Where next for Dubai real estate?

It is always instructive to examine the pages of the Gulf News property section for the nuts-and-bolts of the market, and in particular the re-sale market.

At present the re-sale market looks very hot. It does not take long to sell properties, many of them still not built. Prices are also generally well up on the original selling price, although the first high-rise apartments at Dubai Marina struggle to achieve their original, admittedly high, prices.

Take a five-bedroom Meadows villa, for example, which sold for $382,000 a year ago. The same villa today will fetch $520-545,000. This is a considerable capital appreciation by any standards.

However, rentals have not moved up that much, perhaps due to the supply of new property now coming on to the market. Thus the gross yield on this particular property has fallen from 9% to 6.25% in the same period.

With the yield at this level you have to ask, how much more capital appreciation can be justified? After all, there are many investments that can offer such a yield in the UAE. You only have to look at the 47% gain on local stocks this year.

Perhaps this is why speculators have turned towards buying off-plan. Here the idea is to put down 10-20% and re-sell when apartment prices are 10-20% higher, and thus double your money. Of course, this only works if there is a gap between the selling price and the market re-sale price.

Now what the yield position suggests is that this gap is closing up. This is not an unhealthy development. Having thousands of speculators with no intention of paying a final price for a property would eventually create a speculative bubble, particularly if the initial deposits were debt financed.

Hence, we can see market mechanisms tending to correct this situation. It does not necessarily mean that speculators will lose money, just that their investment will prove far less lucrative than they imagined.

Indeed, they might care to re-consider the long-term economics of property ownership. For instance, the person who actually bought a one-bedroom flat in The Greens this summer has seen a 25% price gain on the unit, while the original speculator got a 5% premium, who really won on that one!

The real money to be made in real estate is in investment for the long-term - ask anyone around 40-50 years' old what was their best-ever investment and the answer is usually a house or apartment. Speculators generally get their fingers burnt eventually, while in the long-run everybody wins on property.