Dubai yields down but still attractive

On rental yields the overall position is that market yields have weakened over the past year but remain attractive to investors, particularly those with a requirement for regular, long term income.

Current yields do also still give some room for upside capital appreciation, though definite moves to eliminate the perceived additional risk of buying in Dubai - the absence of property laws and consequently expensive mortgage market, for example - for this to be a factor. Optimists expect a property law in 2005, the pessimists worry that the UAE federal authorities will delay legislation.

So to examine some real life examples: Over the past year the gross rental yield on a one-bedroom apartment in The Greens is down from 9.5% to 8%; rental yields in The Spings town houses are marginally lower at 6.5% from 7%; and in The Meadows executive villas prices have moved sharply upwards reducing yields from 7.4% to 5.3%.

This is a pretty representative sample, and should be regarded as the average situation. Is it therefore a good investment to buy one of these properties with a view to letting it out?

First, all these communities are established and facilities are set to improve dramatically in the next six months with the completion of shopping and leisure centres, and a new access road system.

So finding a tenant at the right rental level should not be difficult. Secondly, all the charges involved in rentals are also well known, such as the community service charges which are paid by the landlord.

Thus the business risk of not finding a tenant and having an empty property is negligible. The question really becomes one of investment alternatives and whether you are prepared to shoulder the modest inconveniences of letting a property for a higher than deposit account return on your money.

US long term Treasury bonds yield around 4% at present and against that benchmark one of the higher yielding Dubai properties could be considered a good investment. There is also something of a 'comfort barrier' in case yields in Dubai start to fall further due to the increasing supply of property.

But this factor should not be given too greater weight. If increasing supply is matched by a more than commensurate increase in demand then yields can still go up; but the recent slight easing of yields on rentals might tend to suggest that this equation is beginning to have some impact.

However, what is driving rental yields down is the fact that property prices are rising faster than rents which are also going up fast. Hence in Dubai the lower rental yield may reflect rising investor confidence rather than any fall-off in demand, indeed quite the reverse.