How inflation helps a Dubai property investor

Dubai property investors are a pretty smug and self-satisfied bunch. Those who bought early have made spectacular profits, and almost everyone has been a winner so far.

But inflation could prove the icing on the cake for local real estate investors. This will drive up local rental prices even further, and improve rental yields. House prices will follow rents upwards. And for those who borrow against their investments, inflation will erode their debts.

The only losers here will be those who do not buy property, and continue to rent, hoping perhaps that at some point in the future the market will undergo a big correction. However, the burden of rising rents may prove far higher than any savings that they could conceivably get in the future.

You only need to look at how much you will pay out in rent, and then ask, 'will I really be able to buy this five bedroom villa for $300,000 less than today in five years' time?'

Actually, when you think about the effect that rising general inflation in the UAE is likely to have on house prices, then any fall back in prices will probably be from a higher general price level than that seen today - which is universally agreed to be low by international standards.

In real estate the general rule of thumb is that buying and gearing up makes very good investment sense in a rising market. In a falling market - such as the UK today - renting is definitely better than buying, as the gearing works in reverse in a falling market.

But how likely is the UAE to become a falling market in the current frenzied investment environment, with more than $100 billion committed to projects in Dubai alone, and Abu Dhabi now beginning to plan its own massive expansion programme?

There might be a case to answer if real estate was expensive in the UAE, and all the good news was therefore in the price. But that is simply not the case. Moreover, the UAE has an outstanding economic outlook, thanks to ownership of 10% of the world's oil reserves and an enlightened government.

Buying property under these circumstances still requires the normal application of due diligence and common sense. But as High Highness Dubai Crown Prince General Sheikh Mohammed bin Rashid Al Maktoum has said, sometimes the biggest risk is not taking a risk.

Those who are paying outrageous rents in a few years time, while those who bought homes are paying monthly mortgages that are practically unchanged, will rue the day that they ignored these words of wisdom!