Buying a property in Abu Dhabi: how much should you be paying?
There is a brilliantly simple answer to the question "what is something worth?", something is worth what someone will pay for it, no more no less. But that doesn't help us when deciding what we want to pay, we want to test the market first before agreeing to a number.
So how do the experts value something? The easiest way they do it is seeing what the one next door sold for, and knowing if the market is going up or down. Simple and effective. But the average person on the street doesn't have access to that kind of information and it isn't publicly available in Abu Dhabi. Property websites are often unreliable and the use of price per square foot is very clumsy as it doesn't take into account things that can greatly affect value such as view, amenities, location, layout, finishings etc.
So how can we do it then? We do it by accessing the far more numerous and publicly available data on what people are paying to "buy" a house for a year.
When we rent we essentially buy the use of a house, yes we can't do what we want with it but we can do the most important thing - which is live there. So the unit next door to the one I want to buy is renting for Dh100,000 - so what does that mean? Well investors consider this proposition all the time, they're looking to buy then rent the property to get a return on that capital investment. If an investor can get a return of Dh100,000 per year from an asset then a smart one can calculate exactly how much he should pay based on borrowing and use of capital costs. I won't go into the complexities of that as it depends on so many elements but I will talk about the "Factor".
To find the Factor, you divide the asking sale price by what a similar property is being rented for. A real life example is a four-bed Gardenia Villa in Golf Gardens. Public information tells you these can be bought (by locals only) for Dh4.2m, the same information tells you they rent out for Dh280,000 per year. Dh4.2m divide by 280,000 give you a Factor of 15.
So is that good or bad?
Let's consider a few more options. A Muneera townhouse is for sale for Dh5m and is also advertised for rent at Dh340,000, a Factor of 14.7. A Muneera three-bed apartment with a sea view on the fourth floor is being sold at Dh2.6m and rents for those units are currently Dh190,000, a Factor of 13.7. The cheapest Saadiyat villa is currently going for Dh5m (in the primary market) and the cheapest you can rent one for is Dh280,000, a Factor of 17.8.
Part of the reason Saadiyat property seems overpriced is speculation. With all the attractions being built on Saadiyat people are happy to pay a higher price on the basis that they expect the value in their property to rise.
The beautiful thing about rents is someone is only paying for what is there now; they have no interest in whether the value of the property will rise in the future. Renters pay for what they get.
One of the surest ways to spot property bubbles is when rents lag behind sale values (i.e the Factor on properties starts to rise). It means people are paying more for property than they should. When prices drop rents don't drop as far or as fast. Renters are still paying for what they get but the premium on the property, which was added by people thinking the value would increase, has been removed.
There is no sure formula and everything will depend on your circumstances, but currently a "good" Factor is between 13 and 16. Anything less could be a bargain, anything more may be overpriced.
Ben Crompton is managing partner at Crompton Partners real estate agency
Updated: August 30, 2013 04:00 AM