What is a "good investment"? This question alone could occupy a separate article. The answer depends on what kind of benefit the investor wants to get.
If we are talking about short-term income, a good investment will be one that combines a high return of funds with a profit in a short time, although with high risks associated with the need to correctly choose the moment and object of the deposit.
If a person is interested in finding a stable source of profit, even if in a small amount, then a "good investment" will be one that offers the least risks with a stable long-term return on funds.
Dubai offers both options, but there are nuances.
This article will give an overall picture of the investment climate in the emirate, which will help create an understandable image of the situation for the investor.
The content of the article:
- Source data
- Dubai's economy and real estate market prospects
- Market offer and return on investment percentage
- Costs, benefits and incentives
- Conclusions
Source data
The first thing to consider is the current situation with the COVID-19 pandemic and international restrictions on movement.
Dubai, the largest city in the United Arab Emirates, is one of the key trade and financial hubs of the Middle East.
There is a large real estate market in the city-naturally, given its size and location.
The construction sector and investments in it provide from 10 to 20% of the total GDP of the emirate. However, above all, Dubai is a resort city. Its economy and infrastructure, including the real estate market, are focused on making profit from large tourist flows.
Against the background of the above-mentioned problems and restrictions, Dubai has significantly suffered in terms of its tourist destination, including experiencing the largest outflow of population among the Council of the Commonwealth of Arab Countries.
The low influx of tourists and other visitors, such as expats, has reduced rental demand, especially for the luxury housing sector, so in general, home purchase prices have declined, reaching a record level in recent years.
A situation is being created when buying real estate in Dubai has become cheaper than ever, but it will not be possible to earn a lot in the short term. Nevertheless, all economic indicators show that the recovery of the sector to pre-pandemic indicators can be expected in the second half of 2022 or 2023.
All the data given below should be passed through the filter of the situation described above.
We also need to determine which aspects of the real estate market we should take into account.
We will formulate the main questions on which it is possible to meaningfully study the emirate's economy, at least for an investor.
- How stable is the economic situation and what are the prospects for its growth?
- What is the offer on the market and what percentage of return on investment provides real estate?
- What are the costs and obstacles for the investor and, conversely, what amenities does Dubai offer?
Let's divide the questions into three blocks and describe what each of them is.
Dubai's economy and real estate market prospects
We will need two data sources: the Global Real Estate Transparency Index (GRETI) and the Global Property Guide (GPG).
The first is a cumulative index of market prospects, consisting of more than 200 different indicators.
The second is a group of indices, of which we are interested in four ones: gross rental income, long-term investment rating, competitiveness rating and economic freedom index.
GRETI formulates an assessment in five states: "opaque", "low-transparent", "semi-transparent"," transparent" and "high-transparent". For ease of understanding, think of it as a score from 1 to 5. Countries are evaluated in six categories.
In 2021, Dubai is designated as a "translucent" economy — not good and not bad, in other words.
The strengths of the emirate are
- developed economic infrastructure;
- comfortable state regulations and laws;
- developed technology sector.
The latter can be observed in practice — by the end of 2021, within the framework of the state program "paperless strategy", all key services and services for investments will be transferred to an electronic form accessible to investors remotely and from anywhere in the world.
Dubai is ranked 36th in the world ranking.
According to the GRETI data, two conclusions can be drawn.
- From a fundamental point of view, the Dubai economy is attractive for investment, although due to the obvious international situation, current indicators are different.
- At the moment, Dubai is not in the best shape. The situation in the tourism sector has "dragged" the rest of the economy.
At the moment, you can profitably buy a sufficient amount of real estate in anticipation of rising prices for it in the next year or two. Subsequently, the most profitable solution will be the resale of this property. However, from a certain point of view, rent can also become a steadily growing source of income.
The conclusion above is confirmed by the GPG data.
- The rating of long-term investments in Dubai is "unexpressed". Deposits in the emirate are not regarded as unprofitable, but it will not be possible to get high long-term profits at the moment.
- Gross rental income is 5.19% per year. The indicator expresses rental income as a percentage of the price paid for the purchase of real estate.
- The city is ranked 16th in the world in terms of the competitiveness of the economy. This indicator describes the quality of the macroeconomic environment, state institutions and the technological level of the economy.
- The index of economic freedom is 77 points. Dubai is a "mostly free" market. The main share of government interventions in the real estate sector is accounted for by regulating the growth of rental rates and curbing price manipulation.
A long-term investment in real estate to hold property for five or more years will not bring such high returns as shorter investments in buying and reselling. But we need to consider the prospect of the next two or three years. In the future, we should not expect a sharp growth in the next year.
The investor should determine what profit he expects to receive from the investment and in what time frame. At the beginning of the article, we mentioned two strategies. It is cheaper to buy a property right now, but it is the expectations of profit that should dictate the next steps.
At the end of this section, you should clearly indicate:
The first five months of 2021 show clear indicators of the sector's turn towards growth. The situation with the record low cost of real estate until the end of this year may radically change in the direction of price appreciation. It is extremely important to correctly calculate the time for the purchase.
Market offer and return on investment percentage
The Dubai real estate market offers a fairly rich range of offers.
There are two reasons for this.
The first is an extremely developed construction sector with a high construction rate of about 60,000 new objects annually. By 2040, Dubai developers have already planned to create more than 550,000 new objects. The second reason is a diversified economy.
It is worth highlighting four main areas.
- Elite residential and resort real estate — expensive vertical apartments, villas, townhouses, penthouses, hotels in the coastal zone, cottage settlements.
- Affordable housing — mid-range apartments, studios, small villas with one or two rooms, hotel apartments in central, commercial and industrial areas (Downtown Dubai, Jebel Ali, Business Bay, special economic zones, etc.). This direction is interesting for most tourists, expats and foreign workers.
- Commercial real estate — industrial areas, offices, warehouses and sorting facilities, housing for workers, dormitories (for example, in Jebel Ali).
- Projects under development — land plots, objects at the project stage.
At the moment, luxury real estate has lost more in price than other areas. In 2021, according to the real estate agency Knight Frank, among the top 25 cities for investment, Dubai was one of two in which prices in this segment are consistently declining.
In view of this, it will not be possible to make a profit from the purchase and sale of such real estate in the short term, but low prices create an excellent situation for buying and owning real estate over the next few years.
Affordable housing is becoming much better, but pandemic restrictions are still holding back the growth of the segment. The relative drop in prices is not as strong as in the case of luxury real estate, a gradual increase is already being observed, but rather slow.
At the moment, ready-made commercial real estate is the most attractive for short-term investments. The growing e-commerce sector and the development of the outsourcing sector are stimulating an increase in demand for this supply, and now this is the segment with the most intensive growth.
The developed projects and facilities at the early stages of construction are the strength of Dubai, which always demonstrates the best indicators for deposits. Another name for these types of real estate: land plots and "off-plan" real estate.
The construction sector is constantly building new facilities, at least in order to load huge production capacities in order to prevent equipment downtime. Often, the pace of construction exceeds the current demand, so developers are looking for opportunities to attract as much investment as possible in their projects "here and now".
Attraction is carried out by offering investors extremely low prices for the purchase of an object under construction. The developer receives the necessary payback of projects at the moment, and the investor purchases inexpensive housing, which will increase in price many times simply due to the completion of construction.
This is the most profitable way of investing, since the purchase of an "off-plan" will pay off not only due to the construction of the object itself, but also due to the upcoming increase in real estate prices due to the natural recovery of the UAE economy.
Do not forget about the restoration of the influx of population — this will ensure an increase in demand in the post-pandemic period of the coming years.
Let's look at two more indicators of Dubai's investment attractiveness.
The first indicator is ROI (return on investment).
It is used to measure the ratio between net profit and investment. A high ROI means that the income from investments compares favorably with their value.
For the emirate, the average figure ranges between 8% and 15%. This is one of the highest percentages in the world.
The second indicator is gross income or, in other words, net income. This is the amount of net profit that can be obtained from renting or reselling real estate before all taxes and costs have been deducted from the amount.
When investing in ready-made real estate, the net income is usually located in the region of 10%. This is a significant figure, but it pales in comparison with those that can be extracted from investments in objects under construction ("off-plan").
The income in this case can reach 80-90%.
The difference between ROI and gross income is that the first is calculated for the entire sector, while the second is calculated for individual types of supply.
Costs, benefits and incentives
Dubai has a special tax policy. The main taxes fall on corporations, and taxes from citizens are often collected through indirect sources, for example, VAT or interest on transactions.
An individual investor should know the following.
- For each real estate sale transaction, you will have to pay the state 4% of its amount.
- You must pay 5% of the rental rate per year if you rent a house, or 0.5% of the purchase price. This is the so-called "Municipal tax».
- Property owners do not pay taxes on land or property.
- It is necessary to pay a tax for the collection and removal of waste (garbage, etc.) This is about $ 27-54 per square meter of real estate per year.
- If you want to insure your home, banks offer a standard rate of $ 95 per month or premium insurance of $ 408 per month.
- Payment of utilities: water, electricity, gas. In the UAE, the most "difficult" period in terms of expenses is summer. Usually at this time, the owner of the property pays $ 490 per month for utilities.
Owning a property in Dubai is quite cheap in terms of costs. An owner who pays taxes on his own spends incomparably less than, for example, in most Western countries. The tenant invests part of the costs in the cost of renting in general, which further eases his tax burden.
It should be pointed out that the ownership of property for foreigners in the emirate is of two main types.
- Real estate is purchased through intermediaries or if there is a representative-a citizen of the UAE. This is the main offer on the market.
- The property is "Freehold", that is, in the unconditional personal ownership of the investor. This offer is much smaller and applies to certain areas of the city. This is obviously the most profitable.
The Dubai authorities also offer various preferential programs and investment opportunities. We have already mentioned the transition of many state and municipal services to online.
A small list of available solutions that an investor can get remotely:
- issuing licenses and permits;
- business registration;
- buying and selling real estate;
- participate in preferential programs;
- calculate tax expenses and rental rate;
- connection of various services, including utilities and insurance services.
As for benefits, it is worth clarifying special visa regimes: gold cards for large investors, visas for visitors and remote workers, special preferential visas for pensioners and many others.
The state is also taking steps to ensure the safety of the assets of investors, tenants and other participants in the real estate sector. The most important of these steps is the strict regulation of changes in the rental rate.
In a concise form, you need to know about this system that the rental rate can be changed only once a year and not more than 20% in the most extreme cases.
On the one hand, this frees up the hands of investors who want to freely manipulate the prices for renting their own real estate, but, on the other hand, it reduces the risks of price spikes in the market and sudden collapses in rates.
This measure also protects bona fide investors from those who want to speculate on the market to the detriment of other participants, for example, by dumping.
Conclusions
In the current situation, Dubai real estate can be called a "good investment". The main thing is to understand what you are going to get and for what time.
Real estate, especially elite, is now cheaper than ever, but buying for resale in the near future will not bring high incomes, for this it is necessary to wait a year or two until the economy and the sector recover.
With every month of 2021, this prospect becomes more and more obvious — the UAE has already entered a phase of recovery growth after the autumn of 2020.
Buying real estate for rent today can bring a stable income, especially if we are talking about affordable and small-sized housing, office and warehouse premises.
In this case, it should be understood that income growth will be stable, but slow. However, in 2022, upward motions are quite possible.
The most profitable solution in this situation will be the purchase of objects under construction. The general low real estate prices in this case are also supported by the desire of developers to attract additional funds.
Such housing itself becomes more expensive as construction is completed. But taking into account the fact that the average construction period of real estate is 2-4 years, the natural increase in value will also overlap with the general recovery of prices after the impact of the pandemic in 2020.
Thus, the profit from the resale of such real estate upon completion of construction will bring many times more income compared to the invested funds.
In any case, Dubai at a fundamental level is a market specially designed for the comfort of three groups of the population: investors, expat foreigners and tourists.
Even with a small profit, an investor can be confident in the safety of his assets and low costs for their maintenance.
If you are interested in the opportunity to make money on investments property in Dubai, please contact us.
