It goes without saying that real estate assets are under pressure due to the market uncertainties triggered by COVID-19. However, for the seasoned investor, this could be just the right time to grab some property in the UAE. Why miss a clear opportunity to come out of the pandemic with a top-tier asset bought at a heavy discount?
But according to investment experts who spoke with Zawya, those with sizable capital who are looking to invest in a property should first make sure that they have some money set aside in an emergency fund that can cover their expenses for at least six months. This can be in the form of either cash or bank deposits that can be withdrawn easily after untoward events like the sudden loss of employment or a business setback.
“For residential purposes, in the case of a loan purchase, it is advisable that the monthly instalment not exceed one-third of your salary. Combined liabilities, including vehicle/education loans, must not exceed 50 to 60 per cent of your salary,” said M.R. Raghu, Managing Director, Marmore Mena Intelligence. “For investment purposes, one can look at options like real-estate investment trusts, which are more flexible than an outright property purchase,” he added.
There are many reasons for buying property right now. Besides all the incentives from developers, such as post-handover payment terms and free service charges for the first few years, the Dubai Land Department has also presented fee waivers, low booking fees and even an increased loan-to-value (LTV) ratio.
The UAE Central Bank had recently increased the loan-to-value ratio for first-time house buyers by 5 percent, which means that they have to put up less cash as down payment. “However, given slowing economic growth and declining job security, end-users must ensure they have access to sufficient contingent funds before committing to a large purchase, like a family home,” said Anita Yadav, Partner at Aspire Capital.
Investors should also keep in mind that tenants will definitely seek rent reductions owing to job losses and other negative impacts of COVID-19 on businesses.
“The average gross rental yield for Dubai comes at around 7 per cent,” said Raghu. “This is before taxes, maintenance fees and other costs. Apartment and villa rents have come down by double-digit percentage from last year.”
However, Dubai still fares well compared to other hotspots like London, Singapore and Hong Kong, which offer average rental yields of around 3 to 5 per cent.
“In a more adverse scenario where a combination of lower oil prices and falling global demand hits the property market, there could be a 1 to 2 per cent drop in yield in Dubai,” Mamtani added.
The prospects for capital appreciation of property in Dubai are low in the near term, and prices are expected to go down further if the pandemic lasts longer. UAE real-estate prices have come down by more than 10 per cent in the first quarter of 2020 compared to the same quarter last year, according to Marmore MENA Intelligence.
It also noted that Dubai apartment values have come down by nearly 40 per cent on average since the peak in 2014.
“In the [very short] term, prices are likely to remain under pressure, given the ongoing new supply and weak demand ensuing from slower economic growth around the world,” said Yadav. “However, in the medium to long term, Dubai property offers good prospects for capital appreciation.”
CASH VS MORTGAGE
Most industry experts recommend that house buyers use a mix of cash and mortgage to fund their property purchase. As a rule of thumb, an investor can pay 30 to 50 percent of the property value up-front and tie up the remaining payment to either a fixed interest or floating rate plan.
“If a buyer can generate higher than 9 to 10 percent return on their cash by investing it elsewhere, then they should probably use a mortgage to finance their homes, particularly since interest rates are low right now,” Yadav recommended.
OTHER ASSET CLASSES
If real estate seems too expensive, you may consider other asset classes depending on your risk profile. Raghu advises: “People over 60 who have retired or are about to retire should look at low-risk options like fixed-income investments, which are typically bonds and a portion in stocks. Younger investors with more time to absorb investment losses can invest more in the stock markets. Investors of all age groups can also look at gold.”