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Property Investment for Expats in the United Arab Emirates

Submitted: December 2013

Unless you are a UAE national, you don’t automatically have the right to own real estate in the UAE. Each emirate has its own rules regarding foreign investment, and foreign ownership restrictions frequently apply. For example, Gulf Cooperation Council nationals may invest in Dubai property without restriction, but not in Abu Dhabi. As a general rule, foreign nationals can only invest in specific areas, wherein freehold land ownership may or may not be permitted for overseas investors.

Property round-trip transaction costs (that is, the cost of buying and selling), are moderately low by international standards (around 6%), but property rights are somewhat poorly protected, and UAE housing market statistics are quite hard to find.

The UAE does not impose any income or corporation taxes, which potentially justifies lower rental yields unless you are liable to tax in another country on your worldwide income for any reason. Such reasons generally include, but are not limited to:

  • you are a US citizen or green card holder
  • you have a partner and/or children staying in your home country
  • you are otherwise treated as resident in a country with no tax treaty with the UAE

Most buildings in the UAE have been constructed over the past few decades, but you never know how badly they will depreciate. Whenever you’re viewing a property, you should check if the builder was looking forward to building well or to building fast. As UAE builders don’t mind forcing their construction workers into subhuman conditions, if not slave labour, there is no reason why they would bother building well. If you think a building will likely depreciate quickly, price this accordingly.

If you really want to invest in property but you are not happy with the UAE property investment climate, you can still make your investments outside the UAE. If you do so, you should consider the tax implications though.

UAE housing market generally

Property prices in the UAE are not particularly expensive, except perhaps in locations wherein foreign ownership is permitted. If home prices in these latter zones are still cheap, one may expect them to rise further in the future as a result of intense foreign demand.

Prime Dubai property typically sells for more than $5,000 per sqm, whereas other properties in central Dubai (villas and flats) are worth between $3,500 and $5,000 per sqm. You can expect similar prices for flats in Abu Dhabi, but not for villas ($2,400 per sqm). This difference can probably be explained by tighter foreign ownership restrictions in Abu Dhabi.

It should be noted that real estate prices in the UAE have been very volatile over the past few years, with price variations frequently showing a two-digit percentage. The general trend is up, particularly because of inflation and a soaring number of immigrants. Nevertheless, there are strong boom-and-bust cycles within that uptrend.

After the 2008 peak, prices fell by up to 50% in just three years. Property prices have soared again since the 2011 trough, at a considerably higher pace than the long-term uptrend. Though prices can keep rising like that for a few more months, this boom side of the cycle should be monitored very carefully.

An assessment of the UAE housing market must include many macroeconomic factors, including:

  • Mortgage availability
  • Evolution of foreign ownership restrictions
  • Interest rate variations
  • Developments in connection with the chronic housing shortage
  • Demographic trends
  • Tax policy, and
  • Psychological factors

Mortgaging

Get your documentation right before applying for a mortgage, and do it early to avoid disappointment.

From a financial point of view, remember that:

  • your net borrowing costs include not only interest but also additional mortgage-related fees and taxes
  • interest rates may go up in the future, but they have some room to shrink further as well
  • homeownership costs are not solely about financing costs (you may to plan for other costs, such as maintenance).

Over the past few years, UAE policymakers have tightened mortgage availability in order to reduce demand for property. For more information on mortgages in the UAE, see ACCOMMODATION – Mortgages for Expats in the UAE.

Property taxes

Property taxes are levied by municipalities. These are the main taxes, if not the only taxes, that you are going to pay in the UAE.

The local property tax is generally paid only by landlords who rent out their property. Thus, it is in effect a tax on rental income. In all emirates but Abu Dhabi, the rate is 5% for residential property and 10% for commercial property. In Abu Dhabi, municipal landlord licence fees must be paid by landlords instead.

Higher property taxes mechanically shrink property values and rental yields. Prior to purchasing property, it is essential that you check how much property taxes you can expect to pay.

Letting your property

Gross rental yields can reasonably be expected to exceed 7%, both in Dubai and Abu Dhabi.  This may be much higher outside of major city centres (above 5%). Rents are likely to rise further in the future, at least to account for inflation, though they have shrunk strongly between 2008 and 2011 (by sometimes more than a third). In Dubai, rents have restarted to rise substantially in 2011. In Abu Dhabi, rents are in the process of bouncing back from the late 2012 bottom, but Abu Dhabi’s rent increases are much less violent than Dubai’s.

Do check the applicable landlord and tenant law prior to leasing property, as the rules may vary from one emirate to another. Most importantly, it can be very hard for a landlord to unilaterally terminate a tenancy without a good reason.

Rents can be freely agreed, but “caps” may apply on annual rent increases. These caps are no longer imposed in Abu Dhabi since late 2013, but they are still imposed in Dubai. Evicting a tenant can be a lengthy process (at least 10 months). Do not attempt to evict a tenant illegally, as illegal eviction may be a criminal offence.

Financial returns

From a financial point of view, the return on property investment comprises of:

  • net rental yields (or rent that you don’t pay), and
  • net capital gains

If rents are to rise (e.g. because of inflation), you are more likely to make capital gains over the long run, i.e. without taking into account medium-term fluctuations.

REIT investments

The UAE actively promotes itself as a financial centre, at least at Middle East level. For that reason, Dubai policymakers have introduced Real Estate Investment Trusts (REITs) in their legislation. It is now possible for international investors to get exposure to the UAE real estate market by buying an interest in a Dubai-based REIT.

Dubai-based REITs are normally supposed to invest in real estate situated in permitted areas only, such as the Dubai International Financial Centre (DIFC). They then distribute their returns to the investors.

Though REIT investments can provide some opportunities, caution is anyway required. In fact, the UAE financial system has yet to be improved, and many may be put off by the transaction costs. It’s probably part of the reasons why Middle East REITs are still not popular among international investors.

 

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