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In an age of instant information and analysis, taking hardcore financial decisions can be confusing. More so, if it involves buying a home when every variable — geo-political stability, property prices, rental market, financing rates - appear unpredictable and volatile. Should one be cautious and continue to rent, or take the plunge and try to leverage the best deal.
Buying a property is a complex process, requiring an assessment of these diverse range of macro forces as well as personal factors such as, tenure of stay in the UAE, choice of property and affordability. And then comes the most complicated of calculations — making a trade-off between renting and buying. In this complicated scenario, let’s look at the range of factors that should go into you making a long-term profitable property decision.
Invest in stability
The fundamental drivers of Dubai’s real estate remains strong. UAE enjoys a prominent place in the world map and is known as a safe haven — a business and financial hub — within a volatile region. Investors in for the long haul can continue to factor in the growth generated in the run-up to Expo 2020 and evolution of Dubai as a centre of Islamic finance.
Political stability, superior infrastructure, tax-free environment, respectable rental yields and freehold property status contribute in making UAE an attractive destination. Interestingly, non-resident and international buyers continued to invest in the UAE, with overall transactions increasing from Dh218 billion to Dh267 billion last year.
Whether one can take advantage of the UAE’s property market depends on how long he/she decides to stay in the country. While it makes sense for those on a temporary stint to rent apartments or villas, those on a long -term tenure may find real estate investment the safest and best option. Property may not promise extravagant capital returns on an immediate basis — but definitely does so in the medium and long term. Even if one heads out of the country, a property here promises to yield steady rental income.
Is this a buyers’ market?
The cyclical nature of the real estate market, however, may leave homebuyers puzzled about timing. In the UAE, the property sector revived magnificently after the 2008 crisis, with the 2012-13 period registering capital gains close to 30 per cent. This alacrity did not last long and transactions slowed down from late 2014. In 2015, prices corrected by an average of 13 per cent. Investor sentiment took a beating with sales transaction figures declining. This resulted in a period of stagnancy when sellers chose to hold on to their properties, waiting for prices to rise, even as confused buyers went into a wait-and-watch mode or stayed on as tenants.
There is, however, a positive way to look at the slowdown — we can say property prices have reached an attractive level and the market is more mature and stabilised after a series of government regulations put a curb on speculators. For those wondering if the market has bottomed out already, or if they should wait a bit longer for prices to fall further, we suggest, there is little point in hoarding, and perhaps wasting, their deposit money.
Reputable research firms indicate that the housing market is expected to bottom out mid-year and start to pick up in later months. As the economy diversifies, demand for residential and commercial spaces will ultimately help push property prices upwards.
The average price correction in 2016 is expected to be 4-6 per cent, but real estate insiders note that market conditions will favor buyers over the next 12 months. The momentum of price decline moderated in December; construction volume looks dynamic and the strong US dollar and low oil prices are likely to remain head-winds for the real estate sector in 2016.
Make a trade-off
A major factor in UAE is the prevalence of a strong rental market. High rents are difficult on tenants who are compelled to pay huge money in rents, while retaining no assets. On the other hand, for property-owners, the same high rent becomes a good investment in the long run. Unfortunately, rental yields in the emirates entered a disappointing phase last year.
Rents in Dubai slipped an estimated 3 per cent, particularly in freehold areas, and is expected to drift down by 5-8 per cent in 2016. This had led to momentary confusion among residents, prompting them to hang back on buying activity.
There is, however, no reason to be disheartened — capital gains in the medium-to long-term remain as promising. In any case, the drop in rents will not be drastic; surveys indicate that rents have taken a beating in non-prime, peripheral locations of Dubai, while tony areas continue to remain expensive.
Rental trends are primarily driven by population growth and availability of property units. The fear among homeowners and buyers that rents will go down across the board is exaggerated. This is easily explained by the supply situation in Dubai. As per research reports, less than half of the estimated units came to the market in 2015. If a similar trend continues with the sluggish delivery pace this year as well, it leaves Dubai’s property market with a supply deficit even as its resident base grows further. And in such an environment, there is no reason for rents to crash.
In the latest January 2016 RERA index (which is going to be issued annually now rather than quarterly), a number of areas have seen the price range of rents drop. It is important to note, however, that rents are not actually dropping, it is only that the rate of increase has stagnated or gone down.
If we analyse the rent situation in Dubai — we see that softening is more pronounced in the freehold communities than in the city’s traditional residential hubs of Bur Dubai and Deira and in the fast-emerging corridors around Al Nahda, Rashidiya and Al Ghusais. And according to market feedback, asking rents continue to firm up at these locations. Sharjah rents did show a slide for first time in two years in December. It declined 1.6 per cent year-on-year in the third quarter, because of rising supply levels across many areas of Sharjah, and other factors.
However, well-managed buildings that are perceived to offer better quality and increased facilities are still in high demand. Residential lease rates for new communities and gated villas in Sharjah continue to rise, with rents growing 4.1 per cent during much of 2015.
In Abu Dhabi too, rents continue to build up due to extensive business activities and limited new supply of housing units. The Abu Dhabi rent situation is such that there is now a ‘widening of the gap between residential rents in Abu Dhabi and Dubai,’ the real estate consultancy JLL said in its 2015 overview.
The fly in the ointment may be financing rates. The US Federal Reserve is expected to raise rates by a further 0.5 per cent this year and the UAE is likely to follow suit because of the dirham-dollar peg. Couple that with anticipated lower liquidity in the UAE, investors fear that borrowing may get more expensive.
It is true that some banks have raised the home finance rates, but our view is that it is well within the affordable range in the UAE and are actually at historical lows compared to the 7 per cent average in the 2007-08 period. We are still far from a Fed rate hike that would impact our rates significantly.
Investors and end users can avail of the discounts and favorable payment plans that are being offered in this softer market. Although home ownership comes with costs such as maintenance fees, agent charges and financing, it is a long term investment that is likely to yield high capital gains for anyway staying in the country for a longer period.
Source: Pawan Dhawan, Special to Property Weekly
— The writer is Head of Home Finance, Noor Bank