One of the main objectives of any investment is to make a profit, stable or one-time. You can benefit from playing on the stock exchange, investing in startups or acquiring liquid real estate. In the latter case, it is important to make sure in advance of the potential profitability of the project and that the object will be in demand.
The sales of property in Dubai in 2022 has reached the highest levels. Thus, in the first quarter, the emirate sold 76.6% more apartments, 56.1% more villas and 124.2% more premises under construction than a year ago. Many of these acquisitions are considered by their owners as a profitable investment: the property can be rented or resold at a higher price. You can find out why and how to calculate the profitability of a future asset, which areas of the emirate are the most profitable and how to successfully transfer living space to another person, you can learn from this article.
- Return on investment (ROI) in real estate in Dubai
- Profitability of real estate rent
- One Percent Rule
- Return on investment after resale property in Dubai nunc.
- Profitability of investments in commercial real estate
Return on investment (ROI) in real estate in Dubai
A home or office, regardless of size, purpose, value or prestige, can act as an asset. Property can be rented out or resold for profit, as well as “freeze” a certain amount with its help, thereby securing funds from volatility.
The profitability of real estate is calculated according to the ROI scheme. This is an abbreviation of the English phrase Return on Investment, which means “return on investment.” In other words, thanks to this formula, you can find out how much profit you will receive in exchange for your investment. Usually this indicator is expressed as a percentage of the value of the asset. With this data, the investor can decide whether he is interested in this operation or not.
The basic way to calculate any investment for a certain period is as follows:
A (Income from investments at the end of the period)
B (Volume of initial investments) B (Amount of initial investment)
The result obtained must be multiplied by 100 to obtain the result as a percentage. For example, suppose the total investment was AED 250K ($68K, ¥458.4K) and the income was AED 300K ($81.6K, ¥550.1K) . By counting, it turns out that the payback will be 20%.
Investing in real estate, like any other, can also be profitable or not. Those who are interested in a return on investment and receiving revenue take into account the profitability of this step – how soon they can reach the break-even point and start making money. These data are calculated in a slightly different way. If we are talking about renting out the property, the formula will be as follows:
A1 (Annual Rent) – B1 (Property Ownership Costs)
C1 Property value X 100.
Let’s say you bought an apartment worth AED 400,000 ($108,900, ¥733,500). The rent per month is AED 7.5 thousand ($2.04 thousand, ¥13.7 thousand), that is, AED 90 thousand ($24.5 thousand, ¥165 thousand) per year. The amount of related expenses is about 36 thousand AED (2.04 thousand $, 13.7 thousand ¥) per year.
The cost of a dwelling (or commercial unit) is made up of:
- Directly its prices;
- State duty;
- Expenses for expert appraisal of property and fee for its implementation;
- Payment for legal and notary services;
- Mortgage deposit and fees (if the purchase was made using credit funds);
- Repair expenses, etc. The list of expenses includes:
- Monthly mortgage payment (if any);
- Repair and maintenance of the house;
- Land rent and maintenance costs of the building and grounds;
- Rental agency commissions (if paid by the owner);
- Utility bills paid by the landlord;
- Municipal tax;
- Losses during periods of idle housing, etc.
Profitability of real estate rent Buying a home with a view to renting it out is a profitable investment. In Dubai, this process is put on stream – in the city, which is in demand among tourists and hired workers, the rental housing market operates as a separate line of business. According to the Dubai Land Department (DLD) , in the first quarter of 2022, the emirate registered the largest number of leases in a quarter of the year – 160,530. Of these, 51.9% were new, and 48.1 were renewed. This is 4% more than the total volume of contracts compared to the fourth quarter of 2021. Contracts for a year in the first quarter amounted to 79.95%, and contracts for a different period of time – 20.05%. One-bedroom apartments were the most popular type of property, followed by two-bedroom apartments in terms of demand. The most demanded options for villas and townhouses were projects in the configuration with three bedrooms, houses with four bedrooms were rented a little less actively. The areas with the highest number of apartments rented in the first three months of the year were Dubai Marina, Downtown Dubai, Business Bay, Jumeirah Village Circle and Jumeirah Lake Towers. Dubai Hills Estate, Jumeirah, The Springs, Al Barsha and Arabian Ranches were the leaders in demand for mansions. The average cost of housing and economic efficiency of these areas are as follows: Neighbourhood Property price (AED) ROI Dubai Marina 1 664 256 6,11% Downtown Dubai 1 089 570 5,42% Business Bay 1 844 904 5,31% Jumeirah Village Circle 828 157 (apartment) 2 128 294 (villa) 6,3% 6,2% Jumeirah Lake Towers 838 000 6,7% Dubai Hills Estate 2 002 865 (apartment) 3 630 055 (villa) 4,8% 4,48% Jumeirah 2 500 000 (apartment) 6 473 000 (villa) 4,8% 2,9% The Springs 2 181 000 5,2% Al Barsha 804 666 (apartment) 8 300 000 (villa) 5,6% 3,05% Arabian Ranches 3 753 800 4,86% The most profitable areas as of May 2022 are: Neighbourhood Property price (AED) ROI Discovery Gardens 347 723 8,87% International City 281 025 8,84% Liwan 393 076 8,52%
It should be borne in mind that the profitability of long-term and short-term rental property may differ. For example, a long-term contract in the emirate can bring the owner about 4% -7% per annum. A short-term lease of an interesting object in a popular location can reach a yield of 11% -13% per year, which means that in this case it is possible to make up for the acquisition costs in eight to ten years. Under the condition of a long-term lease, it will be possible to come to break-even in 14-20 years.
If the project you are interested in is under construction, and it is impossible to find out its ROI directly, you should look in the same area for housing that is similar in functionality and prestige and make inquiries about it. Data on the popularity of this property, its profitability and regularity of occupancy will give a rough picture of how a potential asset that is still being built will behave.
According to Ax Capital experts, today it is almost impossible to successfully rent out housing for a short-term lease if the location is far from the key points of the city and infrastructure. Most of those who come to Dubai for the purpose of tourism are primarily interested in sights and beach holidays. In addition, it is worth considering the transport accessibility of the building and the area as a whole.
One Percent Rule
The one percent rule is a general rule of thumb for those who invest in a property to let out. This formula helps to narrow down the list of options and make a choice faster.
The rule is that when considering options, you accept 1% of the value of the future purchase as a monthly rent. This algorithm is not unconditionally working and applied, but other things being equal, it allows you to highlight the main thing – the benefit. Critics of this theory argue that this method of analysis does not take into account such inputs as the quality and condition of housing, so the result will not be objective. That is, the one percent rule should probably only be used to quickly select from a large number of investment opportunities, but it should not be used as the only way to calculate.
Return on investment after resale property in Dubai
Another opportunity to capitalize on residential and commercial units is resale. There are no restrictions on this issue: you can assign both finished property and that which is at the off-plan stage – that is, at the construction stage. In the second case, it is not necessary to wait for the completion of the project: according to the individual conditions of each developer, the property can be repurchased when the previous owner has contributed a certain amount. For example, for some developers this threshold can be as low as 20% to 40% of the cost. When buying an object under construction for the purpose of subsequent sale, the investor always wins – the profitability of this investment increases every day, and with a successful choice of the zone, it will continue to grow even after the construction is completed.
The liquidity of a particular unit will depend on a number of factors: for example, location, condition of the premises and building, infrastructure development, proximity to key facilities, the presence of a beautiful view from the window, layout, footage, etc.
Ax Capital agency experts note that the speed and ease of sale also depends on the owner’s appetites. If the seller is satisfied with the average market price, the process will take one to two months. When selling property at a higher price than the market as a whole, the process will take longer, at a lower price it will be possible to conclude a deal as quickly as possible. In addition, if the object itself is in demand and interesting, its liquidity will grow. For example, one of the few studio apartments in a building that houses a three-bedroom prime apartment has the potential to have higher liquidity.
For property for resale, ROI can also be calculated. The simplified formula would be:
A2 (Net profit on sale) = B2 (Total investment: Estimated sale price – costs) B2 X 100
Let’s say you are going to buy a house for 400 thousand AED (108.9 thousand dollars, 733.5 thousand ¥). Over time, you expect to receive 500 thousand AED (136.1 thousand dollars, 916.9 thousand ¥) on resale. You plan to invest 50 thousand AED (108.9 thousand $, 733.5 thousand ¥) in repairs. So your estimated cost will total AED 450k ($122.5k, ¥825.2k). The return on investment will be 11.1%. Profitability of investments in commercial real estate
In order to generate income, you can also purchase commercial premises. This step should be assessed as the profitability of buying a business – profitability will directly depend on who you rent this space to.
The average price of commercial premises in Dubai today is 800 thousand AED (217.8 thousand dollars, 1.46 million ¥). In the first four months of 2022, transaction volumes in this area remained strong, reaching AED 506 million ($137.7 million, ¥927.9 million) in April, representing a 128.2% year-on-year growth. The total number of contracts was 228.
In the first quarter 2022, the number of concluded contracts for the sale of commercial premises amounted to 749, only in March there were 308 of them. This three-month total was up 48.3% from a year earlier. The combined value of the acquisitions was AED 1.1 billion ($299.5 million, ¥2.01 billion). The results of the first months of 2022 have already exceeded the result of the previous one by 48.32% in terms of the number of transactions and by 87.62% in terms of volume. This is a sign that the city has fully recovered from the pandemic and is actively developing business.
ROI for commercial premises is calculated in the same way as for residential premises. The only difference is that when renting out, the rental rate can be progressive. For example, an office or a retail outlet can be rented out with the condition of an annual increase in payment by 5%. Schematically it looks like this:
- In the first year – 150 thousand AED;
- In the second year – 157.5 thousand AED;
- In the third year – 165,375 AED, etc.
This will allow you to gradually increase profits and protect yourself from possible volatility. However, this is more of a precaution – the dirham exchange rate against the dollar has not changed since 1997.