How to protect Dubai property investment in a downturn

At present the Dubai real estate boom continues to rage with unit prices rising and rentals still growing to the fury of tenants. It could be that these prices will yet spike to levels unthinkable three years ago.

But no boom lasts forever, and preparing to survive an inevitable downturn is even more important for a long-term investment which is how property should always be viewed. This really comes down to sensible risk assessment and the lowering of downside factors.

Who is my developer?

Step one, whether you are buying off-plan or a completed unit check on the identity of your developer. Do you trust them? Are they an established company with a track record and preferably a government shareholding?

Have they delivered property on time and have there been quality issues? Do they offer third-party finance, indicating that they have past a due diligence test, or is there a hazy self-financing option?

Step two, what is the location of the property you are buying? This is another basic consideration, often forgotten in boom times. Property in a central, convenient location will always sell; something located on the edge of the desert might prove a more problematic re-sale or letting option.

Prudent finance

Step three, consider your finances. If you need a mortgage are you sure that your job will continue if the UAE economy slows down? Will likely rental income cover the cost of a mortgage if you decide to leave and can not sell the property?

Those buyers whose approach to financing has been highly imprudent with the taking of multiple loans from different sources should naturally be thinking of how to extricate themselves before rather than after a property downturn. These are the folk most at risk and most likely to get their fingers burnt.

Indeed, the rule-of-thumb for safe property investment is to approach the purchase as a long-term investor and not with the objective of short-term gain. If that comes consider it a bonus but do not make it your only objective.

High yields

But at present the rental returns on Dubai property are high with yields in the six to eight per cent bracket. This is sufficient to pay a mortgage and comfortably repay a loan over 15 years.

However, all property booms have their Achilles heel. In Dubai the huge supply of new property under construction may exceed future demand, particularly if the economy was to slow unexpectedly.

Construction costs have also grown dramatically hitting the margins of the developers. And it is perfectly possible that bankruptcy before a project is delivered could be the result for some of the more over-optimistic business plans.

For buying a property is like any other enterprise. You have to be aware of downside risk at the outset, and not stumble into it later on. Caveat emptor, plan today to safeguard tomorrow!