Ask the Agent - Can you explain the principles of escrow?

Ask the Agent - Can you explain the principles of escrow?Mohanad Alwadiya - CEO, Harbor Real Estate

- Can you explain the term capitalisation rate.

Capitalisation rate (cap rate) is the rate of return on a real estate property based on the income that the property is expected to generate. It is used to estimate the investor's potential return on investment. It may be calculated by dividing the investment's net operating income (NOI) by the current market value, where NOI is the total revenue derived from renting or leasing the property minus all operating costs. Put simply, the cap rate = NOI/current market value. Given that the capital values for Dubai properties have shown greater volatility than the income being derived, the NOI being generated from the property at today's value needs to be looked into. This allows us to see whether the property's performance is improving or declining by referring to the cap rate. If the cap rate is declining, this leads us to conclude that selling the property would generate greater income.

- Where do you think the best investment opportunities are in the Dubai real estate market?

Definitely in the affordable segment of the market!

We are encouraging clients to invest in this important segment as there are some great opportunities and the demand for affordable housing is likely to continue increasing as Dubai heads towards the Expo 2020.

There are many affordable developments that have been sprouting in Dubailand and other parts of the city, especially in the outskirts.

They are strategically located, with easy access to major road networks like the Shaikh Mohammed bin Zayed Road, thus residents enjoy fast transit times to most of Dubai's popular areas.

The demand for this type of affordable accommodation will continue to grow. Invest in apartments and retain ownership for at least five years to gain superior capital growth and enjoy healthy net annual rental return in the meantime.

- Do you think property prices will fall further in this current cycle? If so, would now be a good time to sell?

The fact that the property industry is notoriously cyclical is widely known yet viewed differently. Investors with a clear strategy and long-term plan simply accept, foresee and plan for cycles in the industry. They look for longer-term sustainable growth rather than take additional risk by trying to accumulate wealth by taking advantage of shorter-term spikes or dips. Investing in property has a very simple purpose: to create wealth over the long term. However, your portfolio needs to be nurtured, maintained and managed to ensure its wealth-creating potential is achieved as it rides the inevitable cycles that occur in the industry. Adopting a short-term vision and reacting unreasonably to inevitable industry slowdowns will lead to underperformance in the longer term. Consider engaging a good property manager who will ensure that you maximise returns.

- I plan to purchase our first family home. What are the factors to consider when getting a mortgage?

There are a number of considerations that you need to factor into your plan of buying a home. One of these is getting a mortgage. Generally speaking, you are much better off financially in applying your hard-earned money towards building equity, but keep in mind that mortgage payments can be subject to fluctuations as interest rates rise. Not all mortgages are the same. Try and have the mortgage establishment fees waived. Depending on the institution, this may save you up to Dh3,000. Also request that you are not penalised for paying the mortgage down faster or in its entirety. By law, the mortgage provider cannot charge you more than 1% of the outstanding amount or a maximum of Dh10,000, but try to have this stipulation dropped from your contract. Make sure your provider will allow you to utilise the equity you build in your home over time. Some lenders will allow you to use this as security for further borrowing.

- Question of the Week: I am buying an off-plan property. Can you explain the principles of escrow.

An escrow can be described as a legally recognised financial instrument held by a third party (typically a bank) on behalf of two other parties (typically a buyer and a seller) who have agreed to conduct a particular transaction in accordance with certain conditions. Funds are provided by the buyer and held by the party (bank) providing the escrow service until it receives the formal advice that certain previously agreed obligations of the seller have been fulfilled upon which time, the seller can receive funds to the amount specified in the agreement between the seller and buyer.

The use of escrow accounts by Dubai developers has now been mandated by law for the purpose of protecting the prepayments made by buyers. This limits developers from gaining access to funds until certain construction milestones are completed, helping ensure developers are not misappropriating funds provided in advance for purposes other than which they are intended.

Anybody can open an escrow account but not anybody can open one for the purposes of property development in Dubai. The developer must first be registered as a bona fide developer with RERA which involves providing documents ranging from those which establish the bona fide nature of the developer including details of its officers and solvency, title deeds proving ownership of the land to be developed, NOC from relevant parties to performance guarantees.

Ask the Agent - Are there still advantages of buying off-plan?

Source: Mohanad Alwadiya, Special to Freehold

The writer is CEO - Harbor Real Estate

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