21 September 2017

Dubai: Yield Fallacy

A look into the international real estate markets reveals that over the years there has been yield compression. In the United States from the 1960’s yields have declined by 29%, whereas in the Hong Kong from 1999 yields have compressed by 34%. This secular decline (over a longer period of time for the US) reflect the structural decline in long term interest rates.

Similar to the international markets we witness that there has been a yield compression in Dubai from 9% to 7% in the apartment space. The yield compression has transpired as function of price growth outpacing rents. In the 18 months prices have remained flat lined but rents have decelerated.

Across major cities throughout the world, there has been a downward trending yield trajectory. Of all the major cities analyzed, Dubai remains far and above the highest yielding city, suggesting that there is ample room for further yield compression (partly a function of investors accepting lower risk premia) in the years ahead.

This suggests a different outcome of discourse, from the consensus based cacophony of analyst concerns that have been expressed.

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