Rental yields in the UAE have remained high, but in the next four years rentals are likely to flatten while property values will continue to soar, according to the Chief Executive of Buniah Group, a local real estate advisory firm. Mohammed Al Safeen said high rents and cheap interest rates have made property ownership the best option for families. And he believes middle-class families who plan to stay in Dubai for more than three years would do well to buy a home.
Rental yields in the UAE have been seeing a good run. Do you expect that to level off at some point?
Rental yields in the UAE have remained high in recent years, at seven to 10 per cent, depending on the property. In the coming four years, it is likely that rentals will flatten, while property values will continue to rise. There are a number of reasons for that. For one thing the cost of funds has fallen with recent Fed interest rate cuts, and therefore the cost of capital to acquire property is cheaper. This means investors can afford to pay higher prices and need a lower return on capital (from a rental) to provide an adequate overall return. The rental yields will have to correct, as at the moment they are out of line in comparison with other global cities.
Has the middle-class been able to absorb the property price hikes in the UAE? What are your recommendations for this group?
Any middle-class family that plans to stay in the UAE for more than three years should buy a home. Property prices may be high but high rental inflation and falling realty interest rates are good reasons for the mid-income group to own property. Globally, we have seen this buyer segment reaping the benefits of rising property prices.
Can you describe the strategy differences that have separated successful developers from the rest?
Developers in the market who have maintained good margins have done so because they launched a number of projects they could handle. So they put their resources on just the execution of the project and nothing else. Furthermore, these developers have ideally phased their sales cycle and have managed an average return of 17 per cent to 25 per cent after taking into account projected inflation and property price hikes. They have set their price index right. Those who needed to generate revenue quickly undersold and incurred losses.
What percentage of realty developers in the market did not get their calculations right?
It is difficult to quantify that. I think overall with the Real Estate Regulatory Agency (Rera) coming into place, most developers will be on track. The ones who were sincere about building the right brand have prospered. Others who have failed will take this as a learning curve.
The UAE is seeing a series of realty funds enter the market. Are the returns still large enough to warrant the interest?
There are a number of international funds coming to the UAE. Also, a number of local funds have been launched. We recently concluded a deal for Dh500 million, that was funded from a larger $2 billion (Dh7.34bn) New York-based 10-year real estate fund. This particular investor actually saw a nine per cent net.
Today in the UAE average yield for fund managers, ranges between 8.5 per cent and 10.5 per cent. We do anticipate, however, this figure to slide down a bit as the cost of land and building construction goes up. Yet, this market will still look attractive. If you look at funds in New York, it is very difficult to touch even six to 6.5 per cent.
Can you tell us more about Buniah and its core services?
Established in Dubai since 2006, our core business is property advisory. The total value of assets that we have advised on is in the range of $7 billion. We work with our shareholders to offer them advice on their property investments. We are involved in sourcing opportunities for our clients, such as land or property, and advising them on their development projects. These are our transaction services that represent 70 per cent of the overall business that we do.
We have acquired investments in the Lagoon project in Al Jadaf and Dubai World Central. And at the moment, we are concluding a major investment in Jordan where we are setting up a health care centre close to the Jordan International Airport. This project is valued around Dh2.5 billion. We offer brokerage services as well, but we are involved in disposing of retail assets only for clients for whom we do advisory work.
How many investors does Buniah Group have?
Buniah is a limited liability company with private investors who have come together. I am not at liberty to say much about them, but I can say there are a number of investors with Buniah, all of whom have been in the property business for almost 15 years. Some of the shareholders are developers and some are private investors.
Can you give us an update of the Building Gate project? Why has it been put on hold?
Building Gate was an initiative by a consortium of investors who were interested in land in Dubailand. But the investors were not able to finalise the deal as both parties were not able to come to a consensus on land pricing. Buniah had been assigned the role of sourcing land for this venture. Availability of land in Dubai is actually become scarce. Most available land in Dubai has been allocated to different projects. What is available is out of reach of most common developers and is limited to strong developers who are capable of doing projects in large sizes. We have massive plans for Building Gate, which has now been renamed Middle East Building Gate, and when completed it will be a $3bn project.
What has been the price range for offerings at Oasis Tower II?
We have seen a complete sell-out on Oasis Tower II, the 28-storey furnished hotel apartment in Dubai Silicon Oasis. Prices on the units range from Dh1,000 a square foot to Dh1,300 per square foot. We have an escrow account on the project. Apartments in Oasis Tower II are priced at Dh603,000 for a studio, Dh850,335 for an executive suite and Dh1.2 million for a one-bedroom.
The project is a joint venture between the Oasis Venture Group and the Buniah Group and it will be completed by the end of 2009. It is a Dh320m project and our first 'development' venture in Dubai.
Do you have plans to expand to overseas markets at a later stage?
If we receive the right project, we will definitely consider that. Right now, we are in the process of setting up two subsidiaries under the Buniah banner – Buniah Technologies and a development management company that will look after the properties under our portfolio. But as Buniah Group, we will continue to focus on transaction advisory.
PROFILE: Mohammed Al Safeen, CEO of Buniah Group
Al Safeen is one of the founding members of the company and one of its investors as well. A Jordanian national, he has a bachelor's degree in mass communication from Yarmouk University, Jordan and a master's degree from Western International University in London.
Prior to his work at Buniah, Al Safeen was the executive vice-president for Eqarat.Com, a real estate solution provider in Dubai, from 2002 to 2006.
Al Safeen also worked from 1995 to 2001 as Chief Executive of World Current in Washington, DC.