Investors are supposed to be rational — but that is easier said than done when it comes to buying property. It is for good reason that some estate agents advise sellers to bake fresh bread before potential buyers come to view a property.
Home-buyers can be blinded by emotional responses — be it smells, super sea views or off-plan marketing gimmicks — and may fail to see that a particular property is overpriced or unsuitable, writes Ben Flanagan.
Even buy-to-let investors can be overly swayed by the enduring appeal of ‘bricks and mortar’, which may not necessarily offer the same return as other investments measured by more mundane share graphs and price-earnings ratios.
In the UAE, where the property market has seen something of a rollercoaster ride in recent years, it is arguably even more difficult to determine whether it’s the right time to buy.
The market has slowed significantly and — given the current low oil-price scenario, and wider regional unrest — the possibility it could see a further decline makes the answer even more elusive.
The property markets in both Abu Dhabi and Dubai witnessed “subdued sales activity in 2015”, according to JLL .
“While lower oil prices coupled with geopolitical unrest negatively impacted investor sentiment, the strengthening of the U.S. dollar made UAE property more expensive for many overseas investors,”
The consultancy said in a recent report. Figures show a fall of 33 percent in the volume, and 28 percent in value of Dubai property transactions in the year to November 2015. Dubai apartment prices fell by 13 percent, and villas 11 percent over the same period.
Rental yields improve
But while sales prices were down, rents fell less sharply — with apartment rents down 3 percent, and villas down 4 percent — marking a potential opportunity for buy-to-let investors.
In Abu Dhabi, property sales prices were unchanged last year, while apartment rents rose by 4 percent and villa rents increased by 2 percent, according to JLL figures.
“Rents have performed better than sale prices in all sectors of the residential market in 2015, increasing rental yields and the future attractiveness of the sector,”
JLL noted. Ben Crompton, managing partner of Crompton Partners estate agents in Abu Dhabi, agreed that this marks an opportunity for buy-to-let property investors in the UAE capital.
“If you are an investor, yields are looking very attractive at the moment. We have had a 2015 of rising rents and flat sales prices so returns have ballooned,” he told Benchmark.
Rents are still very high, interest rates low and buying makes a lot of sense if you plan to stay here for a while or if you are seeking strong rental yields
“Will prices fall very far with yields so good? We will have to see what the rental market does. If it is stable then sale prices will stick with them, but watch them drop away if rents tumble.”
Price declines expected
Some analysts do however forecast further property price declines in 2016 — casting doubt over whether now is the best time to buy.
“Our expectations are for further market declines during 2016, brought about by the continued global uncertainty and the negative impact of low oil prices upon regional economies,”
Matthew Green, CBRE’s head of research and consulting in the UAE, told Benchmark. “That said, there are certainly opportunities to find better value in the market than has been possible for a number of years, and that may encourage increased investment towards the end of the year, should conditions start to improve,” he added.
Buying property to live
For those looking to buy a property in which to live, rather than rent out, the answer of whether to take the plunge is similarly complex. Those looking to live in the UAE for several years — typically five or more – will obviously save money on rent. But buying property invariably comes with hefty purchase fees, mortgage interest payments, annual service fees, and the risk of falling into negative equity.
Lukman Hajje, chief commercial officer at Propertyfinder.ae, said the decision to buy property in the UAE “always depends on your individual circumstances”.
“Prices are very attractive at the moment. Being counter cyclical is not for everyone but often that’s where you’ll find the smart money. Rents are still very high, interest rates low and buying makes a lot of sense if you plan to stay here for a while or if you are seeking strong rental yields,” he added.
Those whose salaries are paid, or hold savings in currencies other than dirhams or dollars will however find the exchange rate stacked against them, Mr Hajje cautioned.
“The high [dollar and] largish deposits demanded due to the mortgage cap regulation is putting some prospective purchasers off, which is understandable. For this kind of cash outlay you have some attractive options around the world,” he said.
But while CBRE expects further price declines this year, Mr Hajje said that the bottom of the market is near — suggesting it could soon be the optimum time to take the plunge.
“Will prices go down further? Possibly,” he said. “But if we are not at the bottom yet, I suspect we are not too far from it.”
Demand remains strong
Dubai estate agent Lewis Allsopp, chief executive of Allsopp & Allsopp, said the local market is already starting to recover — and that he is beginning to see demand outstrip supply.
“Under current market conditions, we’re regularly seeing desirable properties listed at an achievable price receive multiple offers from buyers. This shows the real strength of the market and has the combined effect of keeping supply tight, demand high and, as we’re starting to see, prices increasing,” he said in a statement.
Allsopp & Allsopp also said February marked the highest month of sales volume since the company started in 2008, as well as a 62 per cent increase in buyer registration on the same month last year.
“Oversupply would be the first thing to show the market is in trouble but the fact is we are facing precisely the opposite scenario — we’re actually struggling to find units for the demand. Thankfully the developers are aware of the current situation and we still have properties due to come online this year despite some projects being held up.”
But if you do decide to take the plunge and purchase a property, remember that — even if it has sweet views and smells like freshly baked bread — your decision should remain as rational as when you buy stocks and shares.