DID YOU KNOW...?

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In this context the SPA is not somewhere to get a massage and a facial; it's the Sale and Purchase Agreement. These are essentially the Terms and Conditions of your purchase, and special attention should be paid to the clauses within this document. A key component is the "Unit Specifications" sheet. 

Irrespective of promises from the developer, buyers should ensure all important features, floorplans and qualities of their unit(s) are clearly outlined in this document. Without such itemisation, there is often no recourse for buyers who had differing expectations to the final product that is delivered.

Top Tip: For popular projects, it is rare for the SPA to be varied, however for ultra luxury / bespoke properties, there is more scope for variation. If the developer you are investing with does not have much track record in the Dubai real estate market, buyers should insist on detailed provisions within the SPA.

Off plan projects involve an amount to be paid during construction; and amounts to be paid on completion. E.g. a 60/40 payment plan requires 60% paid over instalments during construction, and 40% on project completion/handover.

A common misunderstanding among investors is that they would be able to take out a mortgage on the property (e.g. a 70% mortgage) and recoup some of the cash used in the initial investment. However, typically UAE mortgage lenders would only provide a mortgage on the remaining payments to be made to the property developer. E.g. in the above example, lenders would only lend a maximum of 40%. This makes the payment plan so important, as if the majority of payments are during construction, the investor's cash will be tied up in that investment until the property is sold.

Top Tip: In some instances, you can release the equity by transferring the property to a family member / company, however the 4% DLD transfer charge will usually still be incurred.

With the Dubai property market experiencing a surge in recent years, some property valuations have more than doubled since Covid-19. With a such an acceleration in market values, mortgage lenders are cautious to protect themselves against any potential downturn in the future. As such, approved mortgage valuations are often lower than the market prices paid for properties and this can leave mortgage buyers having to fund a signficant cash shortfall.

For example, a mortgage buyer may set a budget of AED 6m purchase price based on their earnings. Ordinarily, they could expect to get a 70% loan from the lender as the property is over AED 5m. This would mean they would expect to contribute a down payment of AED 1.8m towards the property, with the bank providing AED 4.2m. However, if the buyer agrees to buy for AED 6m but the bank values the property at AED 5.5m, the maximum loan would be 70% of AED 5.5m = AED 3.85, leaving the buyer to pay the remaining AED 2.15m - an additional AED 350,000 to be funded somehow!

Top Tip: Mortgage buyers should have a clause within the SPA or as an addendum, indicating they will not forfeit the normal 10% deposit if the mortgage financing from the bank is not sufficient. Early valuations can also help to mitigate this risk.

The cost of labour is relatively cheap in Dubai, which means it is often effective to improve the ROI on your investment by enhancing the property. This is clearly easier to do with townhouses and villas, rather than apartments as you will not be able to modify the core structure of an apartment tower.

The valuation of a townhouse/villa is linked to the rental achievable, so it is important to make enhancements that objectively add value to a property such as an extension to increase the number of bedrooms / size of the property, or the addition of a private pool. While enhanced interior deisgn may improve the aesthetic of a property, beauty is in the eye of the beholder, and not all prospective buyers will value such enhancements to the same degree.

Top Tip: Adding enhancements such as a private pool can provide robust protection for investors in a market downturn, as these units will be remain highly sought after. Where two units in a community are identical with the exception of a private swimming pool, a tenant may be willing to pay between AED 30,000 - 50,000 on average, as a premium for the unit with a pool. Given that most investors would accept 7% as a healthy rental income return on investment, this increase in rent may represent a property value increase in the range of AED 425k - AED 715k.

One of the best attributes of the Dubai real estate market is the transparency, and availability of data regarding historical transactions. The DLD provide this information as an open source resource which prospective investors can utilise, and sites such as dxbinteract, present this in a user-friendly manner for consumers to query.

However, transactions can be misleading at times, as several of the largest transactions in the history of Dubai real estate have in fact been purchased by senior leaders of Dubai real estate companies; this doesn't mean that these transactions should be excluded from analysis but they should be considered with a hint of caution as there could be many motives behind such transactions - such headlines are great for marketing; and may have the effect of creating a new benchmark that moves market pricing. If the transaction happened to break down before completion, who would be the wiser?

Top Tip: Use a larger sample size when benchmarking prices of comparable units - this will reduce the impact of outliers. Try to understand the differences between comparable units to justify price differentials.

When assessing investments in the Dubai real estate market, it can be easy to forget about service charges. With villas and townhouses, service charges tend to be quite small in comparison to the rental value of the properties they relate to (service charges are usually less than 10% of annual rent).

However, with apartments service charges can be up to AED 30 per square foot in serviced apartments, often representing between 15 - 20% of the property's annual rent. If that hasn't been factored into investment analysis, that can turn an attractive investment into an investment that under-delivers. 

Another risk with service charges is that the community manager reviews costs at the end of each year and may elect to increase service charges in subsequent years.

Top Tip: Ensure a like for like comparison, reviewing net rental income after service charges, whether you plan to invest in an apartment, townhouse or villa.