Making an investment case for Dubai real estate

The case for buying rather than renting property in Dubai is pretty well proven. In a nutshell, anyone living in the city for five years or more will at least get something back later if they buy, rather than nothing if they rent.

But what about buying a property in Dubai as an investment, and not as a home? Is there a solid investment argument for buying a property and renting it out?

Let us consider what this involves, and look at a typical scenario. Say you have decided to buy an apartment in The Greens, a large apartment complex overlooking the Emirates Golf Club. You put down a 20% deposit and obtain finance for the balance of 80% from Amlak, Dubai Islamic Bank or Mashreqbank.

Now assuming this property has vacant possession, you can go straight to a reputable agency - say Better Homes or Asteco - and ask them to rent it out for you and manage the property. UAE nationals have been doing this for years, and payment of a year's rental in advance is commonplace in Dubai.

Here is one fantasy risk: you may not find a tenant. Considering that there is a queue of people looking for apartments in The Greens, that is a) unlikely and b) you could always drop your rental price if the market turned sour.

Now at present rental rates you will obtain an 8-9% yield on your apartment. That means you get a rental equivalent to 8-9% of what you have just paid. As mortgage rates are presently 6.5% that leaves you with enough to cover your agents' modest fees, service charges and maintenance, and perhaps leave a few dirhams in the bank.

In fact more than a few dirhams, as rent and deposits are paid in advance and mortgages are paid in arrears. This is a positive cash flow situation, but don't rush out and spend the money that you will need to gradually pay the mortgage.

Well, you might say. 'What on earth is the point of buying an apartment and renting it out, if all I get is a few dirhams in the bank and a pile of invoices from Better Homes at the end of the year? And what if interest rates go up and I have to pay some of my own cash to meet the mortgage payments?'

However, this misses the point entirely. For you will gradually own the equity in a valuable asset, i.e. this apartment. Indeed, once the mortgage is paid off in 10-15 years you can sell it and the whole amount is your profit. You could, of course, sell it after just a few years, so long as the price had not gone down, and still have a nice chunk of cash.

Not bad when you have done no more than put down 20% in actual cash from your pocket. How many investments could give you an almost guaranteed 500% return in 10-15 years?

Moreover, property hedges your investment against inflation because if there is inflation the rents will go up and the value of the property too. But rather conveniently the debt will be fixed and not rise at all. This will certainly compensate you for fluctuations in interest rates (though why not fix them with Dubai Islamic Bank?)

This is where property investment can become really interesting. Over 10-15 years property prices do generally rise in line with inflation, or even higher, delivering a 'house price inflation' bonus to the owner.

You perhaps have to take a view on the future of Dubai. Will Dubai be a thriving, multi-cultural trade, financial, tourism and services hub in 10-15 years time? Or will the city suffer some sort of socio-economic or political cataclysm? Those who have seen the past 20 years smile at predictions of gloom which have always been wrong in the past.

Besides even if your property is worth nothing when your tenants have finished paying off your mortgage you still have a roof over your head, or you can continue to take the rent as your income.

Then again, you could argue that Dubai property is expensive and that anyone buying now will regret not waiting for a while. But is this true? At $1,000 per square metre for a villa, Dubai real estate is five times cheaper than in London where the average salary is no higher and maybe lower.

This is the last, and most important, consideration for an investor. The reality is that Dubai property is cheap, by international standards, by local standards, by rental yield, in absolute terms, by whatever yardstick you choose.

What will change this? New real estate laws? A greater availability of mortgages? More buyers moving into the market? A more peaceful Middle East? The success of Dubai? Most likely all of the above, and thus real estate prices will increase over time.

Can an investor go wrong? Of course, anyone can make basic mistakes in buying real estate, such as choosing a poor property in a bad location. But it is hard to make a solid argument against Dubai property investment right now