Dubai property cool down heating up action for investors

Rental yields for prime residential properties in Dubai are higher compared to other safe havens such as London, thus attracting income-seeking investors, according to a UK-based real estate consultancy.

“While the Dubai residential price fall continues to significantly outpace rental value declines, initial yields are growing,” Diaa Noufal, Associate Partner – Mena Research, Knight Frank, said in a report.

Yield returns, as a first-hand result to such sale-rent combination, have strengthened over the same period with a 9.9 per cent increase to reach 7.42 per cent in Dubai mainstream market in July 2015.

Residential prices have dropped around 12.2 per cent over 12 months to June 2015, while decline of mainstream rental rates has been cooling down over the same period at a low rate of 1.2 per cent.

In key employment hubs, such as Dubai and London, where home ownership is beyond the reach of many workers, the increasing mobile and flexible workforce has led to rising demand for rented property.

Looking at the UK market, between January 2009 and June 2015, mainstream residential prices in London have increased around 71 per cent, dubbing the city as a ‘safe haven’ for capital investors in the aftermath of the global financial crisis.

However, growth of sale prices has cooled down lately due to waning demand to reach four per cent on a year-on-year basis in June 2015.

On the other hand, rental rates have been increasing at a rate of 3.8 per cent year to June 2015 in London.

As a thumb rule, mainstream yield returns are usually stronger than those produced by prime segment properties.

As mainstream property rental yields stands at around 4 to 4.5 per cent in London (June 2015), prime segment yields are approximately 3 per cent.

In return, low prime property yields combined with hiking prices have pushed prime property seekers to look afield towards London’s periphery market and beyond to regional cities such as Birmingham, Manchester and Bristol where yields are better holding up.

Attractive destinations

In times of economic uncertainty, cold-hearted international investors seek more diversification of their property portfolios; as London provides opportunity for property capital appreciation with prices continuously on the rise in the last five years, reasonable prices and growing yields in Dubai market make an equally attractive income generating opportunity.
For Middle Eastern investors, London has always been regarded as a strong investment complementary to their property portfolios in the region, especially in times of crisis.

With property market in Dubai having experienced an extraordinary journey of boom, crash and recovery in the last decade, London property market was a safe deposit for capital growth seekers in the Middle East.

The percentage of Middle Eastern buyers in super-prime London properties has increased from 11 per cent to 16 per cent in the year to 30 June 2015, second only to British nationals.

Looking the other way round, British have been among the biggest buyers investing in Dubai market ahead of many other international investors, the consultancy states. In the first half of 2015, British investments in Dubai properties accounted for 9 per cent of total transaction volume, second to Indian share only in the non-GCC segment.

This investment exchange relationship between the two cities has proved solid in both directions.

While many British investing in Dubai properties are seeking capital appreciation more than using them as primary or secondary homes, many GCC individual buyers purchasing residential property in London make it as a base for their spouses or children to stay for education purposes in the city or as a holiday home.

Opportunities ahead

The rising significance of the residential rented sector is creating unconcealed opportunities for investors, especially where prices have reached reasonable levels, says the report.

With selling prices in Dubai hit by stronger US dollar, declining oil prices and government intervention, it’s fair to say that there has been more resilience in the rental market than in sales.

In order to make the right investment decisions, finding out what tenants want and need is crucial.

Clearly, location, size, specification and amenities will define the strength of the property position and eventually its investment return, however, tenant appeal is mostly affected by accessibility of the community while investors should look for the maturity of the community sub-market in terms of tenant diversity, overall occupancy and levels of tenant retention, the report adds.

If yields continue to strengthen in Dubai, a further inclination to buying is anticipated from buy-to-let and buy-to-live investors, believes Diaa.

Furthermore, an increasingly important institutional investment segment is yet to mature gradually. This in return will eventually help residential prices gather momentum in the near future.

“Investors will still eye London market as safe haven, especially for Middle Eastern buyers where the city has been long home for vacation and study.

“However, a tightening yields and increasing prices will drive potential buyers towards outer London or in the regional cities where alternative profitable investment options exist,” she says.

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