Investors take notice as affordable housing finds its niche

Investors take notice as affordable housing finds its nicheTown Square by Nshama / Image Credit: Nshama

Dubai has become firmly entrenched as a haven for luxury property investors, but the recent buzz is about emerging options on the other end of the property spectrum.

Earlier this year the Sotheby's Global Luxury Residential Real Estate Report 2015 noted soaring prices and interest in Dubai, drawing luxury investors from traditional markets, but there were also several announcements that heartened those with less capital.

First, the Dubai Municipality announced it was allocating 100 hectares of land to develop 50,000 rental units for low-income earners. Property developer Nshama also revealed its affordable Town Square development, which has an impressive sub-Dh1 million price tag for three-bedroom villas, before news broke about Dubai Municipality's proposal requiring developers to ring-fence a portion of residential projects for affordable housing.

MAG and Binghatti Developers have also made an enthusiastic stab at affordable housing with the recent launch of MAG 5 Boulevard and Binghatti Apartments.


Meanwhile, property transactions for the first quarter eclipsed Dh64 billion, according to the Dubai Land Department. The most popular areas for investors were Business Bay and Dubai Marina — neither is renowned for affordability.

However, Editor Peter Cooper, who has been writing about investment issues in the country for almost 20 years, says the smart money is actually on affordable housing.

''Generally, investors make a lot more out of renting out smaller, affordable units than luxury ones. Although [the latter] can give a higher capital gain, it's not true that luxury property is automatically the best for total investment return.''

While he shies away from using the term affordable housing — ''does that mean subsidies to make houses cheap, or building a long way out of town where land is cheaper?'' — Cooper says as long as cheaper housing is built for a reasonable cost, it can be very profitable. ''The trick almost always in property investment is in the initial purchase price or cost.''

Cooper says he would not like to see government regulations compelling affordable developments be built or that residential units must adhere to any kind of fixed pricing regulations.

''I tend to associate affordable housing with socialist countries that tax the rich to subsidise the poor, and Dubai does not do that, preferring to work on a market business model that delivers a better result in the long run. It's up to the developers to consider where the highest demand is coming from and how to profit from it.''

For his part, Dubai Municipality Assistant Director-General of Planning and Engineering Abdullah Rafia tells the proposed affordable housing development quotas would apply to government developers, not for private developers.


However, Cooper believes that developers may have missed the opportunity to capitalise on the demand for cheaper accommodation. ''Dubai is positioning itself as a global business hub, a city of the future with accommodation to match rather than as a home for the needy,'' says Cooper. ''By building the right infrastructure, the right people will come.

''But it is true that not everybody will be able to afford to live in a high-rise condo in Downtown [Dubai] and these people require somewhere to live as well.''

Real estate strategist Valustrat recently compiled a report highlighting the ''substantial opportunity for investment in affordable rental stock'', particularly family apartments. Declan King, Director and Group Head of Real Estate at Valustrat, says affordable housing presents a ''considerable investment opportunity'' for developers and investors due to a current shortfall.

''[Opportunities exist] for institutional investors for the development and purchase of bulk units, for [Real Estate Investment Trusts] focusing on portfolios of high-yield stock and for housing associations and employers targeting lower-income owner occupiers and tenants,'' says King. ''Opportunities exist in both sales and renting out of affordable properties to earn high yields.''

It is a matter of market forces, he says. Demand for cheap accommodation is outstripping supply, as rent prices surge and incomes flatline. King says rents jumped up 25 per cent on average from 2013-14. Just two years ago it was possible to rent a 150-sqm two-bedroom apartment with Burj Khalifa views for Dh80,000 a year. Today the price has more than doubled to Dh180,000.

''In the last 24 months these apartments have become too expensive, representing more than the acceptable 30 per cent of household income. In Dubai the housing expense currently stands at 38 per cent of average income,'' says Declan.

Last year, average rent of a two-bedroom Dubai apartment was hovering at Dh172,000 a year — or Dh14,333 a month. King says less than 10 per cent of employed expats earn more than Dh14,000 a month, forcing workers and their families to move to cheaper accommodations in the northern emirates. Currently more than one million people commute to Dubai for work each day from Sharjah and beyond.

''Most of the sharp increases in rents were fuelled by strong economic fundamentals and population growth — as employment numbers and salaries grew, so too did rental demand,'' says King. ''The positive sentiment generated by the announcement of Dubai winning the right to host the World Expo 2020 also contributed.'' The fact that Dubai, with its regional stability and steady stream of big-ticket developments, is so attractive to foreign investors also pushes up residential sales prices, which generally leads to an increase in rents.

King says the unyielding demand for affordable rental stock is due to continue. So is investing in affordable development fail-safe? King hesitates. There is no way to guarantee investing in affordable property is a sure bet, he says, as property markets follow inevitable cycles.

''[These] are a normal occurrence,'' says King. ''Dubai has not been through a full property cycle yet, as the global economic downturn in 2007 cut Dubai's property cycle short, and yet Dubai bounced back and started the recovery process in 2011-12.

''Since the third quarter of 2013, Dubai's residential market has been going through a mini cycle. [This is] certainly not a bubble by any measure, and with all the cooling regulations put in place we don't foresee a bubble anytime soon.''

Rental versus sales

King says there is a difference in property rental and sales: rental prices generally lag behind the trends of property sales values. ''There needs to be a clear distinction between affordable rental housing and affordable off-plan investment properties such as Nshama's Town Square,'' he says.

However, there is a natural correlation and it is no coincidence that moves towards affordable housing are taking place in both spheres.

''The recent focus on affordable housing is also reflective of developers searching out new market segments for sales—it could be a valuable source of buyers in a calmer market.''

The wider trend is suggestive of a common concern around assuring stability in the property market, after the huge property value fluctuations seen in recent years.

''Long commutes of more than 28km has become the norm for more than 25 per cent of working expats in Dubai,'' explains King. ''Consequently, people have to choose whether to downsize or move further away.''

The real cost of affordable homes

On top of the final price of the property, a buyer also has to pay an agency fee, which is generally about 2 per cent of the property price. Transfer fees of 4 per cent will then apply, to be paid to the Dubai Land Department within 30 days. A preregistration fee of 4 per cent must also be paid for off-plan property. There is also an administration fee for processing the primary market transfer application form. This is generally between Dh1,000 and Dh5,000.

Mortgage registration fees are generally 0.25 per cent and processing fees are 1 per cent of the mortgage amount. A mortgage valuation fee will also incur a fee of approximately Dh3,000.

Off-plan buyers should also note that they will be paying monthly instalments for the property, which could be on top of their existing monthly rent.

''If a person is earning Dh9,000 a month and pays Dh4,000 rent a month for a studio and an additional Dh2,000 as living expenses, it leaves very little to enter the property sales market,'' says Matthew White, UAE Sales and Leasing Director at Chestertons.

For the below calculations, we will assume the maximum loan-to-value ratio of 50 per cent for offplan property and an interest rate of 3.5 per cent. It shows that homes with less space look like an attractive prospect in terms of price, while bigger homes will take a heavier toll.

Buyers must also remember that the mortgage will cover only 50 per cent of a property's price.

Town Centre

New developer Nshama made waves when it announced the Town Square development in Dubailand in March.

Al Zahra Townhouses

The first residential project launched at Town Centre, Al Zahra offers three- and four-bedroom villas. Fred Durie, CEO of Nshama, has previously stated the project has attracted buyers earning around Dh20,000 per month.
Price: from Dh999,888
Agency fee: Dh19,998
Transfer fee: Dh39,996
Preregistration fee: Dh39,996
Admin fee: Dh2,500
Mortgage registration and processing fee: Dh9,374
Mortgage valuation fee: Dh3,000
Total cost: Dh1.11 million
Monthly mortgage repayments: Dh2,900 (20 years) / Dh4,944 (10 years)
Total amount not covered by the mortgage: Dh614,807 (can be paid through the buyer's own funds, a personal loan or a combination of both)

Safi Apartments

Price: Dh349,988 (studio apartment)
Agency fee: Dh7,000
Transfer fee: Dh14,000
Preregistration fee: Dh14,000
Admin fee: Dh2,500
Mortgage registration and processing fee: Dh3,281
Mortgage valuation fee: Dh3,000
Total cost: Dh393,760
Monthly mortgage repayments: Dh1,015 (20 years) / Dh1,730 (10 years)
Total amount not covered by the mortgage: Dh218,766 (can be paid through the buyer's own funds, a personal loan or a combination of both)

Glitz 2

In January developer Danube launched the project in Studio City, with completion expected in 2017. The company said buyers would have to pay a 10 per cent down payment, 15 per cent over the next 60 days, 25 instalments of one per cent of the unit value per month until handover, and 50 instalments of one per cent of the unit value per month after handover.

Prices in the development are about Dh890 per square foot.

Studio apartments
Price: starting from Dh475,000
Agency fee: Dh9,500
Transfer fee: Dh19,000
Preregistration fee: Dh19,000
Admin fee: Dh2,500
Mortgage registration and processing fee: Dh4,453
Mortgage valuation fee: Dh3,000
Total cost: Dh532,453
Monthly mortgage repayments: Dh1,377 (20 years) / Dh2,349 (10 years)
Total amount not covered by the mortgage: Dh294,953 (can be paid through the buyer's own funds, a personal loan or a combination of both)

Three-bedroom apartments
Price: from Dh1.6 million
Agency fee: Dh32,000
Transfer fee: Dh64,000
Preregistration fee: Dh64,000
Admin fee: Dh2,500
Mortgage registration and processing fee: Dh15,000
Mortgage valuation fee: Dh3,000
Total cost: Dh1.78 million
Monthly mortgage repayments: Dh4,640 (20 years) / Dh7,911 (10 years)
Total amount not covered by the mortgage: Dh980,500 (can be paid through the buyer's own funds, a personal loan or a combination of both)

Read more on making affordable housing a possibility in Dubai

Source: Amanda Fisher, Special to Property Weekly


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