To buy or not to buy?

Dubai's property market is booming, but what are the costs and risks?
To buy or not to buy?
By Diana Milne
Tue 29 May 2007 06:06 PM

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.

If you are going to buy on a 10-year basis the balance is very much in your favour

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.


"So let's say you form a company in a tax haven like the British Virgin Islands and you own it 100% with your husband. If unfortunately your husband dies, the master developer wouldn't be concerned at all because all they need to know is that the company that owns the property is still alive and kicking which of course it would be."

Everybody quotes ludicrous figures here for mortgages. They are very high comparatively speaking

Similarly if the sole shareholder of the company which owned the property died, the executors of that person's will could apply to the offshore country where the company was formed and get the distribution of the shares of that company to the rightful heir.

However, there is a drawback to forming an offshore company in order to buy a property, which is that it makes it far more difficult to obtain financing from a bank or home financing company.

"Banks are very reluctant to lend money to offshore companies," says Alexis Waller, a property lawyer with the law firm Clyde & Co. "So people are often facing a tough choice. If they want funding or financing they are better off buying the property as an individual. But if they want to ensure that the property is kept in their family if they die then they'd be better off registering it in an offshore company name."

Even if money were no object, the choice of homes on offer to expats in Dubai can put them off investing in property. The fact is that no matter how new and luxurious these homes are they are restricted to around 23 designated areas or master developments.

Unlike GCC nationals, expats cannot pick and choose where they buy freehold property in Dubai. It would be impossible at present for a non-GCC national to buy a freehold property in parts of Dubai where there are no designated areas or master developments at present, such as Satwa.

Rautenbach has chosen to continue renting a property because none of the master development locations currently on offer suit her needs. "I live in Satwa because I work on Beach Road. I'm not going to live in Arabian Ranches where it would take me hours to get to work. So I choose to rent - and I think there will always be a market here for the renter because of that."

Similarly, Corley says he wouldn't consider moving out of his rented villa in Jumeirah so he could invest in property.

"I don't want to live in a single development that's being offered in Dubai. I'm very happy in my house in Jumeirah One. It's private, it's un-overlooked, it has got its own swimming pool and I don't care how much it costs me to live here."

Buyers investing in property in a master development, such as the Arabian Ranches, must consider the additional cost of service charges and the fact that they will be subject to the developer's own regulations when it comes to making alterations to their home. When it comes to making any changes to their homes, owners are subject to the restrictions of the master developer who in most cases will be keen to maintain consistency in the appearance of the properties.

This of course also has the advantage that the area in which buyers invest will maintain a consistent appearance designed to be attractive to future buyers.

"With a villa there would be restrictions within the community declaration which would say what you can and you can't do in respect of the community because they want to preserve the integrity and the feel of the place," says property lawyer James Hemmaway who works for law firm Denton Wilde Sapte.

"So you would have to get the consent of the master developer as well as the Municipality in respect of planning decisions."

Homeowners are usually expected to pay annual service fees for the maintenance of the common areas within their building or development, such as the swimming pool or grounds - something renters like Corley don't have to consider. "Nobody's charging me at the moment for digging up the streets to put in new pipes or street lamps," he says.

Waller explains the charges: "There are two kinds of service charges. If you own a villa you'll generally pay a service charge to the larger community. So let's say you are in a villa in the Springs - you have often got use of a swimming pool or a tennis court and also the roads within the Springs. They are all maintained to a standard and people contribute to that. If you're in a building you pay what we call a two-tier service charge in that you pay one form of charge towards the upkeep of the building, so that's the structural part, the corridors, the lifts, the lobby. And you pay a second part towards the larger community and it's a fee that's imposed on the building because it gets the benefits of the roads around it."

She says developers will often give buyers a verbal indication of what the service charges on a property will be but that does not necessarily form part of a contract.

At present says Waller there is no cap on service charges but she expects this to change as competition between the developers increases.

"What we might see as developers try to make their developments more marketable is that they will tempt buyers in by placing a cap on the service charge or by only increasing it by 1% or 2% each year."

Such a cap would prevent residents from being hit with far higher than expected service charges, which Hemmaway says is a risk at present.


"Developers do give estimates of what the service charge is going to be but generally when the property is completed and things are running along, it's going to be a lot more than that. A lot of the developments are luxury, high-end, developments with facilities like swimming pools and tennis courts. Purchasers are not going to get that for free and the more luxurious the facilities are, the higher the service charge will be," he says. Surprises such as unexpectedly high service charges are just one of the risks buyers face in a young market where so much is untested. An even greater risk comes with buying off plan property, as so many purchasers do. When Trench bought her Palm Jumeirah property in 2002 she was buying a plot of land on the promise that one day a villa would be constructed on it. The person who bought it from her eight months later did the same and the value of the property has now gone up to over $1,361,247 (AED5 million).

The more luxurious the facilities are, the higher the service charge will be

But despite these fantastic returns on investment not everybody would feel comfortable buying property off plan and the process can be risky as Hemmaway explains. "One risk at the moment is that if you are buying property off plan then the purchase price which you pay is paid directly to the developer in installments which are not linked to milestones in the construction. You pay that money directly to the developer and it's linked to specific dates. So there's no real incentive to complete the building on time and there is that risk that if the developer goes insolvent you are left with nothing except a contractual claim against the contractor," he warns.

The situation is due to change however, and the Dubai government is working on Escrow laws which would give buyers the ability to pay the money for the property into an Escrow account - a bank account managed by a third party rather than directly to the developer.

"They [the third party] will oversee the payment out of those funds to the developer. And they will only pay it to the developer once the building is at a certain stage, so you have some protection," Hemmaway explains.

These and other legal ambiguities point to the fact that it is vitally important for buyers to take legal advice when buying a home in Dubai. Trench says she is shocked by the number of buyers who only realise once their purchase has been completed that they should have sought legal advice.

"There have been horror stories. One is late completion, extremely late completion of over a year, so clients have to continue renting extremely expensive properties and they are incurring damages and huge expenses. People say it's not necessary to get legal advice when you buy out here, which it strictly isn't. But it's certainly advisable."

Trench's own experience of buying into the Dubai property market has been a happy one. She has already made a significant return on investment and has been satisfied at all stages with the way the whole process was carried out.

Those friends who advised Trench not to buy in 2002 are now eating their words on hearing how successful her investment has been. "The other night I went out for dinner with one of those friends, who asked me how Arabian Ranches was going," she says. "I told him how much the value had gone up and he just sighed and said ‘why didn't I buy at the time like you told me to".

But regardless of how profitable buying property in Dubai can be - not everybody is suited to the properties on offer - or the idea of making such a big financial commitment in a place they don't call home. Anyone considering whether to buy must think about more than just finances when making their choice. It's also about how long they want to live in Dubai, which area they want to live in and whether life in a master development like The Springs suits their needs and their tastes.

As Stephen Corley puts it, "It's a very emotive subject, house purchasing. Life is about slightly more than just adding up the sums at the end of the day and looking at how much money you are making."

But at the rate at which shrewd investors like Trench are seeing the value of their properties increase, adding up the sums will be more than enough to persuade many to buy.

Buying as a way to secure a Visa

The opportunity to secure a residence visa by buying freehold property in Dubai can be a big attraction for some expatriates.

The three-year Homeowners' Residence Visa offered by some developers is ideal for those who want to live in Dubai long-term but who do not plan to work in the Emirate.

Developers charge for the privilege however, and it costs around $1361 (AED5000) for a three-year visa to live on the Palm Jumeirah for example.

The visa can only be granted to the principal owner of the property, his spouse and children below the age of 18.

In the case of joint ownership only one visa will be given to the primary owner.

It does not provide work rights and anyone who wishes to start employment in Dubai still requires a residence visa from their employer.

Expat rental guide

Rent on Dubai property is usually paid with postdated cheques on an annual or biannual basis and many expatriates take out a bank loan to pay for this.

The cheques must come from a local bank so it is essential for renters to have a Dubai bank account. In Dubai bouncing cheques is a criminal offence so renters must make sure they have enough money in their bank account when the cheques are due. Alternatively, some companies will pay this rent in advance for employees then deduct the said amount from their salary each month.

In addition to rent people can usually expect to pay the following additional costs: a refundable water and electricity deposit; real estate commission which is usually 5% of their annual rent; a maintenance charge of around 5% of their annual rent; municipality tax, 5% of their annual rent; a refundable rental security deposit of between around $545 (AED2000) to $1361 (AED5000).

When signing a rental property lease, expatriates will need to bring along a residence permit, a ‘No Objection' letter from their employer, salary certificate, rent cheques, deposit and real estate commission. The usual procedure for moving to a rented home is once you have selected where you want to live, try to negotiate the rent and terms, sign the lease, read the lease agreement thoroughly to be aware of any termination, damage or subletting clauses which could affect you.

Then hand over the rent cheques, deposit and commission, and arrange for the water and electricity to the property to be ready for occupancy.

Information taken from Dubai red-tape, part of the Explorer series.

Expat buyers guide

1. Step one is to research the property developments currently available to non-GCC nationals then register with the one where you would like to purchase a home.

2. Decide whether you need a mortgage and if so speak to the mortgage company to find out how much you can borrow. To qualify for a mortgage you will need to be aged between 21 and 65, to have been in full time employment for at least three years and for the applicant's sponsoring company to have been in operation for at least three years. You will need an insurance policy covering the property and the life of the person responsible for mortgage repayment and for your property reservation to have been confirmed by the developer or management company.

3. When applying for a mortgage bring along your passport (the original and a copy), labour card (original and copy), salary certificate, bank statements for the last six months, a letter from your bank confirming you have no outstanding loans and a registration form for the reserved plot.

4. To arrange the mortgage contact the financing office linked with the property, agree on the financing details for the home, submit all paperwork and sign the relevant paperwork. Your mortgage will be processed once you have paid a holding deposit of 5%.

5. If you are able to finance the purchase yourself arrange payment plans and cheques with your bank.

6. For property that has not yet been built, register your interest in the development by contacting the real estate agents. Then visit the real estate office, pay the deposits and claim the contract.

7. For property that is already built, arrange for a contract to be drawn up then visit the real estate office with your passport (original copy) and 100% payment - unless the mortgage is being arranged.

8. Most developers ask for a 10% deposit to reserve a property. The balance of the purchase price should then be paid in installments during the construction of the property if it is not new. The final installment is due when you purchase the property.

9.If you change your mind and want to withdraw from the process you may stand to lose most or all the money you have paid.

Information taken from Dubai red - tape, part of the Explorer series
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