4 February 2016

Dubai: All the Returns We Cannot See

Returns from a real estate investment are derived from two basic components (i) capital appreciation and (ii) rental returns. Over the last two real estate cycles, investors have focused on the out-sized returns generated from capital appreciation compared to rental yields. However, the latter can account for 40% of the total returns in the long-run, making it an essential component of the return matrix. During up cycles, capital appreciation always accounts for the bulk of the total returns; it is in periods of downturn that rental returns dominate, and in this cycle, dominates throughout the entire cycle to date.

On a city wide basis, capital appreciation since 2009 has been a mere 16%, whereas the total returns including rent during the same period have been close to 70%. Conventional market wisdom for the investor psyche is that low-end properties are a yield product, whereas premium assets are a longer-term capital appreciation play.

Typically services fees is 15% of the rental value across Dubai, however this amount gravitates higher or lower depending on the segment of the market. In the affordable segment, the service fees can account for as low as 12% of rents, whereas in the high-end areas it can be as high as 17%.

An investor should be aware of the fact that the difference between the gross and net yield in a property investment can vary by 25%. This difference is attributed to the various costs included with the rental, service charge and purchase components of the investment.

To download the full report click here: http://blog.reidin.com/PublicReports/UAE160207.pdf