x Abu Dhabi, UAEThursday 20 July 2017

The intelligent property investor does not speculate

The final analysis Property booms and crashes are nothing new, and property markets across the developed world are by their very nature cyclical, experiencing peaks and troughs over time.

Before diving into any property market, you should be comfortable with the risk profile of your investment.
Before diving into any property market, you should be comfortable with the risk profile of your investment.

Property booms and crashes are nothing new, and property markets across the developed world are by their very nature cyclical, experiencing peaks and troughs over time to lesser and greater extents. We now have an opportunity to learn from the downturn in the UAE and focus on sustainable property development. A more mature and long-term approach to our market will yield opportunities and help protect the sector from further shocks.

For those with international property experience, it was clear by 2008 that the local market was in danger of overheating, and what followed is widely accepted as a property cycle with falling prices. However, what was not as expected was the speed and depth of the correction, and it surprised even UAE's most seasoned and conservative property professionals when it hit. Why did the market fall so rapidly over such a short period of time? Was it because the UAE is considered an emerging/frontier market? Was it the fault of the global economic crisis? Yes, partly. Was lack of sufficient liquidity to blame? All of these issues played a role. But the single most important factor was rampant speculation. That is what drove prices so high over such a short period of time, and when the bubble burst it was largely caused by ill-informed and unsophisticated speculators exiting the market in droves.

There are fundamental differences between property investment and speculation. Had the UAE market been underpinned by solid and equitable property investment the story may have been much different, as was the case in more mature markets, many of which have experienced downturns of less severity. Markets that are driven by well-informed investors are still subject to cyclical ups and downs, but they generally experience smaller peaks and troughs, from which they usually recover much more rapidly.

So if your goal is making wise decisions in the property market, I'd like to recommend the following. * Have an in-depth and detailed understanding of the economy and property market that you are entering. Pay special attention to population growth predictions and GDP forecasts. * Make sure you understand the supply and demand formula; basically, are there too many vacant units? * Have an understanding of the sector you are entering and where your desired investment sits in that market. This includes being aware of demographics; for example, does it make more sense to purchase a studio or a 5-bedroom villa?

* It is a wise idea to have your mortgage approved and in hand before you begin looking; in addition, do your legal due diligence, including consulting a property lawyer. * If you are planning to let out the property, get a good handle on your expected rental returns and capital growth potential. * You should be comfortable with the risk profile of your property investment, and it should fit with the rest of your portfolio. Risky assets should be moderated with safer products, such as bonds.

* It is prudent to have an understanding - or at least an informed opinion - about where we are in the property cycle before you take the plunge. As with the stock market, the goal is to buy low and sell high. * If you are going to invest in multiple properties, make sure to diversify across as many of the market's sectors as you can. * When going over your financial spreadsheet, come up with a debt-to-equity ratio and stick to it.

* Downturns, as noted above, are a part of life. Expect one, or more, during your investment period and plan accordingly. * Finally, have an exit strategy. How long do you plan to hold your investment? By its very nature, property is fairly illiquid and lends itself to medium- and long-term investment strategies, not speculation. The UAE property market is going to face a difficult year or two, but those who take a patient, informed and educated approach could see some nice returns on their investments, if they buy with care to begin with.

Steven Morgan, who is based in Dubai, is the UAE head of Cluttons Middle East