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Real estate in Dubai is becoming accessible to mid-income individuals and small families who can consider homeownership in some freehold locations. It is now theoretically cheaper to pay a mortgage than rent — a result of the stabilisation in residential sales prices, coupled with the sharp increase in rental rates during the second half of last year.
But will the stabilization in residential sales prices vis-à-vis rents hold this year? Declan King, Director and Group Head—Real Estate at ValuStrat, which advises on strategy, valuations and asset divestment, says, ''The stabilization seen in the Dubai residential sales market in the second half of last year was encouraged by the direct intervention of authorities to calm the property market and slow the rate of residential asset price inflation. Measures taken in late 2013 — such as the doubling of Dubai Land Department [DLD] transaction registration fees to 4 per cent and the introduction of stricter loan-to-value [LTV] ratios by the UAE Central Bank—created increased barriers for potential buyers and took the heat out of the market. This stabilisation, coupled with off-plan launches and the handover of more new stock, is likely to continue this year.
''With regard to the residential lettings market, we anticipate prospective tenants will find improved scope for negotiation on new leases as landlords face heightened competition from increased supply in some districts. However, we expect rental values will remain resilient in prime locations such as Downtown Dubai, the Palm Jumeirah and Dubai Marina.''
''One of the most talked about topics, alongside how long you plan to stay in Dubai, is 'Are you considering buying a property here?''' says Victoria Garrett, Associate Partner, Residential Sales at Knight Frank Dubai.
''The two are linked and expats have a number of questions they should consider: What type of property do you prefer? How soon would you look to release the capital from the property? Is it going to be a long-term home or would you look to rent it out? These will all help determine what area you should look to buy in.''
With rents having increased considerably over the past few years, many expats have taken the plunge and bought property as they see it as a hedge against rising rents, says Garrett. ''Not only are they able to use the purchase as an investment opportunity with potential capital appreciation but they also aren't wasting money on rent, which is essentially dead money.''
The low cost of mortgage is not the only factor driving more people to purchase property in Dubai. Others are simply looking for a better home.
''This is especially true in some older, more established communities,'' says Garrett. ''These properties could be upgraded, but this is not being done by landlords as they are able to rent them out easily, so they don't see the need to spend money to do it.''
She says there is also a change in expat outlook. Traditionally a haven for transients, Dubai is increasingly being seen as a place for long-term stay. ''Compared to ten or 15 years ago, when people only planned to stay for a few years, we are now seeing people planning to use Dubai as a home rather than a transitory destination,'' says Garrett. ''With people planning on staying longer, it is a natural progression to invest in a house rather than renting.
''It is interesting to note that approximately 80 per cent of mortgages in Dubai are taken out by end users. This shift from people renting to buying is great for stability of the market in the medium to long term.''
Catherine Clarke, Director of Residential Valuations at Colliers International, says, ''Although the rate of growth in the sales market has slowed, two-bedroom apartments under Dh2 million still represent only 9 per cent of freehold supply. In addition to the recent mortgage cap limiting LTVs to 75 per cent and 80 per cent for expatriates and UAE nationals respectively, this means that owning a home is still beyond the reach of most working families in Dubai.
''In order to capture the owner-occupier market and, in particular, families who are looking to remain in the emirate for the mid to long term, it is critical that they are provided access to midmarket housing.
''We have seen a number of announcements recently, including the expansion of Remraam and proposed launch of value housing projects through Dawahi Developments, which suggest that forthcoming supply will be focusing on this market segment. We anticipate that this would have a positive impact on the number of owner-occupiers in the residential market.''
''Homeownership is the aim of pretty much everyone who wants to stay in Dubai for the long term,'' says Mario Volpi, Managing Director at Ocean View Real Estate Dubai.
''Apart from the obvious advantages of ownership and paying a mortgage — rather than paying rent and never seeing a return on investment — owning property gives you freedom from having to negotiate with your landlord on a yearly basis to determine what rent you will pay for renewal.''
With prices coming down, it makes more sense to buy than rent in certain locations. For smaller units such as studios in Jumeirah Lakes Towers, for instance, monthly rents average Dh5,400, but a 75 per cent mortgage would cost approximately Dh4,000 per month, says Volpi.
''For one-bedroom apartments in Discovery Gardens, the comparison is similar with a monthly rent of about Dh5,600 and mortgage approximately Dh4,000.''
Other good locations are Dubai Sports City (DSC), The Greens, Dubai Motor City and Dubai Marina. Volpi says it is approximately Dh1,000 a month cheaper to buy in DSC, and Dh400 in The Greens. In Motor City it is marginally better in favour of buying.
''For two-bedroom apartments in lesser-quality towers in Dubai Marina, buying would still mean being better off on a monthly basis by around Dh200,'' says Volpi.
However, it needs to be understood that the initial buying costs are still high as homebuyers need to pay 25 per cent of the price as deposit to get a mortgage for property worth less than Dh5 million, a 4 per cent transfer fee and 2 per cent real estate agent's commission, as well as bank charges and valuation fees.
Mohanad Alwadiya, Managing Director of Harbor Real Estate, says achieving long-term financial security is a prime motivation for many to consider purchasing their own property.
''Paying rent actually detracts from the ability to build net worth, while owning property allows the individual to change the application of hard-earned dirhams from covering an expense to paying off an investment,'' says Alwadiya.
''In a way, it's a forced form of saving, which will reap benefits for the future.'' The financial advantages are immediate. ''For example, for the individual who pays rent, inflation is a problem because you are consistently being asked to pay more,'' says Alwadiya.
''Conversely, as a property owner, inflation is favourable because in all likelihood the newly acquired unit is increasing in value and if kept for multiple years, inflation will have a compounding effect on the property's value.
We have seen the more affordable areas of Dubai attract an ever-increasing number of first-time home buyers, particularly in projects such as Queue Point and Skycourts in Dubailand. These are well located, offer good value for money and have proven popular among first-time buyers.''
Single and married young professionals and small families are the ones who are making the switch to homeownership, says Volpi. Most realty experts and brokers agree. Alwadiya says, ''We see young couples or families taking the opportunity to invest in their first family home as representing the majority of new mortgage takers in Dubai.''
Experts also acknowledge that home ownership comes with added responsibilities and less flexibility than renting. For a Dh1.5-million property with a 75 per cent LTV, homebuyers will need to pay Dh375,000 up front for a deposit, Dh60,000 for registration fees and Dh30,000 for agent fees, points out King.
''This is before they pay for a surveyor, discharge any mortgage admin or legal fees, or buy furniture,'' says King. ''Should they choose to buy off-plan, then the required cash payment will increase even more due to lower LTV rules for such properties.'' Property owners are also responsible for owners association management fees payable every year for the provision of communal facilities as well as upkeep and maintenance costs.
The additional costs to be considered when renting property include 5 per cent of the rental price as deposit and 5 per cent as agent's commission. Minor maintenance works are also the responsibility of the tenant, the cost of which will be determined by the contract.
For buying property, in addition to the aforementioned deposit and transfer fee, end users have to pay a 0.25 per cent mortgage registration fee, DLD administrative fees and surveyor fees, as well as annual service maintenance charges.
There are other fees and charges that a new homeowner needs to consider, including a 1 per cent mortgage establishment fee required by the mortgage provider — although in many cases clients are able to negotiate this to a lower amount or even have it waived.
''If you have engaged a real estate agent to assist you in searching for, negotiating and purchasing property, you will be liable for a maximum 2 per cent brokerage charge,'' says Alwadiya. ''The first instalment of the annual service charges will also need to be paid in advance. For a more affordable property, this is approximately Dh7-Dh10 per square foot.''
King advocates changes in policy that would encourage owner-occupiers. ''Entry and exit costs for investors and end users are currently the same in the UAE, unlike more mature property markets in the West where owner-occupiers are treated differently from investors, with lower acquisition and disposal costs acting as an incentive to buying,'' says King, who has 23 years of international experience in residential property development, sales and valuation.
Offering long-term residency visas for expat property owners will also be good for the market, he adds. ''At present, owners of homes worth at least Dh1 million get a residency visa renewable every six months.''
Volpi agrees that policy changes are needed. He adds these should include incentives to encourage homeownership, such as a better LTV rate for first-time buyers and reduced DLD fees.
Alwadiya adds, ''The importance of maintaining affordability for the average first-time homebuyer is critical. In the majority of cases in a mature industry, financing tools such as mortgages, easy payment and lease-to own schemes are critical to allow them to participate in the industry.
''Owner-occupiers represent the core of the industry as they view property as an investment, not just a way to make a quick profit.''
Did you know that unique luxury properties in Dubai are bucking the trend
Source: N.P. Krishna Kumar, Special to Property Weekly