To buy or to rent — the million dollar question

Posted on: 11th February 2015

Tenants in the UAE are increasingly looking at property ownership but only for those who can afford to do so

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Most expatriates in the UAE rent property and put aside money to be remitted back home. However, with real estate prices back on track in 2013 and stabilising in most quarters of 2014, several tenants with a long-term investment horizon are increasingly considering to take the plunge into home ownership in order to leverage the capital appreciation prospects of property here. Besides, they also want to build equity rather than spend money on rents with no returns in sight.

Meet Ruchika Airon, a human resources professional and Indian expatriate, who rents an apartment in The Greens, Dubai, but is considering purchasing a villa this year.

“Given the high rents we pay, I think it is a better proposition to buy a property since there is enormous cost savings to be had. We are looking to purchase a ready-to-move-in property in Jumeirah Village Triangle (JVT) because we have a long-term investment horizon. Although risks persist in terms of changing rules and the possibility of a market crash, we believe paying rent is a waste of money.”

According to figures from real estate consultancy Asteco, areas like Jumeirah Village are currently available at Dh800 to Dh1,050 per square foot, down three per cent quarter-on-quarter, but up 32 per cent year-on-year; they still hold promise in the long term as the surrounding infrastructure takes shape.

Anecdotal evidence is that some tenants have already started buying because of resale price drops compared to the continued upward move of rents, thus making it more attractive for tenants to consider home purchase.

However, the UAE Central Bank’s decision to increase the LTV (loan-to-value) ratio for UAE properties and the Dubai Land Department’s move to double property registration fees to four per cent in late 2013 has made several end users reassess their property ownership ambitions, while others were left to rent for longer while saving up larger deposits.

During the first half of last year, there was quite a shift of previous renters looking to buy their home. The locations did vary, depending on whether they were larger families (requiring villas) or couples with or without children.

Meanwhile, a result of the two-pronged regulation has been a renewed focus on properties at the lower end of the spectrum.

Many tenants have taken the initial big step in owning their first home by taking advantage of great value in areas such as Dubailand, with projects like Sports City, Motor City and Remraam providing excellent value and affordability

According to real estate agents, other locations on the radar of first-time home buyers include mature villa communities such as The Springs and Arabian Ranches and quality apartment locations such as Dubai Marina, Downtown, Business Bay, The Greens and Jumeirah Lakes Towers.

Off-plan properties are also being viewed as good value by owner occupiers. Despite the stagnation in capital value growth and the fall in the overall level of transactions being recorded in Dubai, the off-plan sales market has for the most part retained its momentum, with investors taking a longer term view of the market.

There has been a general stabilisation in the UAE property market after the heady inflation rates in 2013. Buyers maybe waiting on the fence, waiting for sales prices to fall further in the resale market as new supply is expected to come onto the market in 2015. .

There is a general sentiment that the resale market may correct further, so some prospective buyers are in waiting mode or looking for distress sales which in prime areas may not happen

There has also been a conflict in expectations between buyers and sellers in the Dubai property market. The stalemate between buyers and sellers is making the resale property market very slow. The seller’s perception of the market is that it is better than it actually is and the perception of the buyers is that the market is worse than it actually is so there needs to be some realisation from both parties.

While risk-averse first-time buyers wait on the sidelines, the current cycle of stable property prices will be welcome news to international investors.

We are currently at the beginning of an expected and much-needed period of stability, which makes the market resonate more with seasoned international investors, who are used to prolonged periods of stable price growth in some of the world’s more mature markets.

Some of Dubai’s prime areas, such as Downtown Dubai, have remained relatively stable, with Palm Jumeirah recording three per cent quarter-on-quarter growth due to restricted supply and ever-present demand.

While the mortgage cap has had the desired effect of cooling the property market in the UAE, it has restricted demand among both UAE nationals and expatriates. The challenge for new buyers is getting their hands on the cash to start the ball rolling.