Prices are pretty flat in the UAE at the moment, and you aren’t likely to get much capital appreciation this year. So why buy if your investment isn’t going to go up in value? Because if you take everything into account, even if your property doesn’t appreciate in value 1 fil, it halves your rent.
Here is an example of two units currently listed on the market:
1. A two-bed apartment
2. A three-bed villa
The two properties are in different areas, are both on the market for Dh2 million and currently rent for about Dh150,000 a year. Now, assume the buyer has a 25 per cent deposit of Dh500,000 with Dh1.5m financed at 4 per cent over 25 years. So how will buying on those properties, rather than leasing, halve the rent?
How you save
Your first saving is when you consider your rent against what your bank repayments would be. It is a simple calculation – the rent on these units is Dh150,000 a year if you are a tenant; if you buy it your finance repayments would only be Dh95,000 a year. That is a saving of Dh55,000 a year, or 37 per cent is the difference for being the owner rather than a tenant. The situation gets better.
If you own your own property, then in the first year Dh35,000 of your Dh95,000 finance payment to the bank goes towards paying off the principal of your loan (the other Dh60,000 is interest payments). This is money essentially going into your pocket as it is taken off the amount you owe the bank, so if you sell the unit, even at what you bought it for, you get to keep this amount.
So to recap, if you buy you are now paying Dh95,000 in finance payments to the bank, which is Dh55,000 less than the rent you were paying. Add to that the fact that Dh35,000 of the Dh95,000 payment to the bank is essentially being added to the resale value of your property each year and you have a total saving of Dh90,000 (Dh55,000 plus Dh35,000), compared to a rent of Dh150,000.
Factoring in the costs
A more unscrupulous estate agent would leave the figures there, but you should factor in about Dh15,000 for service charges now that you are an owner. So Dh55,000 less in payments, Dh35,000 added to your equity less Dh15,000 in service charges means your payments are now essentially Dh75,000 per year. Dh75,000 is 50 per cent of your total former rent of Dh150,000. If you buy you halve your rent.
Watch out for
It is worth mentioning that two things have to be true to take advantage of this saving. First, you need the deposit on your home – not an easy thing to come by particularly for more expensive units. Second, your saving is affected by the interest rate you are paying, so if interest rates go up your saving will be smaller as your bank repayments climb. Make sure you can still afford your repayments if interest rates increase.
Returns for investors
Back to this example – if you are an investor buying at Dh2m, Dh150,000 a year is an uninspiring 7.5 per cent return, and if you factor in Dh15,000 service fees it becomes 6.75 per cent net. But you are using only 25 per cent cash (Dh500,000) to get this return and the other 75 per cent you are borrowing at 4 per cent. For every dirham you borrow at 4 per cent you get a return of 6.5 per cent, a difference of 2.5 per cent on money that isn’t even yours.
So if you are an investor with one of the properties mentioned above, the rent you receive will be Dh150,000, minus the Dh15,000 service charge, minus your Dh95,000 yearly payments to the bank, but add back in the Dh35,000 that goes towards paying off your loan. So you receive Dh75,000 from your investment of Dh500,000 (the deposit). That is a 15 per cent net return on your investment. Where else can you get these kinds of returns?
If you compare this to putting cash in the bank then you need to consider that inflation in the UAE is anywhere between 3 per cent and 4 per cent a year, and the best savings account you can get offers well below 3 per cent. This means you lose money in actual terms by putting it in the bank. Returns on even poor investment-grade property in Abu Dhabi are 6 per cent, so better to park your money in something that offers genuine returns.
So why isn’t everyone buying? If you are worried about selling your property if you have to leave the country, you needn’t be. You don’t need a visa to sell your property, you can sell it at any time.
pf@thenational.ae
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