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If you have lived in the UAE for any length of time you know two things:
 
  1. Property, and by association rent, is very expensive
  2. Investing in property is a big industry, particularly in Dubai
Whether it is to eliminate the high cost of rent or to gain access to high rental yields, most UAE residents own, or have considered owning, real estate in the UAE.
 
Real Estate Attributes
 
There are a few core aspects of real estate that make it distinct from other asset classes such as stocks, bonds, and gold.
 
  1. Tangible – You can touch it! This has a large appeal as you can physically use it, but it also has maintenance costs to go with it.
  2. Cash Flow – A large part of why investors buy real estate is the associated rental income (also known as the capitalization/cap rate). Other investments like gold (which has no cash flow) or even stocks will usually have lower cash flow (known as dividend yield)
  3. Leverage – Most people will borrow money from a bank and take out a mortgage. Depending on the type of property and your nationality you can borrow up to 80% of the value of the property in the UAE. Most other investments you aren’t able to borrow to such a high capacity.
Historical Performance and Risk
 
Below are a graph and a chart showing the residential real estate prices for the UAE and few other countries that many residents in the UAE are familiar with.

A few things to note from the above graph:

  • The UAE experienced a huge boom (some would say bubble) from 2003 up until 2008/2009. This real estate boom is unlikely to recur again and in the same way.
  • I was surprised to see how dismal the South Africa real estate prices have been since 2003. If you factored in inflation it would be even worse.
  • The UK, USA, and Australia have all had more subdued yet more stable growth during this period.
A few things to note from the above chart:
 
  • The UAE had a drawdown (the change from top to bottom) of -35% at its worst. Granted, this happened during the financial boom and bust of 2008-2009 but as an owner during that time you would have had to stomach that sort of temporary loss.
  • The UAE has had the highest average annual return since 2003, largely due to the years leading up to 2008.
  • Your real estate performance can vary greatly depending on where you invest.
 
3 Ways UAE Real Estate Can Enhance Your Portfolio
 
  1. Diversification – Adding asset classes, such as real estate, can add diversification to a standard stock, bond, and cash portfolio. For example, the price of UAE real estate, USA large cap stocks, EU bonds, and gold will not act in tandem and thus provide some risk protection.
  2. Increase Portfolio Cash Flow – Due to the rental income component of real estate, and its steady, contractual nature, you can increase the reliable cash flow of your overall portfolio with UAE real estate. If you desire or need steady cash flow from your investments, adding a property that yields 6%-10% for example, can make a meaningful impact.
  3. Building Equity vs. Spending Money on Rent – This reason is quite obvious and why first time home buyers decide to become owners in the UAE. As a renter, your rent payment goes to the owner and you don’t experience the benefits of property ownership. As an owner, your mortgage payment adds to your equity ownership of the property, as you pay off the mortgage. Once you pay off the mortgage you no longer have a monthly payment.
What Are the Risks?
 
  • Currency Risk – When your assets or income are denominated in a different currency than your liabilities you experience currency risk. If you are an expat and move back to your home country (i.e. the UK), earn your salary in UK Sterling, while still owning a property with a mortgage in the UAE, you have currency risk. You can minimize this by having UAE renters and other strategies but keep this risk in mind.
  • Concentration Risk – When buying a property, you are likely putting a sizeable amount of your net worth in a single investment. As a result, your overall portfolio performance will be driven to a large extent by prices and rental yields of your specific property. This means you need to make sure you conduct due diligence and choose your property wisely.
  • Political Risk – In every country, there is a risk that the local government will enact legislation that is detrimental to property owners (i.e. as extreme as expropriation to as mild as adding a 5% capital gains tax). Even though the UAE is a very progressive emerging market, this risk is present.
  • Leverage Risk – This risk can e a hidden or hard-to-feel risk. Let’s look at an example to clarify
    • You borrow 75% and put down 25% on a property worth 4,000,000 AED
      • You own 1,000,000 AED of equity
      • You owe your bank 3,000,000 AED on the property
    • What happens if your property increases in price by 25%?
      • Your property is worth 5,000,000 AED and your equity doubles to 2,000,000 AED
    • What happens if your property decreases in price by 25%?
      • Your property is worth 3,000,000 AED and your equity goes to zero
      • At this point, if you were to sell your property (ignoring fees), you would have lost your entire 1,000,000 AED investment
    • As you can see, when you borrow money your investment gains/losses are magnified accordingly.

Making Sense of It All

If you are considering buying UAE real estate for personal residence or for investment, realize it can add many benefits to your overall net worth and financial future. If you already own one or multiple properties, it is vital you understand how it fits strategically into your portfolio and financial goals.
 
If you are curious how your specific UAE real estate property fits into your long-term wealth strategy, please email me at steven.downey@holbornassets.com, and I will be glad to have a conversation with you.
 
Full Disclosure: Nothing in this article should ever be considered to be advice, research or an invitation to buy or sell any securities. The information is purely for educational purposes. Please consult your financial professional for investment guidance suited to your situation.

 

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