Ask the Expert - Should I invest in an apartment with minimal facilities?

Ask the Expert - Should I invest in an apartment with minimal facilities?Mohanad Alwadiya

• I have decided to invest in an apartment and am currently considering two options. One has excellent facilities, while the other has minimal facilities. Which should I choose? - Brian E., Dubai

- You must think of your property investment as a product that you will be leasing to an end user. There is no doubt that you will find the apartment with extensive facilities significantly more attractive to potential tenants, as long as you set your rent at a level which will be construed as representing fair value.

And there lies the catch. The more and higher-quality facilities you provide your tenant, the greater the service charges are likely to be. You must do your calculations to ensure that you can at least cover the cost of the service charge differential with a higher rent, which still represents value to potential tenants. Ideally, you should try to factor in a margin of 10 per cent.

If the value equation cannot be provided to the tenant while providing you with an acceptable rental return, you should seek other alternatives, as too much of your rental income is being eaten up by service charges.

• I have bean planning to buy property as a long-term Investment. Given the market is slowing, can you advise whether I should invest in an apartment or villa and in which location? - Abdullah M., Dubai

- I am assuming that the purpose of your investment is to build equity through capital growth. Although the market is slowing, some areas in Dubai are slowing more rapidly than others. For apartments in established areas, such as Dubai Marina, Jumeirah Beach Residences (JBR) and The Palm Jumeirah, price growth has slowed to low single digit levels, while in secondary areas such as Jumeirah Lakes Towers (JLT) and properties in Dubailand price growth is still in the 7-9 per cent range.

For villas, quarter-on-quarter price growth has slowed considerably in the more established locations such as Arabian Ranches and Palm Jumeirah, while secondary locations such as The Villa in Dubailand are still enjoying healthy growth rates in the 7-13 per cent range.

If capital growth is your prime objective, I would recommend you purchase a villa from the Andalusia Collection in The Villa project in Dubailand. The collection consists of only 69 unique villas, which exibit high standards of fit and finish and outstanding value due to large plot sizes and high quality features. I expect these villas to deliver superior capital appreciation due to their quality and rarity.

• As a tenant, I am protected by law 43 of 2013 against outrageous rental increases by my landlord. Given this protection and the fact that property prices appear to be reaching their peak, do you believe I should delay purchasing an apartment to live In? - Ahmed B., Dubai

- I don't see how Law 43 has anything to do with your decision other than to make you more comfortable in putting off your purchase. Ask yourself this question: ''Am I better off using my money to increase my wealth or the wealth of somebody else?''

Owning property allows you to better utilise your hard-earned Dirhams, instead of covering an expense that offers you no future financial return. It will reap bene1i.ts for you in the future as your wealth is in the form of property instead of cash. This allows you to build your individual net worth through capital appreciation of your property, something which is very important for your financial future.

Paying rent can actually inhibit your ability to build net worth. Inflation is a problem because, although Law 43 will protect you from greedy landlords, you will eventually face rental increases that comply with the law, putting greater pressure on your disposable income.

Conversely, as a property owner, inflation is working in your favour because, in all likelihood, your property will increase in value and, if kept for multiple years, you will enjoy an inflationary compounding effect on your property's value.

• I am considering the purchase of several different rental properties and have been trying to calculate their Investment value. How do I do this? - Margaret O., Dubai

- There are a number of different methodologies that can be used depending on the purpose of the valuation. I will elaborate on two of them.

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 yours is attracting a monthly rental rate of Dh7 per square foot per month, then this will indicate the likely cash flow you can expect. This is an extremely simplistic approach that we, as property managers, do not advocate, although it's surprising how many people limit their analysis to this simple method only.

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 return on investment, which is derived from capital appreciation, in addition to net rental income, and compares it to other investments that you may be considering. This is a much more comprehensive evaluation tool, which enables smarter investment decisions and is therefore what we use as standard procedure.

• I am looking to buy one of two apartments. The first is a 12th-floor apartment in Dubai Marina with a marina view and a price of Dh2.4 million. The second is a 15th-floor unit in JLT, of similar size and quality with views of the marina and batter amenities. The seller is asking for Dh1.85 million. Both appeal to me. I plan to take out a mortgage and have Dh970,000 for downpayment. Which apartment would you recommend? - Paul M., Dubai

- For a start, you need to consider the 4 per cent property registration fee and 2 per cent agency fee. For simplicity's sake, we will assume that bank fees are waived. The total purchase cost for the Dubai Marina apartment will now be Dh2.54 million, while the JLT apartment will cost Dh1.96 million.

Financing costs will vary considerably. We will assume you can obtain a mortgage that will average 5 per cent over a 30-year period. For the Dubai Marina apartment, the amount to be financed is Dh1.57 million with 360 monthly repayments at Dh8,449 per month, totaling Dh3.04 million. Assuming the mortgage runs its term, you would have paid Dhl.47 million in interest charges.

The financial requirements for the JLT property look less daunting. The amount to be financed is Dh991,000 with 360 monthly repayments at Dh5,320 per month, totaling Dh1.91 million. Assuming the mortgage runs its term, you would have paid Dh924,000 in interest charges.

The differences in financing costs are obviously significant. Assuming you invested the difference in the monthly payments into a fund that returned a constant 5 per cent compounding, you would receive a lump sum of Dh2.6 million at the time the 30-year mortgage expires.

Alternatively, if you could afford the monthly mortgage payment of Dh8,449 for the Dubai Marina property, why not use that amount to buy the JLT apartment and shorten your mortgage term to just under 13 years?

Given that the apartments are of roughly equal appeal to you, I would recommend purchasing the JLT apartment. In addition to being less financially burdensome, I believe JLT will also provide a slightly better capital return over the long term as buyers will always consider it to be the logical, more affordable alternative to Dubai Marina, while offering a similar lifestyle.

• I am a German citizen and I am thinking of investing in an apartment in Dubai. I plan to initially rent out the property and eventually use it myself during my retirement. Can you advise what I should be considering in this venture? - Name withheld on request

- As the property will be eventually for your own use, I am assuming that proximity to the beach would be preferable. While this is likely to cost you a little more, the income you receive from this investment will also be greater as the vast majority of tenants, whether they be Dubai residents or holiday makers, aspire to live near the beach.

It also opens up options for short-term rentals. If well managed by a professional agent, this strategy can provide you with superior returns and it has been a feature of rental strategies in Dubai for some time now.

The options are simple enough. JBR, Dubai Marina and Palm Jumeirah all offer that sought-after and pleasant sun-kissed lifestyle, while providing excellent amenities and entertainment options. These are iconic developments and very popular with holidaymakers, residents and retirees alike.

From a budget point of view, you have a wide variety of choices available with quality properties in the range of Dhl,200 per square foot (approximately €2,640 per square metre) to Dh3,000 per square foot (approximately €6,600 per square metre). The choice is amazing and getting what works for you is eminently achievable.

You should expect a minimum net rental return of around 7 per cent, which, when combined with the cheap financing available at the moment, makes for a solid investment in preparation for outright ownership and retirement.

Of course, the usual due diligence is required with factors such as location, the developer's track record and reputation, quality, service fees, building management and the existence of a functioning owners' association. That's where a reputable local real estate professional can help you minimise any risks with your investment.

Source: Mohanad Alwadiya, Special to Property Weekly

Mohanad Alwadiya is 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 Department

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