I don't understand why a landlord would keep his property empty with no hope of recovery in the near future. Just take a trip around the new developments - you can see so many completed...
IT seems like Dubai landlords are still hoping for quick recovery. As we can see from the reviews and advices from international real-estate companies, the future of Dubai Real Estate is still very shaky and further price decreases are waiting to come.
Showing posts with label dubai recession. Show all posts
Showing posts with label dubai recession. Show all posts
Monday, 2 November 2009
Monday, 24 November 2008
Will falling Dubai house prices ever outpace rental increases?
The International Monetary Fund recently published an interesting study of housing markets in emerging economies which pointed out that the average decline in house prices in a downturn was 30 per cent spread over four years. This contrasted with much sharper but short-lived plunges in emerging market equities.
Now the first thing to note in the context of the Dubai property market is that we have not reached the top of the cycle yet. House prices and rentals are still going up. And even the moderately pessimistic Asteco real estate company thinks this will last for another 12-18 months.
Therefore, anybody buying a house will save on rising rentals for up to two years. Perhaps then they will additionally save somewhat less in the succeeding three to four years. Given that property yields are around eight per cent in Dubai, we might reasonably assume that in five years the buyer will have saved about 40 per cent of the cost of their home in rent that they would have otherwise paid.
Capital loss versus rental loss
Now what of the capital value of the same home? Let us assume an average annual gain of 10 per cent for the next two years, followed by an IMF-study average decline in three and not four years. Then you would have to figure in roughly a 10 per cent loss in capital over that five-year period.
On this calculation the savings in rent that would otherwise be paid out on comparable property clearly more than outweigh the risk of losing capital in a market downturn. Indeed the margin is quite wide, and this means that the capital loss on a home could be significantly bigger and it would still be better to buy than rent over a five year period.
This really comes down to what everybody knows who lives in Dubai. Rents are high and landlords are making an excellent return on their investment. Meanwhile, the cost of buying homes is cheap by international standards.
Comfort zone
Therefore, buying makes sense to avoid high rentals. But the additional comfort of this calculation is that even in a falling housing market the money saved from rents can more than offset a fall in capital value.
And buyers should also note that high inflation in the UAE will tend to protect the nominal value of homes. In such an environment buying now instead of renting makes good sense even if you see a property crash on the horizon; and waiting for a crash could prove an expensive error of judgment.
For one thing, paying rent is certain to loose you money while at least buying gives you a chance to win on the upside.
Now the first thing to note in the context of the Dubai property market is that we have not reached the top of the cycle yet. House prices and rentals are still going up. And even the moderately pessimistic Asteco real estate company thinks this will last for another 12-18 months.
Therefore, anybody buying a house will save on rising rentals for up to two years. Perhaps then they will additionally save somewhat less in the succeeding three to four years. Given that property yields are around eight per cent in Dubai, we might reasonably assume that in five years the buyer will have saved about 40 per cent of the cost of their home in rent that they would have otherwise paid.
Capital loss versus rental loss
Now what of the capital value of the same home? Let us assume an average annual gain of 10 per cent for the next two years, followed by an IMF-study average decline in three and not four years. Then you would have to figure in roughly a 10 per cent loss in capital over that five-year period.
On this calculation the savings in rent that would otherwise be paid out on comparable property clearly more than outweigh the risk of losing capital in a market downturn. Indeed the margin is quite wide, and this means that the capital loss on a home could be significantly bigger and it would still be better to buy than rent over a five year period.
This really comes down to what everybody knows who lives in Dubai. Rents are high and landlords are making an excellent return on their investment. Meanwhile, the cost of buying homes is cheap by international standards.
Comfort zone
Therefore, buying makes sense to avoid high rentals. But the additional comfort of this calculation is that even in a falling housing market the money saved from rents can more than offset a fall in capital value.
And buyers should also note that high inflation in the UAE will tend to protect the nominal value of homes. In such an environment buying now instead of renting makes good sense even if you see a property crash on the horizon; and waiting for a crash could prove an expensive error of judgment.
For one thing, paying rent is certain to loose you money while at least buying gives you a chance to win on the upside.
Dubai Property Prices Falling
It’s not news that Dubai’s property market is expected to experience corrections next year and according to Morgan Stanley gradually decline by up to 10 percent by 2010. However, a real bombshell was dropped last Thursday when Arabian Business reported that Palm Jebel Ali’s island prices have depreciated some 40 percent in the last two months.
After all the hype and excitement about Dubai’s market, this news is certainly a wake up call for many would be investors who are standing on the brink of making a decision right now.
This fall in property values has been pinned on the global crisis and current investors who liquidate their assets in Dubai in order to keep their cash flow going.
This turn of events puts the development (and more to follow for sure) back to where they were some two years ago. To make matters worse, local Dubai mortgage providers acted and reduced home financing loan-to-value (LTV) to about 70 percent down from 90 in October. Of course this isn’t helpful for those looking to finance a property loan right now.
Five and six bedroom villas on the island used to be valued at around 16 million Dirham (approximately $4.35 million). In the last couple of months however these prices were depreciated to 9 million Dirham instead - a huge loss for current property owners.
Despite this, they didn’t really lose out on a bargain since overall the value of properties on the island increased by as much as 80 percent from the original launch buying price.
As reported from various realtors in Dubai, sales have dried up and making them seems harder these days, unless they accept a significant drop in property prices.
It will be interesting to see whether those predictions will come true in the near future. As for now, it is probably a wise move to hold on the investment for existing property owners while new buyers can snap up a bargain.
After all the hype and excitement about Dubai’s market, this news is certainly a wake up call for many would be investors who are standing on the brink of making a decision right now.
This fall in property values has been pinned on the global crisis and current investors who liquidate their assets in Dubai in order to keep their cash flow going.
This turn of events puts the development (and more to follow for sure) back to where they were some two years ago. To make matters worse, local Dubai mortgage providers acted and reduced home financing loan-to-value (LTV) to about 70 percent down from 90 in October. Of course this isn’t helpful for those looking to finance a property loan right now.
Five and six bedroom villas on the island used to be valued at around 16 million Dirham (approximately $4.35 million). In the last couple of months however these prices were depreciated to 9 million Dirham instead - a huge loss for current property owners.
Despite this, they didn’t really lose out on a bargain since overall the value of properties on the island increased by as much as 80 percent from the original launch buying price.
As reported from various realtors in Dubai, sales have dried up and making them seems harder these days, unless they accept a significant drop in property prices.
It will be interesting to see whether those predictions will come true in the near future. As for now, it is probably a wise move to hold on the investment for existing property owners while new buyers can snap up a bargain.
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