Democracy, property law and Dubai realty prices

The rental yield obtained on property in the UAE is still high by international standards. For example, a typical rental yield on a Dubai villa is 7.5-8%; in London or New York 3.5-4% would be quite acceptable.

Therefore properties in London or New York are twice as expensive to buy for a given rental amount. In short, investors in Dubai expect a higher rental yield to justify the perceived additional 'risk' factors of an investment in Dubai property.

This 'risk' is partly systemic, despite the fact that the UAE has been among the most stable countries in the world in terms of governance since its independence in 1971. There have been none of the damaging swings in economic policy evident in many industrialized countries.

Democratic law

However, investors like to see the rule of law, and a legislative system that is linked to democratic representation. If nothing else, investors feel that this is the ultimate guardian against the possibility of a despotic ruler, who might ruin the value of their investment along with the country of course.

Hence, it stands to reason that a country which adopts democratic forms of representation to underpin its legal system will soon start to benefit from a reduction in this 'risk' premium. Foreign investors in particular will feel more comfortable, and begin to invest more, therefore pushing up price levels to something closer to international standards.

Of course, it is not enough just to announce elections to one body, there needs to be a coherent plan to gradually spread representation without causing anarchy. Investors have become weary of the progress of African-style democracy, and want to see a clear plan.

UAE gets it right

The steps towards democracy announced by the UAE over the National Day holiday are well thought-out and will gradually build a strong representative system of government without a loss of central authority.

Each of the seven emirates will elect its own local council which will send representatives to the FNC; the Dubai business councils already elect their representatives, while the Abu Dhabi Chamber of Commerce is currently holding its first election among 50,000 members. This sounds more like Switzerland than Zimbabwe.

For property owners this can only enhance the attractiveness of the UAE as a place to invest, especially when backed up by a raft of new property laws like the legislation produced by Abu Dhabi this summer. For once Dubai is a step behind, and its comprehensive new property laws are believed to be imminent.

But the overall verdict is simple: by adopting international standards of democratic governance and modern property laws the UAE property sector is in the process of making a quantum leap from an exclusive limited market with low valuations to an inclusive international market with much higher valuations.