were a year ago. Rents in the buy-to-let market have reached their zenith and have begun to fall.

Investors should remember what happened to the e-age boom. There were gloomy predictions then which all proved wrong until the crash actually happened.

Take note of some experts who consider that the property bubble may be ready for bursting. It is not a matter of if, more a matter of when. Good times cannot last forever.

If the assumption is that we all invest to grow wealthier, then one has to remember that for this process to happen quicker the risk element has to be greater.

It is a sad fact of economic life that any investment that promises exorbitant returns will never work. Property investors should be happy with moderate growth and a steady income stream.

However, greed and ignorance still remain the main enemies of all investors none more so than those trading in the real estate sector.

The writer is managing director of Al Ghaith & Co, public accountants, and a financial writer.