Buy or rent? For some would-be homeowners, legal issues - not financial ones - stop them from taking the plunge.
Great homes look for patient owners
One recent morning at LLJ Property, a firm based in Abu Dhabi, there were no pinstripe-suited investors perusing the brochures bursting with property listings, and no spouses on mobiles whispering to their partners about floor plans and down payments. The reception area was empty. Yet to get past the frosted glass doors and into the inner sanctum of broker offices, the firm's managing director was required to place her thumb on a biometric reader that authenticated her fingerprint - a high-tech relic from the late, great property boom.
"Those were to keep the swarms of buyers out of our offices," said Linda Loughnane, who founded the firm in 2005. "We don't need them so much anymore." The hordes of speculators have gone, but Ms Loughnane is not complaining. In fact, she says business is steady and almost - believe it or not - "normal". What that means, in large part, is that potential buyers come and go at a leisurely pace, unconcerned about being outbid by a foreign investor with a blank check snapping up as many units as he can. A majority of her clients these days are driven by a fundamental calculation - does it make more sense to buy or rent?
For those new to the UAE, that may seem like an obvious question to ask, but it is actually a sea change in the way residents approach their property decisions. In previous years "the market was driven by a very, very different dynamic", says Johnny Robson, a senior manager for corporate investment with Sorouh Real Estate. The Dubai, and later Abu Dhabi, property markets were opened to foreign investment at a time when the credit bubble was fully inflated and attracted those with fat wallets (or credit lines) who actually had no intention of living here. Today, the market is dominated by "end users" - those who live here and want to make the smartest decision about how to allocate their dirhams, whether those residents are Emiratis or expatriates settling down for the medium to long term.
With thousands of units expected to be delivered in Abu Dhabi this summer, a huge oversupply of apartments in Dubai and mortgage rates creeping lower "the maths is starting to add up" in favour of buyers, Ms Loughnane says. As a sort of back-of-the-envelope calculation, advisers in mature property markets recommend looking at the ratio of what it costs to buy compared to the annual cost of renting a similar property. A ratio of 20 to 1 is often considered an informal dividing line - a ratio above 20 indicates sales prices remain too high, while a ratio below 20 means the case for buying is more compelling (some more conservative advisers prefer 15 as a better benchmark). However, it's important to keep in mind that ratios will vary widely based on neighbourhoods and projects. In any case, based on data provided by LLJ Property, the ratio in Dubai, where rents have fallen sharply in the last year, is currently around 12. Meanwhile, the ratio in Abu Dhabi is currently around nine - not surprising, given that Abu Dhabi rents are among the most expensive in the world. Al Raha is just one of a handful of Abu Dhabi developments set to be completed this year. Among the others are a collection of projects on Al Reem Island, the island just east of Abu Dhabi Mall that is the emirate's most centrally located free zone, meaning it is open to foreign investment. The projects there include Tamouh's Marina Square and Sorouh's Sun and Sky Towers. At Abu Dhabi Cityscape last week, Sorouh Real Estate was distributing brochures stating that buyers in the developer's new Sun Tower would pay as little as Dh6,500 per month, thanks to a promotional 4.99 per cent mortgage offer provided through a partnership with Abu Dhabi Finance. The headline, "Why rent?" was aimed at those who consider making monthly payments to a landlord to be "dead money", says Mr Robson of Sorouh. The target market is expatriate Arabs who have lived in the area for a generation or more without the ability to own property. By contrast, Western expatriates tend to stay in the UAE for only around four to six years, and are thus less likely to make a sizeable property investment, Mr Robson says. Sorouh's research indicated that unlike speculators, who are interested in profiting off rapid price appreciation, end users are generally more attracted by securing low monthly payments. To that end, the company developed a spreadsheet showing the cost of buying in Sorouh's Sky Tower versus renting a comparable apartment near the Corniche. For example, Sorouh's cheapest two-bedroom units sell for slightly more than Dh2 million. With a 4.99 per cent mortgage and assuming a 15 per cent down payment, that results in a monthly payment of about Dh9,500. Based on market analysis from Landmark Advisory, a two-bedroom along the Corniche rents for about Dh220,000, or just more than Dh18,000 per month - almost double the cost of buying. There are multiple wild cards, however. For one, the mortgage rate is only fixed for two years. Mr Robson argues that mortgage rates are trending down and predicts "there won't be any kind of price shock" when the rates are reset, but he notes that is no guarantee. Indeed, in a country where fixed-rate mortgages are extremely rare, buyers would be well-served to always consider how fluctuations in interest rates would affect their monthly payments. And further, buyers here take on risks that are not present in more mature property markets. The truth is that despite the awesome scale of property development throughout the UAE, the market is just now entering its adolescent phase. Many would-be buyers, particularly expatriates, remain understandably wary of the flimsy legal framework in place to protect property owners. In Dubai, to name one example, shoppers are often deterred by tales of exorbitant service charges. The fees are charged according to the developer's discretion, and potential buyers understandably feel like they do not understand the total costs associated with being an owner. There are also questions about whether those who are not UAE citizens are required to fly home to renew their visas if they own property. "The prices have come down. That is good for buying, but for people like us it is still too much risk," says Ramachandran Raveendranath, a 10-year resident of Dubai who recently considered buying. "In any other part of the world, when you buy property you become part of that society. Here the rules are a bit different." There are signs that could be changing. In Abu Dhabi, the Department of Municipal Affairs has said it expects a new law governing property transactions to be passed by the end of the year. A similar measure, the so-called strata law, would go a long way to addressing some of the concerns in Dubai. That law was passed in November 2007 but the regulations have still not been finalised by the Dubai Land Department and the Real Estate Regulatory Authority. Until then, a large number of would-be buyers are content to stay on the sidelines. Neil Harrison, who is 31, was on the cusp of buying an apartment in Jumeirah Lake Towers (JLT) when the financial crisis struck in the fall of 2008. He was able to walk away from that deal unscathed, and he has been keeping an eye on the market ever since. "It definitely looks like more of a buyer's market. From what I can see, you do get a lot more for your money," he said. Mr Harrison, a copy writer for an advertising agency, said he could likely buy a similar apartment in JLT for about half what he was planning to pay two years ago. Still, when his latest rental agreement was up, he opted to rent a flat with friends in Dubai's Knowledge Village. He said he has heard too many nightmare stories of developers not meeting their obligations and buyers feeling like they had no legal recourse to recover their money. "I think they need to do a lot more to reassure people about their investment," Mr Harrison said. Another issue is loan availability. At least anecdotally, financing is more difficult to come by in Dubai at the moment. Laura Adams, sales and leasing officer with Dubai-based property firm of Better Homes, says most Dubai banks are reluctant to lend more than 60 per cent of the purchase price, essentially restricting the market to those with significant cash on hand. In fact, Ms Adams says most of her deals are completed entirely in cash. Nevertheless, she says buyer interest is gaining momentum. "There is a lot more movement and a lot more inquiries," Ms Adams says. Mortgages seem to be more accessible in Abu Dhabi at the moment. In addition to its 4.99 per cent offer to Sorouh buyers, Abu Dhabi Finance last month lowered its rates to 5.75 per cent for all first-time buyers, in an attempt to kick-start the market. Other banks, including HSBC and Standard Chartered, have dropped rates as well. That said, banks are not lending to just anyone - they will check closely to see that borrowers have the ability to make their monthly payments. Specifically, they want to lend to people who make a reasonable monthly salary but also do not carry other sizeable debts, such as car loans or credit card bills that could impact their ability to pay. Another factor to consider for those who are considering wading into the market is that most developers are refusing to lower prices significantly. In Abu Dhabi, for example, the average price per square foot is around Dh1,600, whereas it is closer to Dh1,300 in the secondary market. "The true value can be found in the secondary market these days," says Ms Loughnane. While developers can offer attractive financing deals, competitive mortgages are available in Abu Dhabi for qualified buyers, she adds. But while most observers agree that buying property is an increasingly compelling proposition, the key to convincing more shoppers to sign on the dotted line is clearing up the overall economic uncertainty. Consumers want to know that developers are financially sound and, perhaps more importantly, that their jobs in the Emirates are safe for years to come. Tony Wiseman, who works in the construction industry in Abu Dhabi but rents a villa in Dubai, considered purchasing an apartment but was unable to pull the trigger. "The way the market is at the moment, especially from an employment perspective, you never know how long you will be hanging on," Mr Wiseman says. email@example.com