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Dubai's residential property market has had its ups and downs and, like any real estate market, it can be tricky to predict the next upturn. All markets operate in cycles and although the Dubai property market is not performing as strongly as it has done previously, there are reasons to believe any price corrections will not be as severe as in 2008.
From a potential investor's point of view, property prices are currently lower than they have been. Dubai now has some of the world's best rental rates with an average yield of 7 per cent. With the World Expo 2020 around the corner, there are expectations there will be a surge in demand for real estate. With that in mind, affordable housing has emerged as a growing segment with interest from both developers and consumers. Young urban professionals with high disposable incomes are carefully analysing the segment, as the market for first-time buyers is looking ripe.
With developments like Serena by Dubai Properties, Dubai South by Emaar and Akoya Imagine by Damac in the pipeline, consumers can currently buy villas for under Dh1.5m.
Where to invest?
It is not that surprising that Dubai's real estate developers are looking closely at affordable housing, specifically targeting middle income consumers. A number of developers have been marketing their properties to millennials, with appealing investment plans and prices. The current downturn means that secondary market prices (properties that are being sold for the second time) are increasingly attractive to middle-income consumers, especially if they have the necessary capital for a down payment.
When investing in the secondary market, there are considerations to explore. Is the property in good condition and a good location? If you're going to rent it out, does it already have a tenant? If you are going to live in it, does it have all the amenities you need? How much are the maintenance and service fees? But the most important aspect to consider from an investment point of view is whether rental income from the property will cover the cost of investment in the property — and how quickly.
Dubai's large expatriate population means that rents have not fallen as much as property prices have, giving investors who buy now slightly higher yields.
Another market segment that is attracting millennials is off-plan. Tighter liquidity in the market has impacted the purchase of off-plan property. Off-plan purchases must be very carefully analysed, with a lot of research into the developer. Projects marketed by master developers are generally lower risk, as master developers can absorb a short-term lack of liquidity. Smaller developers may struggle to absorb these costs and require faster sales cycles to maintain their working capital.
In February, we issued a report entitled Building Confidence that outlined five key trends that will define the real estate market leading into 2017:
* Liquidity is tightening
* Oil prices are unlikely to recover significantly in the short term
* Developers are focusing on delivering projects, while buyers are increasingly looking to own the homes they live in
* Affordable housing is a growing segment – initiatives like Dubai South may soon see rent-to-buy schemes
* A short-term softening is likely before the market returns to growth in the lead up to Expo 2020
What you need to know about financing
Selecting a property is one of the most challenging aspects of investing in Dubai's housing market, as there is a wide range of choices. Once you've found the property you want to buy, financing is regulated by different measures put in place by the UAE government to stabilise the market and reduce significant fluctuations. If an investor has enough seed capital for a down payment for a property valued at under Dh5m, a financial institution can finance up to 75 per cent of the investment for first-time expat buyers and up to 60 per cent for expats who already own a property in the UAE. For UAE nationals, the bank can finance up to 80 per cent of the investment for first time buyers, and up to 65 per cent if the investor already owns property.
For discerning young investors, this is a good time to invest in Dubai's housing market. Millennials should take a long-term view, as with the right combination of timing and pricing, there are considerable upsides in the current market.
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Source: Sidharth Mehta, Special to Property Weekly
The author is is Partner and Head of Real Estate at KPMG