How long do expats need to stay for buying a home to make sense?
While many expats choose to rent in the UAE, it can take as little as a year for a property investment to be financially worthwhile
Many people say to me, “I’m only going to be here for a few years, surely buying doesn’t make sense?” Or they say, “I would buy if I knew I was going to be here for 10 years”.
But what is the real story here? People buy in their home countries all the time, a natural progression they do not really think about. They will argue they saved to get a deposit for “my own place” and bought because "I wanted a home to call my own".
In my previous columns, I explored why buying nearly halves your rent, and why buying property is a good investment even if you don’t know whether the market will go up or down. Those articles showed that in most circumstances property is a good buy.
While finding an apartment or villa takes time, and buying it costs money, how long do you have to hold onto the property for the purchase to make financial sense?
One approach, is not to look at a time horizon. If you buy here and need to leave, you can have your property managed by a real estate brokerage here or one of the banks. Your mortgage will be paid and the additional rent sent to you. But if you want to know the exact figures and the time horizon within which buying makes sense, then I have set them out below.
Let us take an example where you buy and sell a property for exactly the same value (many real estate agents will try and tell you that you will make huge capital appreciation gains but let's keep it to a base case scenario).
First, let's examine the costs involved in buying. In Abu Dhabi those costs are roughly 4 per cent of the value of the property made up of a 1 per cent transfer fee (legally now transfer fees are split between buyer and seller), 2 per cent broker fees and 1 per cent on other bits and pieces like administration and mortgage costs. In Dubai transfer fees are 4 per cent so if the buyer pays half - so 2 per cent plus 2 per cent broker fees and 1 per cent on other bits - that is a total cost of 5 per cent of the value of the property.
So how long does it take to make back that 4 to 5 per cent of the value of the property for you to “break even” and then start making money from your purchase?
Let us take the easy scenario where you buy in cash. The standard yield on a property in the UAE is about 6 per cent net (net meaning after service charges). So, for example, if you buy a property for Dh1 million, you would expect to make Dh60,000 per year of pure profit if it is an investment, or if you are living in it this is a Dh60,000 saving as you are not paying any rent. Your costs to buy this Dh1m property were 4-5 per cent or Dh40,000 to Dh50,000, so after one year if you sold the property at what you had bought it for you would have made a profit of Dh10,000 to Dh20,000.
So it makes sense to buy even if you are only here for less than one year.
Now let’s use a slightly more complicated scenario where you use a mortgage to finance the purchase. Taking the same property as above, we will assume that you have a deposit of 25 per cent and the rest is financed at 4 per cent interest over 25 years.
The bank payment will be Dh48,000 per year (you get to pay this monthly, so just as if you were paying rent in 12 cheques). Approximately one third of this payment or Dh18,000 will be a principal repayment (so taken off the loan) and Dh30,000 will be pure interest for the bank. You can see this by using an amortisation calculator. So, as above, you will make Dh60,000 in savings for the rent but Dh30,000 of that will be lost in interest charges (the Dh18,000 will not be lost as it will be removed from the loan amount and realised upon sale). So your notional profit will be Dh30,000, which means you will need to hold onto your property for just over one year to be able to break even. Hold it any longer and you start making money.
And when you buy, you only pay interest charges to the bank monthly, so there are no huge rent cheques.
Therefore, before you dismiss buying the UAE, it really is worth doing the numbers.
Ben Crompton is the managing director of Crompton Partners Estate Agents
Updated: July 16, 2018 01:52 PM