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The returns on buy-to-let property ‘no longer add up’

Residential property investment, as opposed to buying a home for your own use, no longer really stacks up in my view. The rental yields are generally too low for the large amount of capital at risk, and many hidden costs undermine your total rental return.

I am not just talking about UAE property here but generalising across the world, although I would not doubt that somewhere out there you can find an exception to this rule. Basically it is a matter of the price you pay, and if you can buy it cheaply then of course it still makes sense.

But you should probably sell immediately if you do, because holding this bargain will not be a good idea as this article explains.

The global regime of low interest rates deliberately forced upon us by central banks in the wake of the global financial crisis seven years ago has distorted investment returns in residential property the same as everything else.

People have been prepared to gradually pay higher and higher prices for lower and lower returns, or at least a rental income that has barely shifted over this period. At the same time many of the costs associated with property ownership have not stayed static.

They have been rising, whether that be the agent’s fees or the cost of getting a boiler fixed in the middle of the night. Indeed, sometimes it seems the agents are in league with the contractors pushing these charges up.

My poor old mother in the UK used to get a nice supplement to her pension from a multi-room house let out. But today when I look at the accounts it’s appalling how much goes on maintenance. The rent on the units has just not kept up with these rising payments and that’s partly because the tenants’ income has hardly budged.

True, the capital gain has been substantial over the past 15 years, and this is the profit that ought to be realised while it is still there. Once current low interest rates go, and that is what the Federal Reserve is planning for the world, even that will inevitably start to fall.

Buy-to-let investors really will get what I am saying today when house prices drop, and I don’t think house prices and interest rates have ever gone up at the same time.

There are special local factors in the UAE residential property rental markets that also ought to be considered. Dubai’s rent control system is very bad for property investors.

Eventually you are likely to get stuck with a tenant paying significantly less than the market rate that you cannot either get to vacate your property even after a year’s notice, nor force them to pay the true market value.

Who in their right mind would knowingly take on a liability like that? Investment yields on rental property barely cover mortgage costs and you risk the problems of a sitting tenant on a lower rent. I don’t think so.

Abu Dhabi has sensibly abandoned such controls and so should Dubai if it wishes to continue to attract property investors in the tougher competition for this money that is coming in global markets. Sure tenants should have their rights but not at the expense of a market return for the landlord.

Tenants should rent a property for an agreed period at an agreed rate and not acquire residency rights. If you want that, you need to buy the place. It’s not only in Dubai that this has become an issue. Rent control has ruined many property investment markets around the world. Dubai should watch out.

However, these factors aside, all investment markets are cyclical and rise and fall with the total return that they can offer. Residential rental real estate is no different.

With property mortgage costs rising around the world, this cycle is about to turn down on the capital side. That most likely means substantial capital losses for landlords across the board. And how long will it be before mortgage rates are this low again?

Only when house prices have bottomed out and mortgage rates are at their highest will the rental market really become a good place to invest again.

For then you will have the swing back in the other direction working to your advantage as house prices rise in value as mortgage rates fall.

You don’t do it when property prices are stretched to the limit by artificially low interest rates – as they are right now – and rates are on the way up, with rental returns held down by static incomes, surging maintenance costs and in some markets such as Dubai, rent controls.

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