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For Middle Eastern investors, London has always been regarded as a strong investment complementary to their property portfolios in the region, especially in times of crisis.
While the property market in Dubai experienced an extraordinary journey of boom, crash and recovery in the last decade, London was a safe deposit for capital growth seekers in the Middle East. The percentage of Middle Eastern buyers of super-prime London properties has increased from 11 per cent to 16 per cent in the year to June 30, and second only to British nationals.
Looking at it the other way round, the British have been among the biggest buyers in Dubai’s realty market ahead. In the first half of 2015, these accounted for 9 per cent of total transaction volumes, second only to share of Indians in the non-GCC segment. This investment exchange between the two cities has proved solid in both directions.
While the many British investing in Dubai are seeking capital appreciation more than using them as primary or secondary homes, individual GCC buyers purchase residential property in London to make it a base for their spouses or children to stay for educational purposes in the city or as a holiday home.
Nevertheless, as global markets come under increasing pressure from a persistent decline in oil prices accompanied by devaluing international currencies and political unrest, it is evident many property investors in both London and Dubai are looking to income generation as their measure of value, pushed by a healthier residential rental market that continues to gain significance as an asset class.
In key employment hubs, such as Dubai and London, where home ownership is beyond the reach of many workers, the increasing mobile and flexible workforce has led to rising demand for rented property.
While Dubai’s residential price fall continues to significantly outpace rental value declines, initial yields are growing. Dubai has seen its residential prices plunge around 12.2 per cent over 12 months to June 2015, according to the Knight Frank Global House Index, while the decline in mainstream rental rates has been cooling down at a low rate of 1.2 per cent.
Yield returns, as a first-hand result of such sale-rent combination, have strengthened over the same period with 9.9 per cent increase to 7.42 per cent in Dubai’s mainstream market in July. This is good news for an income-seeking investor as yields are high compared to other relative safe havens.
Looking at the UK market, between January 2009 and June 2015, mainstream residential prices in London increased around 71 per cent, making it a safe haven for capital investors in the aftermath of the global financial crisis. However, growth in sale prices has cooled down lately due to waning demand to reach 4 per cent on a year-on-year basis in June. On the other hand, rentals have been increasing at 3.8 per cent in the year to June.
As a rule of thumb, mainstream yield returns are usually stronger than those produced by prime segment properties. These are at around 4-4.5 per cent in London (June), while prime segment yields are approximately 3 per cent. In return, low prime property yields combined with price gains have pushed prime property seekers to look afield towards London’s periphery market and beyond to Birmingham, Manchester and Bristol where yields are holding up better.
In Dubai the magnitude of decline in prime residential prices in the year to June was smaller at 4.5 per cent compared to the mainstream properties due to higher demand in the first segment.
Compared with other safe-haven assets like government bonds, investing in property appears to be more fruitful in both Dubai and London. The Dubai government bonds (DUGB 43s) were trading at $89.78 (Dh329.49) with at a YTW (yield-to-worst) of 6.01 better compared to a 30-year US Treasury yields of 3.10 better. (Both are figures for July 2015.)
On the other hand, bonds in the UK (Government Gilt 30- and 10-year bonds, for example) are resulting in lower yields of usually below 3 per cent.
The rising significance of the residential rented sector is creating opportunities for investors, especially where prices have reached reasonable levels. With selling prices in Dubai hit by stronger US dollar, declining oil prices and government intervention, it’s fair to say that there has been more resilience in Dubai’s rental market than in sales.
In order to make the right investment decisions, finding out what tenants want and need is crucial. Tenant appeal is mostly affected by accessibility of the community while investors should look for maturity of the community’s sub-market in terms of tenant diversity, overall occupancy and levels of tenant retention.
Properties in Dubai Marina, for example, remain a much sought-after asset. With luxury finishing, adequate amenities, and a highly accessible location, rental rates are rising above the market average.
If yields continue to strengthen in Dubai, a further inclination to buying is anticipated from buy-to-let and buy-to-live investors. Furthermore, an increasingly important institutional investment segment is yet to mature gradually. This is in return will eventually help residential prices gather momentum in the near future.
Investors will still eye London market as safe haven, especially for Middle Eastern buyers for whom the city has been long home for vacations and studies. However, tightening yields and increasing prices will drive potential buyers towards outer London or in the regional cities where alternative profitable investment options exist.
Source: Diaa Noufal, Special to Gulf News
The writer is Associate Partner — MENA Research at Knight Frank.