As a long-time property investor and expert negotiator (I say that only because I’ve been doing it for 15 years), I didn’t get even one dirham off my last investment in Dubai, thanks to the World Expo 2020. Dubai is now what we call a seller’s market.
Even then, I had a smile on my face as I knew the fundamental reasons for my investment were solid, and despite what happens in the market in the short term, the long-term prospects look excellent in Dubai, Expo 2020 or not.
I’m a long-term investor and those who have heard me speak about investing know that I call short-term investors traders. Traders typically like to buy low and sell high. Don’t get me wrong, I’ve nothing against trading in property. It is just that, in my opinion, most investors use this strategy and play with money they can’t afford to lose, which, of course, could lead, and has led many, to tears.
We know that no market goes up constantly. There will always be highs and lows along the way. Trading is a good strategy when you can hold the property even if the market takes a dip. You need the financial strength to hold during down times, when rents could fall (especially in places such as Dubai), values drop and buyers disappear into thin air.
Positive cash flow
If you’re someone who doesn’t yet have the financial strength to hold and you’d like to take advantage of the Dubai market, then you must look at a different kind of investment. It’s an investment that provides what we call a positive cash flow — a property that earns more than your monthly expenses, including mortgage payment, on the property. Are those harder to find? Absolutely, yet when a property has a positive cash flow, it is less risky. Risk can never be zero, but as investors it’s our objective to get the risk as close to zero as possible and a property with a positive cash flow helps.
Dubai is one of the few markets in the world where positive cash flow is relatively easy to obtain. With low interest rates and higher yields, a net yield of 3-5 per cent is quite achievable. However, in markets with higher interest rates and lower yields (such as India), the prospect of achieving a positive cash flow from traditional investment is almost zero. In these markets, positive cash flow comes form nontraditional approaches such as commercial and retail.
It’s not about when
Analysis of UK average property prices over the past 30 years shows that it doesn’t really matter when you buy. Amazingly, if you bought at the top of the market or at the bottom of the market, over a 30-year period the variance in the final value is a mere 2.27 per cent. Averaging out the growth in both boom and down times comes to 6.3 per cent a year.
If you add leverage to that, then your 20 per cent deposit is averaging a return on investment of 25 per cent a year — and that’s in good and bad years. Talk about peace of mind!
But the good news doesn’t stop there. Skilful property investors find and invest in properties that are undervalued. You see, price and value are not the same thing in the property market. Just because a property is on the market for Dh3 million doesn’t mean it’s worth that. It could be a lot more or a lot less. Understanding how value is ascertained in any market is crucial knowledge that you must have before investing.
I found out long ago that every property has five prices. There is the property’s price on the market, what the seller really wants, what you think the property is worth, the price you agree to pay for the property and what the bank or surveyor says it’s worth.
When you can find a property with a significant difference between what you pay for it (the price) and what it’s really worth (the value), then you have yourself a great deal. Negotiating in that situation just makes a good deal better. Point of note here: never negotiate without knowing what the real market value is. If you do, that’s like me giving you 10 per cent off on a banana priced at Dh1,000. Not a good deal, although that does depend on how much you love bananas.
Finding out how to exactly value a property in a market is beyond the scope of this short article and something that is covered in workshops at the Institute of Real Estate and Property Investors (REAP Institute). However, armed with the right skills, you should be able to find property that is BMV or below market value in any market and anywhere in the world. If you find a really good one, then, like me, you’d be happy to invest without a single dirham, penny or cent off.
Going back to the UK for a moment, you might be thinking that Dubai is not the UK, and you’re right. However, as a major international city, Dubai is still way underpriced when compared to other major capital cities. Will Dubai improve over the long term? You bet. As an investor, have the vision: hold and prosper.
There is always a place for shortterm investing or trading in an investment portfolio. You just have to ensure you’re able to manage the risk.
So, what’s the outlook for Dubai? Just like in 2007, when I was asked the same question, my answer is: ”It’s going to crash and then boom and then crash and then boom.”
The only problem is that no one knows when. Will Expo 2020 keep the crash at bay? I’ve really no idea, and to be honest I don’t care that much if the market does crash or not, because long term the numbers look good — and I love cheap bananas.