Are the glory days of property investment over?
UAE residents are tapping the global real estate market even as returns are being squeezed
Property has been one of the most desirable investments globally of the last 25 years. Bricks and mortar — or concrete, glass and steel — holds a firm place in investors' hearts. It has also delivered a winning combination of rental income from tenants and capital growth from rising prices.
However, property isn't quite what it was. Mortgages are cheap and tenant demand healthy, but it is expensive to buy and capital growth is slowing. Also, many governments have tightened ownership laws and hiked taxes to stem the flow of foreign investors, notably in the UK but also Canada, Australia and New Zealand.
Returns are being squeezed in many global cities. In the year to June 30, capital growth across 21 leading global cities slowed to just 0.7 per cent, according to the Savills World Cities Prime Residential Rental Index.
Yields are now 3 per cent or below in Hong Kong, Singapore, Beijing, Sydney, London and Madrid, with Berlin at 3.1 per cent and Paris at 3.3 per cent. Dubai is one of the most rewarding with average yields at 4.6 per cent, beaten only by Los Angeles (5.2 per cent) and Moscow (5 per cent).
Knight Frank's latest Global Residential Cities Index, published earlier this month, shows a definite slowdown. Average growth stood at just 3.5 per cent in the year to June, down from a high of 6.7 per cent at the end of 2016.
“Rising economic uncertainty, trade tensions, political crises and affordability concerns are leading to weaker sentiment in mainstream housing markets,” Knight Frank partner Kate Everett-Allen says.
As ever, it depends on where you are buying. In the Chinese city of Xi’an, property prices increased 25.1 per cent, while Budapest grew 24.2 per cent. Other cities that have posted double-digit growth include Ahmedabad and Hyderabad in India; Chongqing, Guangzhou, Wuhan and Wuxi in China; Athens, St Petersburg, Warsaw and Vienna in Europe; as well as Bogota, Colombia and Capetown, South Africa.
However, Ms Everett-Allen cautions, "many are rising from a low base and in several cases, a dearth of supply has put pressure on prices”.
There are other issues, too. Property ownership can take quite a bit of effort — and can be a lot more demanding than buying stocks and shares. It is an "illiquid" asset, difficult to sell in a hurry if markets crash.
Despite high prices and the other challenges that come with property ownership, many UAE residents are confident they can still make a good return — provided you invest for the long term. Here, they share their tips on how to get the most out of property investment.
Invested in: UK and the Netherlands
Sarah Bacon, chief executive of real estate investment management start-up We Share Property, agrees that owning property can be problematic. “It can take months to complete, property managers don’t deliver and tenants can let you down,” she says.
Yet none of that deters her. The Briton, who has lived in Dubai for eight years, has a couple of properties in the UK and one in the Netherlands. The pull is “partly emotional and partly analytical”.
“On the emotional side, bricks and mortar are tangible and can be passed on to children. On the analytical side, property remains a key asset class in a diversified investment portfolio,” Ms Bacon says.
Her mantra for success is, keep it simple. “I buy properties that are cheap, close to public transport and likely to rise in value,” she says.
Choose the right property management company and you have little to worry about. “Get it wrong and you will lose out, probably with zero recourse,” Ms Bacon cautions.
Invested in: UK
Briton Mandy Peden, who moved with her husband to Dubai 15 years ago, still regrets failing to go on a shopping spree when property prices crashed during the global financial crisis.
Since then, Ms Peden has bought several properties in the UK, including a flat in East Sussex, England, for £95,000 (Dh447,566) five years ago which brings in rent of £595 a month and is now worth an estimated £135,000.
She also bought a small block of flats in South Wales for £55,000. It needed £10,000 of work and is now valued at £95,000. “Total rent is £775 month, giving us a yield of 14 per cent,” she says.
That kind of income is almost impossible to generate from any other asset class, which more than makes up for today’s lower price growth prospects.
She has had few problems with tenants, aside from one who stopped paying rent and left the place untidy. “Most tenants stay for years and make the place their home.”
Ms Peden finds that property has been less problematic than investing in stocks and shares. “Like many others, we took financial advice when we first arrived in the UAE, and the fees swallowed up most of our profits,” she says. “That hasn't been a problem with property.”
Invested in: UAE and UK
Daniel Djokaran, director at Ariya Partners, helps investors buy new-build apartments in the UK and Germany. He personally owns two apartments in Dubai (in Jumeirah Lakes Towers and the Springs) and two in the UK (in London and Manchester).
He has chosen Berlin for his next acquisition, which PwC has ranked the most exciting and desirable global market for the last four years, as a flood of young tech professionals meets chronic undersupply of property. “Local mortgage rates are low, and there is no capital gains tax when you sell, if you keep the property for at least 10 years,” says Mr Djokaran, 29.
Germany may be on the brink of recession but Mr Djokaran says to ignore cyclical short-term swings. “If you cannot withstand a spell of slow or negative growth, it’s best not to invest at all.”
Mr Djokaran prefers new builds over existing stock. “They appreciate faster, require less maintenance and may come with warranties.”
As for his two purchases in Dubai, Mr Djokaran has had mixed results. He successfully bought an off-plan villa in 2007, just before the financial crash. "It was delivered with little delay and a good-quality finish and was always tenanted at market value," he says.
He sold for a healthy profit in 2016, but the other property he bought the same year was more problematic. "We finally completed in January this year, 12 years late, although with 10 per cent off the price as compensation,” he says.
He was unhappy with the finish and had to slash the rent to attract a tenant. “We recently had it valued to see if it was worth selling, but it’s worth less than we paid 12 years ago.”
Invested in: France and Scotland
Airline pilot Ben Barber, 35, has been in the UAE for six years. He owns a holiday home in France and two student lets in Scotland, which “are fully managed, require little input, provide a healthy yield and give us valuable exposure to our home property market”.
The holiday bolthole in France is an investment in his family's happiness. "The French mortgage system is favourable, we have fixed a low monthly payment for the lifetime of the mortgage,” he says.
Mr Barber, who writes expat finance blog Buildingwealthwisely.com, says property yields are well above inflation and generate a positive cash flow. “This gives us a margin of safety, even if running costs or taxes increase, and we plan to hold ours for as long as we are expats.”
However, he would not recommend new investors start with property. “I would start with more liquid assets which are easier to drip-feed money into, such as stocks and shares, then invest in property later,” he advises.
Invested in: UK
Chris Battle, who runs The Property Hub Meetup in Dubai, says property and shares have one thing in common. "You must treat both as long-term investments — a minimum five years with shares, 10 years with property and ideally a lot longer for both.”
Mr Battle owns 10 flats in total — three in each of London, Ipswich and Bradford and one in Norwich. He says that although buying property is more expensive and complicated, it can be worth it in the long run. “It took me nine months to buy my first investment flat, but this is not such a big deal as I plan to own it for decades,” Mr Battle says.
Shares and property deliver similar long-term returns, but the big advantage of property is that you can borrow to invest and “leveraging" amplifies your returns.
Say you want to buy $100,000 (Dh367,290) worth of shares. To do that, you need to have $100,000. “But for $100,000 of property, you may only need $25,000 as a deposit, and can borrow the remaining $75,000,” Mr Battle explains.
If both investments then increase by $5,000, the shareholder has made a 5 per cent return on their $100,000 stake, but the property investor has made a 20 per cent return on $25,000. "Nobody will lend you $100,000 to invest in shares, so leverage isn’t possible.”
Of course, you have to pay interest on that $75,000, although that is less of a burden in today's low interest rate world. You also have to repay the original sum borrowed, but with an interest-only mortgage the burden may be less than you think, Mr Battle argues.
“Mortgage terms typically run for 25 years, and by then your debt will be worth much lower in real terms,” he says.
Property can offer a more durable income in retirement than stocks and funds. “If the stock market crashes, that could eat into your pot's value and the amount you can withdraw, whereas a portfolio of properties could generate, say, 4 per cent a year, and you never have to touch the capital value of your property,” Mr Battle says.
While nobody likes the idea of being called by a tenant at 3am complaining of a leak or other disaster, he says: “In reality, how often does that happen? Also if you have an agent, they can call them instead.”
Property and shares is not an either/or proposition. “A diversified portfolio has room for both,” Mr Battle says.
Updated: October 29, 2019 03:27 PM