Buying v Renting

Wednesday, October 8, 2014

There comes a moment in many an expat’s life when you realise the UAE really is home - and will be for many years to come. And with that comes the realisation that you’ve also spent hundreds of thousands of Dirhams renting, when you could have owned your own home all along.

It’s a realisation Sam Wani hears about every day. As General Manager of Independent Finance, a Dubai based mortgage advisory and Better Homes finance partner, Sam specialises in helping expats invest in their own homes.


‘Believe it or not, the average time an expat spends living in the UAE is actually 11.2 years. It’s longer than you think. And the average rent in Dubai is 120,000 AED. So even over a period of just 6 years you’re likely to spend more than 720,000 AED in rent’, he said.

Cut your biggest expense by 40% overnight

Rent is most expats’ biggest single expense, and, as Sam says, is unnecessarily wasted money. Sam has calculated that the average property price in Dubai for a two bedroom apartment is 1.5 million AED and that a monthly repayment would be around 6,000 AED. When you consider that this figure is just 60% of your equivalent monthly rent cheque, taking the next step and buying would make perfect sense.

‘The problem is buying a home is the single biggest decision we’ll ever make, so people delay it. And because there’s a perception in Dubai that you’re never permanent, it naturally delays the decision even further. But all that changes when you start to see the years add up’, he said.

Patience is the key to getting started

Once you’ve decided it’s time, then for most expats the challenge is in finding the initial 25% minimum deposit. To tackle this, Sam recommends thinking long term.

‘A typical double income household in Dubai brings in around 30 to 35,000 AED per month with living expenses of around 20,000 AED. If you save the 10 - 15,000 AED difference every month you’ll be ready to buy in around 3 ½ years,’ he said.

Until recently, patience and timing has always worked against end users, who were too slow to keep pace with flippers. With deposits to gather and mortgages to arrange, they’d invariably be beaten to the punch by cash investors.

‘Many cash investors understood prices would spike. They’d buy and sell in six months and make a quick 10% - with 2% going to the broker and 2% to the Land Department for a quick 6% net profit’, he said.

The days of flipping are over

However, Sam believes the Dubai property market has now entered a new cycle, which will be dominated by end users. Two government initiatives have now changed the playing field to favour end users, according to Sam. First land department transaction fees were doubled to 4%, effectively penalising short term buy and flip investors, while the Central Bank issued a 75% LVR (loan to value ratio) mortgage cap for expats and 80% for Emiratis.

These initiatives have flushed out short term investors by preventing them from over-leveraging and by eroding quick returns with additional transaction costs.

Now banks have now begun to see greater opportunity in mortgage lending. Inspired by a more stable market, the number of mortgage lenders is steadily growing. By 2015 there may be as many as 40 lenders in the market, offering a wider and more sophisticated range of products, like interest only loans, multiple owner mortgages and offset mortgage products (where savings reserves accumulate interest to pay down your mortgage).

If you’re ready to get started, Sam has a blueprint for success that can work for you.

Step 1 - Get the ownership structure right

Sam recommends taking legal advice, however drawing up a will registered in both your home country and the UAE is the first step to ensure the safety of your assets according to Sharia law. Ideally, you’d buy using an offshore company structure and own the property through a trust to manage any inheritance tax in your home country. UAE banks are accustomed to this structure and will lend to offshore companies.

Step 2 – It’s OK to think big, but start small

Only buy what you know you can afford and aim to build equity quickly. If you have to buy in a newer area, make sure the location is not too remote, amenities like schools and medical centres are established and are good quality and you’re close to transport. There are bargains to be found near the new airport and around DIP and Silicon Oasis.

As you build equity here, you can then look to upgrade. Sam says the average family will move home three times.

Step 3 – Have a Plan B in place

In the event you leave Dubai you can sell or alternatively list your apartment for rental.

Sam says renting your property will only become easier as Dubai’s population is growing steadily at 4.9% annually while new stock is rising by only 3.7%, creating more demand than supply.

In fact, leading up to 2020, there may be a shortfall of around 750,000 units, according to recent Merrill Lynch and Jones La Salle reports.

Step 4 – Realise the power of leverage

‘After the 2008 crash, prices returned to their pre-crash values in just five years. Growth is expected to remain steady at 5% now with the change in market dynamics’, he said.

Back to Sam’s original calculations, a new home buyer would need to invest around 400,000 AED to get started, but the gains are leveraged.

‘We need to remember that we’re seeing capital appreciation on the entire 1.5 million AED value and given a modest 5% p/annum rise in value the buyer would see a 150% return on investment in six years.’ Compare that to a 700,000 AED loss in rent and it’s easy to see why buying makes sense.

If you’re ready to enter the property market, then Better Homes can help. Call us +971 600 52 2233 to find the perfect home at the right price in the best locations around the UAE. And while you’re at it, drop Sam and his team a line at Independent Finance on 04 381 9314 to ensure you’ve found the best financial deal to match.

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