The real assets in Dubai

The real assets in DubaiImage Credit: Supplied

The robust growth of Dubai's re-emerging property market, backed by strong fundamentals, has renewed investor confidence and attracted more investment into the property sector. The market offers plenty of opportunities for investors from small-scale retail buyers to high-net worth individuals. There are also asset classes that appeal to large companies or institutional investors.

When investing in real estate, it is essential to first identify your goal and determine the amount you want to invest. Thereafter, select the asset class, determine whether you want a short term or long-term investment and study the rental yield and risks involved.

Most importantly, learn the skills required when investing and trading various asset classes such as residential, hotel, serviced apartment, industrial property, warehouse, retail and office.

''An investor's preference for a property is often dependent on a wide range of variables,'' says Khawar Khan, Research Manager at Knight Frank. ''However, the risk-return trade-off is most important in the mind of most.''

Furthermore, investors today are generally more vigilant and carry out proper due diligence, unlike many investors in 2008-09, he points out.

There are residential units as well as various types of commercial and industrial assets available in Dubai to suit different preferences. Khan says institutional investors are more inclined towards a ready stock of office space and industrial assets with multinational tenants and long-term leases in place.

They also prefer to invest in different kinds of assets and in different locations to minimise risk, he adds.

Khan says ultra-high-net worth individuals have a propensity for trophy assets, where wealth preservation is key. In the UAE, this translates into investments in hotels and prime residential real estate. In many cases, however, property investors tend to take a relatively longer-term view to investment, aiming to take advantage not only of annual returns, but also of capital appreciation, Khan points out.

Residential property

Residential property is a popular vehicle that attracts everyone — newcomers, veteran investors and large organisations alike — because it is more secure and a relatively simple investment medium to generate rental income and gain from value appreciation. The scale of financing in this asset class depends on the investor's preference and capacity. One can purchase one or a few apartment units, town houses or villas. Large scale investors can take up an entire floor or more, or even entire buildings.

Sean McCauley, Director —Agency at Asteco Property Management, says residential units appeal to most investors because in the long run vacancy rates for residential property are normally lower than commercial property, hence the asset generates a more stable earning. McCauley says the return on investment is not necessarily higher than that of a commercial asset, but it is less erratic — there is a bigger market for a two-bedroom apartment than a large office space.

Mario Volpi, Managing Director of Prestige Real Estate, says when a property is purchased by an investor rather than an end user, it becomes an income-generating asset.

''Fees and maintenance issues can obviously eat into the capital, but in the long run the income generated, plus the capital appreciation, ensures the property can perform better than stocks and shares,'' he says.

The return on investment of this asset is largely based on a range of factors such as price, rental income, expenses, maintenance, remedial works, etc. However, when the asset is held for a longer term, it can outperform the savings schemes offered by banks, says Volpi.

Office property

Investment in office property is not as extensive as in residential property, since the latter is a more established asset class among average investors. However, office space is a less complex investment channel than other specialized commercial asset models, such as industrial, warehouse, hotels, etc.

Most office properties are in shell and core buildings, where tenants have to undertake the fit-out work for the unit and manage it. The property owner, therefore, does not have to worry about maintenance work, whereas in residential units maintenance is the property owner's responsibility, points out Manish Khatri, Vice-President of Business Development and Investments at Aqua Properties.

The Dubai property market permits single-unit purchase of office space, which is not the case in other property markets where an entire building has to be purchased, adds Khatri.

Hence, Dubai has attracted single-unit or small-scale buyers looking to diversify their investment portfolio. However, this asset class generally targets large institutional investors or high net-worth individuals and families who prefer to take up entire floors or buildings.

Lease terms for office units are longer, ranging between three and ten years, compared to residential units that are leased annually. The yield gains are also higher, ranging from 5-8 per cent on average, based on the type of building and its location, says Khatri.

''In Downtown Dubai, you can purchase an office unit for Dh2,800-Dh3,000 per square foot and rent it out for Dh160-Dh180 per square foot. This gives you around 6-7 per cent return. In Business Bay, you can get a ready property for Dh1,400-Dh1,500 and rent it out for Dh90-Dh110 per square foot, which gives a 5-6 per cent return,'' says Khatri. ''So return on investment fluctuates depending on the location, the type of building and the developer.''

Mat Green, Head of Research and Consultancy — UAE at CBRE Middle East, points out: ''Despite the high headline vacancy rate across the market as a whole, the availability of good-quality, single-owned office accommodation over contiguous floors is somewhat limited.

''Over the next 12 months, demand for quality office space will increase as companies move out of older offices to those with better offerings. This is likely to lead to further rises in rentals as property owners seek to achieve premiums on remaining space, as occupancy levels rise.''

CBRE expects demand to remain high in key locations such as Downtown Dubai, Dubai International Financial Centre and Tecom throughout the year, adds Green.

Hospitality property

Considered a niche market, the hospitality real estate segment attracts sophisticated investors who are operators themselves or those with large portfolios who invest in hotel property and hire an operator to manage it for them, in return for a fixed guaranteed income.

According to Green, the hospitality supply in the emirate has reached more than 60,000 hotel keys, in addition to more than 23,000 hotel apartment units.

''Hotels in Dubai witnessed the highest profit levels in the region last year for the fourth consecutive year, with an average occupancy of nearly 80 per cent,'' says Green.

In the next three years, around 13,000 new hotel keys and 4,500 hotel apartments could be delivered, Green adds, for a total of around 6.4 million room nights each year.

''With Dubai winning the right to host the World Expo 2020, this pipeline of additional rooms will undoubtedly swell much further over the next five years, as developers mobilise to meet the anticipated demand.''

The hospitality sector had mainly targeted large-portfolio investors, who would purchase entire buildings or hotels rather than a small section of it, Volpi points out. However, with Dubai growing as a holiday destination of choice, the hotel apartment concept has become an established asset class that has garnered the interest of individual investors.

Small-scale investors are buying serviced hotel apartments in freehold areas to benefit from the growth of the hospitality sector. They give their units to an operator or a rental pool management to lease these on short term basis and generate rental income.

''The rental return of serviced units is higher than that of residential property, but due to more wear and tear in these units, the maintenance cost becomes higher. Typically, the return ranges from 10-20 per cent, depending on various factors,'' says Volpi.

A hotel property is a good income-producing asset, especially with the significant growth of the hospitality business in Dubai. However, Khatri says large-portfolio buyers with no knowledge of the hotel industry will benefit more if they diversify their investment, instead of investing in a specialised asset such as hotels.

Khatri also says there are a few very important considerations when investing in a hospitality property.

''If an investor has Dh100 million to invest, but knows nothing about the hotel business, I would advise the investor to invest in an asset class that is more comfortable to handle,'' he says. ''Therefore, investors can buy a residential building or individual bulk units in different areas in Dubai to diversify their investment and make more diversified returns.

''Moreover, it is easier to liquate residential investments individually. For hotel property, lease periods are longer, from 5-15 years or even more, and to liquidate a hotel asset would require a lot more specialised knowledge and time.''

Industrial property

Industrial and warehouse units are not an average investor's assets. These are specialised commercial property that attract serious investors who possess good knowledge of the industrial and commercial market.

Khatri says the cost of building a shell and core shed is relatively cheaper, therefore, the yield on a warehouse investment is very high — around 8-10 per cent — and is even more dependent on location.

Investors with manufacturing and industrial background take up warehouse leases for 30-40 years from the government and then sublet them. However, these units are not readily available for purchase, except for those in Dubai Investment Park, Dubai Industrial City and Jebel Ali, says Khatri.

''The majority of investment in industrial facilities is done with the help of professional accounting and consulting firms, who prepare comprehensive business feasibility reports and provide details about the assets, liabilities and potential income,'' says Khatri. ''There are a number of studies and research that go into this investment, hence, industrial investments are more suited for the serious and sophisticated industry players in the market.''

Retail property

Retail assets comprise large malls, small commercial centres and individual shops. The retail industry is huge, but from an investor's point of view, there is very limited stock to purchase.

According to McCauley, purchasing a retail unit at the right location can generate excellent return. In Dubai, there is scarcity of retail options. For example, most towers may have hundreds of office or residential units, but only a few retail units on the ground level are available for purchase.

Moreover, in practice developers tend to retain retail units for themselves. Similarly, master community developers also retain the community malls as part of their own portfolio, adds McCauley.

Therefore, this business is predominantly for large scale investors who can afford to purchase an entire shopping centre, as it is a big challenge for investors of individual
retail units to source suitable retail options, Mc-Cauley points out.

Factors to consider when investing in a residential property by Sean McCauley:

1. If the property is off-plan and under construction, check the reputation and credibility of the developer.

2. Is the payment plan attractive?

3. Can you to take out a mortgage for the property? What is the loan-to-value ratio?

4. How well is the property managed and what are the service charges?

5. What is the financial status of the owners association? Do all owners pay the service charge?

6. What is the occupancy level in the community or building?

7. What is the average rental rate and what is the maximum rent according to the Real Estate Regulatory Agency's Rental Increase Calculator?

Source: Hina Navin, Special to Property Weekly


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