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Short-term capital appreciation has often been the sole consideration of investors in, Dubai’s real estate market. With sales prices rising by the week, almost any asset was certain to make a profit in recent years. However, a calmer property market this year means capital gains are now harder to find and searching for yield is more important to buyers seeking return on investment.
Real estate investors looking for higher yields in Dubai are now advised to more broadly consider different locations and alternative asset classes.
Beyond the residential
Property investors in the UAE are very familiar with the residential segment of the market. It is a sector that many understand from personal experience. However, opportunities for investment in other asset classes are now available for those with budgets of at least Dh1 million. Ownership by all nationalities of a single commercial property such as a retail, office or warehouse unit is possible in the UAE.
Purchasers have a choice of buying offices in areas such as Business Bay and Jumeirah Lakes Towers, shop units in communities such as Jumeirah Village Circle and International City, or industrial premises in Jebel Ali Free Zone or Dubai Investments Park (leasehold).
An analysis of gross yields for typical property types in these locations suggests that commercial real estate as an asset class provides several benefits to an investor over residential. Generally, dealings with the tenant are more businesslike and less emotive than when compared with letting a villa or an apartment. The lease could also be for a longer term and pass more responsibility for upkeep and maintenance of the property to the tenant.
Commercial real estate also offers portfolio diversification to residential investors. The downside risk is that if the business fails, the property owner might not be able to collect rent.
In more mature property markets in the West, specialised asset segments such as car parking, self-storage, student accommodation and retirement villages have evolved as developers and investors seek out investment opportunities and better yield. These property Gulf News Archives types are generally not yet available in the UAE, but will probably emerge in time.
Internationally, development in these segments is often encouraged by way of government incentives on acquisition, holding or disposal costs.
For the purpose of the above analysis, we have considered gross yields, i.e. returns before any allowance is made for outgoings such as acquisition costs, management fees, service payments, finance charges, etc. These expenses can be considerable.
A buyer should identify such costs in advance to arrive at a reasonable estimation of the net yield, i.e. the return that can be expected after all costs are deducted. Investors should note that increased service charges, protracted void periods and higher mortgage rates can all significantly impact any returns.
If you are considering a step into real estate investment in Dubai’s more mature property market, you might find it beneficial to search for yields in different locations, or even in a completely different asset class from what you might have initially been considering.
Source: Declan King, Special to PW