How do Dh15,000 a month earners buy 'affordable' property?

Real estate agents say the 25 per cent downpayment clause has impacted sale of completed properties in the affordable communities. (Dennis B Mallari)

Average price of residential properties in 'affordable' communities of Dubai are still beyond the budget of residents who earn less than Dh15,000 a month, says a new report.

“Although prices dip below the threshold during downturns, on average, these communities - Discovery Gardens and International City - are not affordable for households with a total monthly income less than Dh15,000, the demographic with the greatest housing undersupply,” Phidar Advisory, a Dubai-based consultancy, said in its Q1 2015 report on Dubai real estate market.

“Households in these communities are particularly sensitive to inflationary pressures. We will need to adopt new models for development, capital raising and operations to meet this challenge, ideally one that involves both the public and private sectors,” company Managing Director Jesse Downs said in a statement.

According to the report, prices of standard quality apartments (read: affordable) have increased 75 per cent with the long-term average price for these properties being above the affordability threshold (Dh810-Dh910 per square foot).

Real estate agents say the 25 per cent down payment clause has impacted sale of completed properties in the affordable communities, as the sole breadwinner (earning Dh15,000) having to pay 14.13 times of his/her salary to meet the initial buying cost.

For example: A one-bed unit in Discovery Garden costs on average Dh675,000, which means the buyer has to make a down payment of Dh168,750.

Thereafter, the buyer pays 4 per cent of the property value, Dh27,000, as registration fee to the Dubai Land Department; 2 per cent brokerage commission Dh13,500; mortgage processing charges i.e. 1 per cent of the finance amount, nearly Dh5,000; property valuation fee Dh3000 and transfer fee at the registration trustee office Dh4,000. This means, the buyer earning Dh15,000 or below a month needs to pay over 212,000 in a single payment.

In case of off plan units, most of the developers are seeking 10 per cent payment every three to four months, which means the most affordable of the one-bed unit is priced at Dh500,000.

Simple calculation show the buyer (earning below Dh15,000 pm) will have to pay 10 per cent (Dh50,000) as the first installment along with Dh20,000 as Dubai Land Department registration fee followed by Dh50,000 every three to four months (Dh16,667 or Dh12,500 per month) till you pay 40 to 50 per cent of the total payment followed by 15 per cent every five months, Dh75,000 (Dh15,000 per month) till you reach the 90 to 95 per cent mark with 5 to 10 per cent (Dh25,000 to Dh50,000) at the time of handover.

A report released by Colliers International in October 2014 said mortgage installment for a property priced Dh1 million was Dh4,056 per month, which was 35 per cent leverage of a resident earning Dh11,600 per month. (Assumptions: interest rate 4.25 per cent reducing rate; repayment period 25 years and down payment 25 per cent of property value)

It said that there are approximately 120,000 freehold apartments in Dubai; 59 per cent of which are priced below Dh1 million and these properties were affordable for 60 per cent of Dubai’s households. But, there remains a clear mismatch between demand and availability of suitable and affordable supply.

The average household size in Dubai consists of 4.2 members with these households requiring a minimum of a two-bedroom apartment.

Two bedroom apartments below Dh1 million represent just 5 per cent of total freehold supply, and those below Dh2 million represent a limited 9 per cent of total freehold supply.

In the last six months, mortgage providers are looking to come out with products for residents earning Dh10,000 cent month and  developers selling “off-plan” properties in newer communities at a price range of Dh500 to Dh600 per square feet.

Prices falling

According to the Phidar report, apartment lease rates came down by mere 0.3 per cent, while sale prices declined 3.9 per cent, pushing yields up to 7.2 per cent. Lease rates for villas decreased 2.4 per cent and sale prices fell 3 per cent, pushing yields to up to 5.7 per cent.
Apartment transaction volumes were up 0.6 per cent in first quarter 2015 compared to the same period last year, but villa transactions were down 57 per cent, it added.

US dollar impact

The consultancy stated that a strong US dollar was driving property prices lower and could soften investment demand further.

“The strong US dollar continued to hit Dubai property prices. Euro zone quantitative easing and the Federal Reserve’s plan to tighten monetary policy, possibly later in the year, will likely maintain the dollar strength and temper investment demand for Dubai property in the short to medium term,” Downs added.

In late 2008/early 2009, it was the confluence of a global recession, speculative demand and massive property supply expansion that had caused Dubai’s property market collapse the report said.

Read: 'Affordable' mortgages for Dh10,000 earners?

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