| Picking property in emerging markets - Dubai |
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| Dubai has been getting a lot of attention of late, with many Irish investors looking to follow in David Beckham and Michael Owen's footsteps by purchasing in the Palm development (pictured) where prices for the final phase of three bedroom apartments start at €523,000. But investors should do their research before buying in an Arab country, and one way to get exposure to the market, without incurring the risks involved in purchasing, is by doing so through a property fund. |
The Dubai property market continues to boom due to a shortage of completed units and a projected surge in the population. Dubai’s construction and real estate boom is largely dependent on the anticipated rise in population levels. The Ministry of Economic Planning projects that the population of Dubai will grow to two million residents by 2010, from 1.2 million currently, placing pressure on the real estate market to accommodate the demand for housing.
 | | Dubai -Palm Resort |
Dubai’s present attractions for investors are many. Chief among these is that the market currently has premium levels ranging from 10 to30 per cent, with property yields of 8-10 per cent. Competition among lenders is also expected to bring the cost of borrowing down from an average of 6.5 per cent for a floating rate local mortgage, which will in turn put upward pressure on house prices.
Backing up the view that the market is set on an upward trajectory despite spreading international real estate weakness, Dubai based Amlak Finance, the largest Islamic finance company in the United Arab Emirates (UAE), has just launched a $75 million fund under the Islamic Shariah rules of Ijarah, to focus on investing in the region’s booming property sector.
Mohammed Ali Al Hashimi, chief executive of Amlak Finance, says the close-ended Amlak First Real Estate Fund would be an ideal vehicle for individuals or corporate investors who aim to achieve medium-term capital growth through investment in the Emirates’ robust real estate sector.
The term of the fund will be for three years, with a minimum projected Ijarah rate of return of six per cent. The fund, designed to appeal to all investors looking for capital growth with acceptable risk parameters, has a minimum subscription of $25,000.
Al Hashimi said the fund would allow investors to get their foot into Dubai’s property ladder and enable them to spread their exposure to wide variety of properties currently leased by Amlak.
‘The launch of this fund is testament to our confidence in the strength of the real estate sector in Dubai. There has been strong interest in property acquisition by individuals and corporations, and this has been fueled by Dubai’s vision to become the commercial and tourist hub for the region. We expect this upward trend to continue well into the future,’ Al Hashimi said.
Dubai has caught the eye of international and regional investors to such an extent that the modest increase in UAE domestic borrowing for investment in real estate last year has been more than offset by foreign interest. According to regional reports, Saudi Arabian investors are pouring capital into Dubai at an unprecedented rate. Last year alone, an estimated $7 billion of Saudi money was invested in Dubai, with a further $480 million winding up in the UAE stock exchange.
However, despite the attractions, there are some downsides. In particular, the new Dubai property market has been criticised for its lack of transparency and data which will only be properly addressed when the central land registry is operational for all transactions.
Also, directly related to the absence of a central registry is the fact that non-nationals can only hold freehold property via contracts with real estate development companies. However, real estate liberalisation initiatives are currently in progress and it is expected that a resolution to this problem will be found over the next year. Once this occurs, another drag on property prices will be removed, opening the way for further growth.
On the rental side, although yields are impressive, the overall position is that market yields have weakened over the past year but remain attractive to investors, particularly those with a requirement for regular, long term income.
Current yields do also still give some room for upside capital appreciation, although definite moves to eliminate the perceived additional risk of buying in Dubai - the absence of property laws and consequently expensive mortgage market, for example – will have to be in evidence soon to spur confidence. Optimists expect a property law in 2005, the pessimists worry that the UAE federal authorities will delay legislation. |
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| Article appeared in the March 2005 issue.
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