To buy or not to buy?

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Cynthia Trench recalls her friends' reactions when she announced in 2002 that she had decided to buy property on the Palm Jumeirah in Dubai.

"Some people I told thought I'd gone totally mad," she says.

"A lot of people considered it to be a very risky venture." And to a great extent they were right.

At the time when Trench, a partner in the Dubai based law firm Trench & Associates, made her purchase, real estate freehold had just been released to expatriates for the first time and few property laws existed.

The concept of non-GCC nationals buying freehold property in the emirate was previously unheard of, many of the homes expatriates could buy had not yet been built and there was no clear indication of whether property values would rise or fall.

Yet five years later Trench is laughing all the way to the bank. She paid a 10% deposit for her US$707,848 (AED2.6 million) property on the Palm then sold it just eight months later and made a 100% profit on her down payment. She then bought a property on the Arabian Ranches development for which she paid $503,661 (AED1.85 million) in November 2005 and which is now worth over $817,000 (AED3 million).

A lot has changed since Trench first jumped on the property bandwagon. Last year a law was issued formalising the rights of non-GCC nationals to buy freehold property in Dubai.

Property values in the emirate have rocketed and there are now thousands of properties to choose from. They range in price from $532 per square foot on The World development to $134 per square foot in International City. Banks and financial institutions are suddenly falling over themselves to lend money to prospective buyers, some offering 90% mortgages. The number of "designated areas" where expats, not just locals, can buy properties is on the rise.

Yet Trench remains within a minority of expatriates who have taken the plunge and invested in Dubai's booming property market. Many remain nervous about investing in what is a relatively immature market and prefer to rent instead, unsure of the true costs, risks, and long term viability of buying property in Dubai.

It means that rent is rising just as fast as property prices. Liz Hopkins, a 32-year-old television executive who rents a two-bedroom villa in the Springs has the money to invest in a Dubai property - but after looking into the process and taking advice from lawyers and accountants has decided to stay put.

"It would make sense for me financially to buy a property here because I pay so much in rent every month and I've got the capital. But I just feel uneasy about it all particularly as nobody can predict whether Dubai's luck will suddenly change and prices will crash," she says.

The unpredictability over whether property prices will rise or fall in Dubai over the next 10 years, is one reason behind expats' reluctance to buy. Property prices in the emirate are linked to supply and demand and so far the steady flow of expatriates into the country has seen property prices rocket.

According to Puniet Singh, commercial operations manager for Sherwoods Independent Property Consultants, prices increased by a massive 50% between 2004 and 2005 and averaged out at around a 30% rise in 2006.

"It's been a demand driven growth because there's been a strong influx of expatriates and rising income levels," says Singh.

"Dubai's future in the next 10 years is about balancing out supply and demand. They are projecting population growth at anything between 5% to 8% a year which would create a healthy demand for new units," he adds. However he admits maintaining this level of growth could be a challenge for Dubai and that any slowdown in inward migration could lead to a balancing out or even fall in property market prices.

"Until now Dubai has shown every sign of measuring up to the challenge. But if demand is not regularly maintained then the supply might overflow the demand. And that's when it could become a buyer's market," he warns.

Dubai based financier Stephen Corley, managing director of Paradigm - a strategic planning consultancy - believes it is impossible to make any firm prediction on whether house prices will rise or fall in Dubai. But he believes, particularly in the case of apartments, that supply will inevitably outstrip demand.

"At the moment, one can quite clearly say that as far as apartments are concerned in Dubai, supply is categorically at some stage, this year, next year or the year after, going to outpace demand. Economically, text book speaking, prices could fall." However, he adds, anyone choosing to invest in property now is unlikely to lose out within the next 10 years. "If you are going to buy on a 10-year basis, the balance is very much in your favour in terms of doing well out of it because you would be spending the money on rent anyway."

Despite the fact that in recent years property prices in Dubai have risen sharply - they remain highly competitive when compared to those expats can expect to pay in places such as the UK.

Billy Rautenbach, director of operations for real estate firm Better Homes, believes you get "more bang for your buck" in Dubai with a range of prices to suit all budgets.

"If you came to Dubai with $195,000 to spend you could buy much more for your money here than you could in London for example. And that's in terms of size, location, all those things. If you look at locations like International City, investors can buy property there where the entry level is about $81,674 (AED300,000). And I don't know many other places in the world where you can buy a studio apartment for that kind of money."

"Everyone thinks we only have high-end stuff but there are still properties where your entry level is quite low," she goes on to say. In terms of mortgages, buyers now have a wide range to choose from with a number of local home finance companies and multinational banks offering up to 90% of the purchase price to UAE nationals and residents and up to 70% to non-residents. Some 100% deals are also reported to be filtering through.

The maximum mortgage that can be granted is $1,361,247 (AED5m) and mortgages must be paid back in monthly installments within a period of 25 years. Buyers pay a process fee to the bank of around 1% of the loan amount, and a registration fee of around 0.5% of the loan amount. Currently interest rates are high, rising to as much as 9.5%.

"Everybody quotes ludicrous figures here for mortgages," says Corley. "Mortgages are very high comparatively speaking."

Singh describes the interest rates as "very high compared to the UK. We are looking at anything between 7.5% and 9.5%". However he hopes that in future the influx of foreign companies now offering home financing in Dubai will lead to a more competitive market with lower interest rates.

"Today not only local financial institutions but also international financial institutions are entering the foray of providing mortgages. Hopefully that will create a more competitive scenario," he adds.

When investing in properties in Dubai legal experts advise people to buy through an offshore company, rather than registering ownership of the property in their own name. This is because the law relating to inheritance of real estate in the UAE still needs clarification.

Article 17.1 of the civil transactions code specifically states that the law of domicile of the foreigner would apply upon death as to the distribution of the estate. But article 17.5 states that with regard to real estate, the laws of the UAE would apply.

"And that means a huge question mark because there are no laws of the UAE which apply to real estate distribution to foreigners. Some people say it's governed by Sharia law and others say article 17.1 still applies and they apply the law of domicile," explains Trench. "If a person buys a property through an offshore company however, their property is protected because the company itself cannot die. For the purposes of peace of mind it's definitely recommended that you buy property in the name of an offshore company," she adds.

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