The current rental yields on Dubai real estate are high by global standards at 7-10 per cent which must reflect the fact that this is a new and immature market. In the long run a return to rental yields more in line with comparable international markets should be expected. So that means either house prices go up or rentals have to fall.
London is an extreme example but there rental yield – which is the capital value divided by annual rental income – is only 2-3 per cent. That means that house prices are three to four times higher than in Dubai for the same amount of rent.
Why is that the case? How come such low UK rents can support very high property prices? Well, many argue that UK house prices are in a speculative bubble and far too high. But what really maintains these high prices is the availability of low-cost mortgage finance and the preparedness of buyers to stretch themselves to the limit.
It was not always like this. When this correspondent let his London home in 1996 the rental yield was 16%. But since then house prices have gone up and up, thanks to falling mortgage rates and an enthusiasm for home ownership bordering on a national obsession. And as people have moved from renting to buying this has lowered demand for rental property and has kept rents not much changed in a decade.
Downward pressure on yields
This seems to be what happens in a mature housing market. Rental yields fall lower and lower, although not usually to the extreme now seen in London.
Now it may be that the Dubai real estate market first undergoes some kind of a correction downwards in capital and rental prices due to oversupply in 2008-9 as suggested by analysts at EFG Hermes and Standard Chartered Bank. But in the longer term we would surely expect the Dubai market to shift its rental yields more into line with the rest of the world and mature markets.
What then will move: the rentals or house prices, or perhaps both in different directions? It is hard to imaging landlords being terribly keen to cut annual rents, which one way or another people are managing to pay, and in the 1999 downturn in Dubai landlords left apartments empty rather than cut rents. But there might be landlords with financial commitments that leave them no choice except to cut rents to fill their property.
Is it not more likely that the emerging mortgage finance sector in the UAE will really get its act together and make it cheaper to buy homes, and encourage people to make this move with vigorous marketing promoting home ownership? And that this factor will drive up house prices in the long run, bringing rental yields into line with other comparable international markets.
It is really an anomaly that Dubai rental yields are so high, and over time markets correct and even overcorrect such anomalies.
For any foreign buyer will tell you that Dubai property is cheap by global standards and in the near future it would seem only to be expected that higher house prices will force rental yields lower just as they have all around the world.