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Buy Instead of Rent in Dubai…Here’s Why

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Dubai, when compared to London, New York, Hong Kong, Paris, Mumbai, Singapore and Sydney has been rated as the most ‘affordable’ city to purchase a property. On the flip side of it, Dubai has also taken the crown of being the most expensive place to rent a property. Inspite of several reports coming in that 2016 will see a decline in rental prices, Dubai will come nowhere close to these cities in terms of rental yields.    Villa rental prices fell by between 2 per cent and 5 per cent in 2015, while prime apartment in communities, such as DIFC and Jumeirah Beach Residence, experienced the highest rental falls of around four per cent.   After a strong growth in 2013 and 2014, 2015 saw the decline of property prices in Dubai but the rental decline did not match the pace of the fall in property prices, which directly resulted in the rental yields going up. This trend is expected to continue in 2016, atleast until the last quarter. All this has resulted in more investors purchasing properties in Dubai to take benefit of the high rental yield and more tenants deciding to purchase their own homes.

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The bulk of expats living in the U.A.E. fall in the mid income sector, i.e. earning between AED 15,000-AED 25,000 p.m. . Unfortunately, this bulk of the population, till recently, did not have much choice in selecting a place to call home. It was either the lower mid segment places like International City or the premium areas like Dubai Marina, Downtown, etc. to choose from.

Keeping this untapped segment of the general population in mind, many developers started developing projects and the mid segment was finally given multiple choices to select properties based on their budget and desired locations. The banks are following suit and are now offering low fixed interest rates, ensuring the monthly installments continue to remain same over a number of years.

The downward pressure on the residential market which was at it’s peak in 2015 and it seems will continue through till the last quarter of 2016, is easing. The lifting of the sanctions in Iran and the uncertainty of other global real estate markets is helping to relieve some of that pressure. However, capital appreciation on properties is not expected in the midterm, due to weakened oil prices, the supply pipeline and ofcourse the strengthening dirham against a range of traditional investor economies.

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The Dubai government has taken positive steps to bolster the economy by ensuring the infrastructure projects are expedited and ‘Brand Dubai’ becomes a global name. The EXPO 2020 and the huge infrastructure work happening around the area is one such example.

Dubai developers have also realized that it would not be in their best interest to flood the market with supply on a weakened demand. This has resulted in only 8000 units being delivered in 2015 instead of the expected 25,000. We expect another 10,000 units to be delivered this year instead of the expected 30,000

All this has resulted in investors and end users sitting on the sidelines and waiting for the right balance between the asking price and the selling price, beginning to purchase the targeted property and seeking out mortgage options.

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Rent or Buy Property In Dubai- The Big Question

The Price to Rent ratio is considered as the International benchmark in many of the countries to indicate the direction you should be taking when making this important decision.

The price to rent ratio is a calculation where the average price of the property you are living in or intend to buy divided is divided by the average yearly rental.

(Price-to-rent ratio = Average list price / Average Annual Rent)

Trulia, the U.S. based marketplace has provided the following thresholds:

  • Price-to-rent ratio of 1 to 15 = much better to buy than rent
  • Price-to-rent ratio of 16 to 20 = typically better the rent than buy
  • Price-to-rent ratio of 21 or more = much better to rent than buy

Based on these ratios, let’s take the following examples:

Discovery Gardens

The average price for a 1 BR apartment stands at AED 700,000, while the average rent is AED 65,000 per annum (or AED 5000 per month).

The price-to-rent ratio is 10.76.

If purchasing the same unit:

Downpayment: AED 175,000

Monthly Installments: AED 2,650 (approx.)

Business Bay

The average price for a 1 BR unit is AED1.2 million with average rent at AED 90,000 per annum (or AED 7500 per month)
The price-to-rent ratio is 13.33.

If purchasing the same unit:

Downpayment: AED 300,000

Monthly Installments: AED 4,500 (approx.)

Jumeirah Lakes Towers has a Price-to-rent ration of 14.4.

These examples will run true for all mid segment type of housing in Dubai and in most cases the above examples clearly indicate that the cost of owning a home is less than the cost of renting a similar property.

The initial required capital, however, is high with the central bank’s cap of atleast 25% down payment and other property related charges of upto 6.5% of the total value of the property.

Inspite of this, the savings by paying a lesser amount on a monthly basis and that too towards your own property along with the satisfaction of owning your own home, more then makes up for the initial hurdle.

The International Monetary Fund (IMF) recently reported that the price-to-rent ratios in Dubai have declined since mid-2014, indicating a healthy correction in the housing market. This also means that the cost of owning a property in Dubai is less than the cost of renting the same unit.