Ask the Expert: Rent returns

Ask the expertMohanad Alwadiya

I have just purchased a new apartment as an investment. What is the best method of determining an optimal rental rate?

The simplest method is the sales comparison approach. This method relies on identifying a factor that is homogenous to similar, if not identical, properties. For example, if an apartment similar to the one that you are planning to invest in is attracting a monthly rental rate of Dh7 per square foot per month, then this will indicate the likely cash flows you can expect. This is an approach that we as property managers do not advocate, although it’s surprising how many people limit their analysis to this.

A more comprehensive method is the Capital Asset Pricing Model, which comprehends levels of risk and opportunity cost as it applies to your investment. This model identifies potential total return on investment, which is derived from capital appreciation in addition to net rental income and compares it to other investments that you might be considering. This is a much more comprehensive evaluation tool, which enables smarter investment decisions and, therefore, is the one that we use as standard procedure.

There seems to be a lot of confusion as to Dubai’s real estate oversupply. Given the importance of supply and demand in determining values, how can such confusion exist?

Calculating optimal supply levels, particularly when emerging from a recession when lots of projects were cancelled or delayed, is particularly challenging. It depends on an accurate estimation of construction timelines, which are invariably fluid, and demand for real estate assets, which will emanate from population growth. In Dubai’s case, population will be largely driven by overall economic growth going forward. In addition, it needs to comprehend a lag effect from the time that conditions conducive to development are identified by developers and when properties are finally released onto the market.

Given that Dubai’s economy is expected to grow at 5 per cent annually for the remainder of the decade and initiatives such as the World Expo 2020 are expected to generate an additional 270,000 jobs, the demand for housing and commercial facilities is expected to grow. Much of the city’s planning comprehends the number of people living in the emirate to grow to 3.4 million by 2020, a 7 per cent annual increase from today’s population of 2.25 million.

Source: Mohanad Alwadiya, Special to Property Weekly
Managing Director of Harbor Real Estate and advisory board member and instructor at the Dubai Real Estate Institute, the official training and certification arm of the Dubai Land DepartmentPW

Al Nisr Publishing accepts no liability for the views or opinions expressed in this column, or for the consequences of any actions taken on the basis of the information provided.


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