Real estate is a long-term investment, and capital gain is the ultimate rationale. So when buying property in Dubai some imagination about what the immediate future holds is required. What will the Dubai real estate market look like in five years' time?
Of course, nobody has a crystal ball that can really foretell the future, educated guesses and analysis of present trends are the best that can be done. Indeed, this is only slightly less reliable than talking to friends around the dinner table.
Yet the fact remains that most people buy real estate with at least five-years of ownership in view, and often with some kind of long-term mortgage finance to consider. So this remains a very important conjecture.
Five years' ago
Let us step back five years. What was the Dubai property scene like then? Rents were almost half current market levels, a one-bedroom flat that currently sets you back $16,000 a year was then available for $8,000.
Five years' ago the freehold property market was not open to foreigners but UAE nationals bought and sold property. Rental yields on property were then rather higher than today and the market price of property perhaps a little over half.
Now if we try to project forward five years, does this flashback help? Could market rents double again and property prices also sustain a similar increase? Natural human conservatism makes such a leap of the imagination difficult, so let us try to set this in the context of modern Dubai.
First, rental rises have just been capped by the Dubai Government at 15% for 2006. This might sound aggressive, but do not forget that a 15% rise each year for five years is exactly equal to a doubling of rents.
Secondly, inflation is a new factor to take into account. It is only this year that the UAE has started to experience hyperinflation of 15-20% according to the National Bank of Dubai. One thing we know about inflation is that once started it is slow to stop.
Thus rising general price levels may well be a feature of the next five years in a way that has not been apparent in the previous five years. Now buying a large fixed asset like a house or apartment is an excellent way to hedge against inflation.
For in a period of high general inflation the value of money is eroded, and salaries will also rise to compensate, or the UAE will cease to be competitive in the global labor market. House prices will also rise in tandem, so only those that have fixed the price by buying earlier will be able to maintain their cost of accommodation, unless they have an exceptionally generous landlord.
Now there is no doubt that the upcoming supply of property in the UAE is going to slow property price appreciation but this does have to be balanced against the likely impact of galloping inflation in such a vibrant emerging economy.
Thus far buyers of Dubai property have benefited from surging capital values and have effectively capped their 'rent' at the much lower initial mortgage cost. Could it be that higher inflation will actually boost this double benefit in the next five years? Inflation can play some strange tricks on investors, and this may be one of the pleasanter side effects, at least for real estate buyers.