In the global search for investment returns the pricing of major asset classes has increased to reflect much lower interest rate levels. Interest rates are now on the way back up again but this has so far had little impact on asset pricing. So the search is still on for assets with a good yield like Dubai property.
Consider the case of a newly arrived expatriate family arriving from the UK. They have just sold the family home and wants to re-invest the funds in bricks-and-mortar. But the dilemma is simple: should they buy in Dubai, or go for a UK buy-to-let property?
Now let us answer this from an investment perspective, quite apart from the fact that owning your own home has an attraction of its own.
If you buy in Dubai and save on your rent then your saving will be equivalent to the yield, or rent paid, on the property, presently around 7-8%. Now in the UK and buy-to-let investment will probably not cover the cost of the mortgage and return 3-4%, and property prices look stagnant and possible falling.
Dubai yields good value
Unless Dubai rentals collapse – and they would need to fall by an unprecedented amount – the Dubai option looks the better investment. Indeed, in the Dubai property you have a margin of safety in that the rental yield has a long way to fall to reach UK rates.
It has to be said that with a 7-8% rental yield Dubai property appears fairly valued, while UK and many other major property markets have rental yields that suggest they are 50% or so overvalued.
This is not rocket science: with a 4% yield it takes 25 years to re-pay the value of a house; and 12.5 years at an 8% yield. It is not hard to see the better deal, or the more sustainable investment case.
Now it may well be that this equation shifts in the future, against the Dubai model. The population growth of the city might not absorb the available property supply at some point, but you still have to ask which market out of the UK and Dubai is the high growth emerging market, positioned on the cross-roads of world trade and which is the debt-ridden service economy?
Another way to look at this is to consider the property cycle, and to ask whether property is priced closer to 'fair value' in the UK or Dubai. From this perspective Dubai property prices still have higher to go while the UK may have already topped out.
So property investors in search of value should still consider Dubai seriously. Of course you need to be selective and pick the right location and do your due diligence. But the market fundamentals are still strong at the moment.