In the last episode of #BetterInformed, we have examined the factors that are driving today’s property market. What’s behind this surprising increase in the number of sales transactions? Well, the reasons we have identified were namely the fact that people have started giving more attention to their homes, unprecedented affordability, which includes lower property prices, lower interest rates, and reduced down payments for first-time buyers.
Naturally, many are wondering if it is the right decision to sell a property in these market conditions. Numerous sellers are frozen in place, hedging their bets and hoping the situation improves in the coming months. However, as real estate brokers and advisors, it is not our place to force someone to sell their property, nor we are able to do something like that. A good broker will make sure to understand the client’s circumstances and advise them on their options, including options to sell or hold the property.
As most of us would agree, this is a buyer’s market. So, why would anyone sell now? Based on our experience in the market, we have identified 4 main reasons why people decide to sell a property in these and similar market conditions.
Firstly, it is evident that people will sell a property due to financial pressures. Unfortunately, many have been faced with financial burdens in recent months due to job losses, salary reductions, and other factors that resulted in the need to sell the property. Furthermore, we have worked with business owners liquidating their assets in order to divert the funds into their business during these challenging times.
Even though these distressed sellers are less prevalent in the market than most buyers seem to believe, it is so often this class of seller that dictates the market prices.
Sellers looking to trade up
This is a perfect time to upgrade your living arrangements. We already know – it’s a buyer’s market, which means it’s a good time to sell your smaller home in order to invest in a much bigger and better property. It’s always wise to make these types of transactions in a market like this.
If the cost of an apartment three years ago was 1 million AED and a villa was 3 million AED, today the price of both properties would be 20% lower. This means you would be able to sell your apartment for 800,000 AED with a loss of 200,000 AED. However, if you would decide to buy that same villa today at 2.4 million AED, you would have paid 600,000 AED less than 3 years ago.
So, what does it mean?
Well, trading up in this market would give you a net saving of 400,000 AED, compared to selling and buying in market conditions when the prices were higher. You would also benefit on any future capital gains on a larger villa rather than the smaller apartment.
Beneficial currency exchange rates
Currency is one of the compelling reasons why some sellers decide to sell a property today. If we look at the currency rates, we’ll notice that the UAE Dirham is pegged to a very strong US Dollar at the moment. Therefore, it’s a good time for many expats to convert the proceeds of the property sale into the local currency in their home country. If we just look at the Pound Sterling, Russian Ruble, and Indian Rupee – they are all trading around 20% lower against the UAE Dirham today than they were in 2015 which mitigates any 20% fall in prices a seller may have experienced.
It’s also worth noting that the US Dollar is known worldwide as safe-haven currency which actually strengthened as a result of the pandemic. However, as this global crisis eases over the coming months, we may see the US Dollar and the UAE Dirham weakening slightly and therefore reducing the currency benefit for those who have waited too long.
Selling to reinvest in better yielding properties
Finally, we are speaking to a number of investors looking to liquidate inadequate performing assets in order to reinvest in other properties at lower capital values. These investors are looking to put their money into assets that will generate better ROI and/or yield in the future.
Why would anyone do this? By selling and reinvesting, while taking advantage of low borrowing rates, the investor is able to spread the proceeds of the sale over multiple properties with a better net return. If you bought a property several years ago at 1,000,000 AED, it is highly probable that this property is now worth around 700,000 AED and that the rental prices have decreased over the past few years (from AED 60,000 to AED 40,000). This also means the returns on the property went down and reinvesting in a better performing asset makes much more sense. Just for instance, if you use the proceeds from the sale to purchase new properties, you would be able to make down payments on three properties at 700,000 AED with much better returns.