How to Pick an Abu Dhabi Investment Property
1 PICK THE RIGHT DEVELOPER
2007 in particular saw a lot of inexperienced developers take to the market in Abu Dhabi. The subsequent downturn in 2008/2009 saw those developers struggle to complete their units on time and in the specifications that were given to those who bought off-plan. Before you buy a unit look into the developer, what else have they built, what is their reputation like, how big or experienced are they.
If you choose a poorly built unit your initial great returns will diminish quickly over time as the unit deteriorates and maintenance fees rack up. You may also find yourself selling it at a loss later on and losing money that way.
2 WHAT IS THE BEST TYPE OF PROPERTY TO INVEST IN?
There is no answer to this question. In some markets five bed apartments are a solid bet and in some places one bed villas give you the best return. The beauty of being an investor is the numbers speak for themselves – follow the numbers and leave your heart, your gut and your instincts behind. But saying that smaller units usually give better returns but are more awkward to manage.
3 HOW DO YOU SPOT A DEAL.
What is a property worth to an investor? As mentioned above, all an investor should care about are his returns. The common abbreviation in the UAE is “ROI” (Return on Investment), you also see “IRR” (Internal Rate of Return) and “Yield” used. These returns are two-fold – income and capital appreciation (see “Do the Sums” below). An investor should really make his judgment on income but with half an eye on capital appreciation.
It doesn’t matter if the unit you are buying is 10% below market if the yield/IRR is low. Real investors don’t buy on price, they buy on yield. Calculate your net yield as set out in the Appendix.
4 WILL YOUR RETURNS BE CONSISTENT.
So your yield looks good now, but what about next year, and the year after that? Predicting the future has been tried and failed by better investors than you or I, but you need to avoid some basic mistakes:
a) Is the tenant paying over market rent? If you’re buying a tenanted property you need to make sure that the numbers haven’t been inflated by a tenant paying more than the unit is worth, as that person may ask for a reduction or move out in future. Don’t just look at what they’re paying, pay attention to the market rent.
b) Is anything being built near-by that will affect future rent – positively such as extra amenities, beaches, malls etc – or negatively, such as airports, other residential buildings, roads etc
c) What other buildings/developments are coming up which have units like yours? Will this choke the market with extra units?
Remember your investment property will command rents based on pure supply and demand, how many units are there of your type and how many tenants are there for them. Don’t confuse this with sale prices which are based partly on supply and demand but also have a huge chunk of “sentiment” involved. Sentiment is what the buyer thinks the property will be worth in future as he will be holding it for a while, this affects value. Sentiment has a very small effect on rents as the tenant is only there for a year.
5 DO THE SUMS.
It’s worth mentioning a third time that all an investor should be looking at when he thinks about his new property are his returns. There are two different types of return from property investments, income thrown off in the form of rent and capital appreciation realized upon the sale of the asset. Both of these are more valuable in the UAE than they are abroad as the UAE does not tax them.
Income Over Capital
Professional investors make sure that they make money from the rent the property generates – banking on capital appreciation alone (that the market will go up) is a risky bet. Make sure that the unit you’re looking to buy can be rented out easily (or is already occupied) and, at a minimum, the rent will cover the repayments you’re making to the bank for any debt you’ve borrowed. Your rent can be split into three parts:
a) The amount of debt that you owe to the bank that you pay off – this will only be realized on the sale of the property (as you will need to pay less back to the bank than you originally borrowed); and
b) The amount of interest you pay to the bank on your loan; and
c) The amount by which the rent received is greater than your repayments to the bank from the capital borrowed. If you own the property outright then you will receive all of the rent,
Gross and Net Rates of Return. Knowing the difference between Gross and Net rates of return sorts the amateur investor from the professional. The Gross rate of return is the one your broker will tell you – rent divided by purchase price. The Net Rate of Return is your real rate of return, it shows you exactly how much you will be getting per year on your investment as a percentage of your full purchase price. How do you calculate this? The answer is your broker should do it for you, but if you’re not using a broker from Crompton Partners flip to the Appendix for the sums.
Capital Over Income
Many investors get into the housing market looking to make money by selling their property for more than they bought it for. The most obvious example of this was the practice in 2007/8 of people buying property off-plan and then “flipping it” by selling it again shortly after for a profit. The potential for high gains from this method is much greater than slow accumulation from rental income but it is also much riskier. The risk comes from the investor hoping the market will go up – if it goes down the investor loses money.
Do the Sums. You can’t do the sums to imagine what you will be able to sell the property for, which is why smart investors don’t pay capital appreciation too much attention. Even the greatest investors get caught out by the boom and bust cycles. If you’re buying a property certainly keep half an eye on the fact it might appreciate but never base a purchase on an assumed increase in value. Try to buy at the bottom of a cycle rather than at the top of course but don’t live and die by it.
The only time you should base your decision on resale value is making sure you’re not buying a unit that is badly built (see “Pick the Right Developer” above).
Warning – If you’re buying a unit hoping that it will go up in value then you’re gambling on the market moving in your favour (i.e. the price going up). If you buy something rented out for a good return then even if the market stalls or the value of your unit drops you will still be making money (traditionally rents are far less volatile than property values).
6 REAL INVESTORS DON’T BUY CASH
If you are an investor and you are a cash buyer you should investigate the principal of leverage. Leverage is a very simple tool used by used by investment funds around the world to magnify income and capital appreciation gains. Email email@example.com for our Guide to Leverage. You can also read my article on it here.
7 HOLD YOUR UNIT
If you have been clever about purchasing a good income generating asset and the market starts to go down don’t panic. Even if you have to leave the country if you don’t have to sell you should consider holding the unit. Reputable companies like Crompton Partners can manage your unit and look after your tenants and you don’t have to sell just because you leave. Just wait for the next up cycle and cash out then.
By November 2016 the US housing market had recovered almost all its losses from the 2008 crash, one of the largest falls in history.
a) Make sure you’re buying a quality unit that won’t depreciate over time.
b) Make sure you have done the sums on your income over costs to make sure your money is working for you. Leave your hunches behind.
c) Keep an eye on capital appreciation but don’t let it rule your investment decisions.
If you are an investor email firstname.lastname@example.org or call us on 800 CPEA (2723) and we can provide you with investment breakdowns for your chosen properties to show you exactly what you’re getting into.
Ben Crompton is an ex-lawyer and the Managing Partner of Crompton Partners Estate Agents LLC which has branches in Abu Dhabi and Dubai. Follow him on Twitter @benbcrompton
Gross Return. This is simple:
Rent per year divided by purchase price
i.e for a property with a rental yield of 180,000 and a purchase price of 3,000,000 =180,000/3,000,000 = 0.06 = 6%
Net Return. This is the same basic calculation but with the hidden costs added in. Service charge on this unit would be about 20,000 pa and the registration fee and broker fee are often 2% of the purchase price each.
(Rent per year minus service charge) divided by (Purchase Price plus 2% Registration Fee plus 2% Broker Fee)
i.e (180,000 – 20,000) = 160,000 divided by (3,000,000 plus 60,000 plus 60,000 = 3,120,000) = 160,000/3,120,000 = 5.1%
So your net return, the actual money in your pocket is 5.1%. If appropriate you can also add in financing costs and a maintenance contract.
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