Dubai property market offers highest net yields in 4 years

Citywide residential capital values have come down faster than rental values

General view of skyscrapers on Sheikh Zayed Road on September 27, 2017 in Dubai, United Arab Emirates. Image used for illustrative purpose.

General view of skyscrapers on Sheikh Zayed Road on September 27, 2017 in Dubai, United Arab Emirates. Image used for illustrative purpose.

Getty Images/Tom Dulat

Dubai property investors seeking high yields now have an opportunity to pick the perfect property and negotiate the asking price.

The last couple of months have registered the highest net yields since the first quarter of 2015. As per the latest ValuStrat Price Index, the returns on villa properties citywide are at an average of 4.7 per cent and for the apartments are at 6 per cent.

Citywide residential capital values have come down faster than rental values. The second quarter of 2019 ValuStrat Price Index showed that annual rental values have come down by 10.6 per cent, and capital values in Dubai have dropped by 11.5 per cent. When you have capital values falling faster than rents, your yields will go up.

In the affordable segment, there is more demand for renting a unit, as about 75 per cent of the expat working population earn less than Dh10,000. This sector looks for renting affordable units because they simply cannot afford to buy a property. Affordable units, such as in International City, Discovery Gardens, and Dubai Production City (IMPZ), are being absorbed relatively quickly, resulting in high yields for investors.

In International City, for instance, net yields were 8.2 per cent in July this year, and for the same period last year investors achieved a 7.5 per cent net yield. The community saw a 14.3 per cent fall in capital value and 4.7 per cent rental decline year on year, between July 2018 to July 2019.

However, it is not only affordable communities that have witnessed increased net yields, but even mid to high-end communities have recorded a hike this year. For instance, The Greens, Jumeirah Village and The Lakes are middle-to-high level communities, where investors recorded rental net yields of 7.6 per cent, 6.3 per cent and 6.8 per cent, respectively, in July this year, compared to returns of same period in 2018, when they got 5.8 per cent, 5.4 per cent and 5.8 per cent respectively, as per the ValuStrat Price Index.

Rents of these communities have, however, not come down to the same level, resulting in the yields to go up. Another factor that has positively affected net yields is the reduction of service charges in many communities.

Even prime communities offer high yields in Dubai. Palm Jumeirah, for instance, offers net returns of 5.7 per cent and Downtown Dubai 4.6 per cent which is high compared to international markets like London, Paris, New York, and Hong Kong where investors get 1-2 per cent yields.

Advice for investors
It's essential for the investor to know the difference between gross and net yields. The gross rental yield is the annual rent divided by the total price, whereas net yields are calculated after subtracting all expenses, such as service charges, from the rent value. The net yield also considers the vacancy rate, insurance, and management fees, hence it's more realistic.

Without proper due diligence on net yields, you can end up buying an apartment in a building where services charges are high, which would lower your returns. Also, note that rents are not always guaranteed as your property can remain vacant at times, so find out about net yields from the relevant sources before buying a property.

When searching for a property, investors must check whether they have the funds to pay for the down payment and other associated charges as that is vital to be eligible for a mortgage. Look for the right location, which largely depends on market demand and preferences. Also, look at the property itself, its age and quality, and find out details of the infrastructure, amenities and facilities.

Haider Tuaima is head of real estate research at Valustrat. Views expressed are his own and do not reflect the newspaper's policy.


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