"Why do you still recommend Dubai property as an investment?" asked an old friend worn out by an onerous refurbishment project and annoyed at the recent fall of rents in the city.
"Don’t you think people should consider emerging market bonds or shares instead? That’s true passive investing and you don’t have to do all this running around after tenants." Her point is well made. Rental yields on many villas hover around five per cent in Dubai, and even the best-yielding, one-bedroom apartment will struggle to make it to seven per cent.
Landlords have also seen the capital value of their units fall in value by 25-30 per cent in the past three years since the government acted to prick what looked like another housing bubble in formation back at the end of 2013.
I suppose if the revival in bond yields seen since the arrival of Donald Trump in the White House continues then there could be a case for looking at bonds, and indeed some of the Dubai banks are currently touting the higher yields available on emerging-market debt, albeit nothing too fruity. My main quibble with bonds and shares as a superior investment to property is that you expose yourself to a very large capital risk to the downside in return for, well, not very much return.
Bond yields shift in reverse to capital values. Thus the benchmark 10-year US treasury, whose yield is up from 1.6 per cent to about 2.3 per cent since Mr Trump’s accession, is down by some 30 per cent in capital value.
Imagine if you had rushed into bonds back then. Moreover, the US Federal Reserve’s stated policy is to hike interest rates higher this year, and that can only be negative for bond prices. At least, that is what the former "Bond King" Bill Gross says. For shares the position is a bit different, and arguably worse, because we have just hit all-time highs again after an eight-year bull market.
What goes up must come down eventually. The higher you go the harder you fall. The stock market is overdue for a violent correction or crash, although that is not to say it could not climb a little higher first.
Again you have to look at the downside risk in stocks and note that hey, it looks an awful lot bigger than the upside.
Dubai property by contrast looks to be at the bottom of a classic three-year real estate down cycle. As I have remarked in this column before, this summer is likely the bottom, as deals dry up in the heat when many potential buyers are overseas.
But you have two key Dubai market drivers in place: a falling US dollar and rising oil price. Who knows? A stock market correction might also lower interest rates and frighten investors out of equities and into property.
However, it is only human nature that people feel most comfortable investing in markets that are close to the top, even if they are the last buyer in that market, than dipping their toes into bargain-hunting in markets that have recently fallen.
In the context of Dubai residential property I would seek out districts where price recoveries from the global financial crisis have not been good but investment in infrastructure is high; or districts with the better-quality villas where oversupply is now a temporary issue.
The apartments on the trunk of the Palm Jumeirah are one example of value-for-money, with many priced at not much more than post-crisis prices. But at the same time, about US$3 billion is being invested in projects on the Palm that will soon be completed, raising its profile, including the upmarket Nakheel Mall and The Pointe waterfront.
For villas I would look at Jumeirah Park, where the Nova villas are dumping more product onto the market than it can absorb. That leaves these high-spec and well-built villas something of a bargain, with a superb central location behind the Jumeirah Lake Towers.
Note that my picks are completed and not off-plan property. I am weary of anything that smacks of flipping property after watching the implosion of the last Dubai bubble in 2009. The rental yield of a villa or apartment yet to be delivered is zero, and negative really if you have to keep your money tied up in it for much longer than originally promised.
One final reason to pick real estate over stocks and bonds is so obvious people often forget it – the leverage of a mortgage. Many investors use a mortgage to buy property, and that means you invest more money upfront than you do saving up in bonds and stocks, so the compounded returns are always going to be that much higher.
Peter Cooper has been writing about property in the Gulf for two decades
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