Tumbling Dubai house prices are producing rental yields as much as three times better than central London.
While sales remain sluggish, initial yields of up to 10 per cent in parts of Dubai are three times those that are being achieved for prime residential property in London.
The spike in overall London property prices – up 71 per cent over a six-year period – means overall yields for London stand at 4 to 4.5 per cent, but yields for prime properties are just 3 per cent, according to Knight Frank.
Meanwhile, city-wide initial yields in Dubai stand at around 7.4 per cent, but are much higher in fringe locations.
“If rental rates are stable and prices are going down, that’s healthy,” said Tariq Bsharat, executive director for strategy and operations at the developer Mag Group. “There’s a perceived increase in risk in market and they [investors] are demanding a higher return.”
Mr Bsharat said that the highest initial yields for investors can be achieved in International City, Discovery Gardens and at its own project, Mag Boulevard in Dubai South “because there is some speculation there”.
Initial yields are lowest in Bur Dubai, Deira, Palm Jumeirah and Dubai Marina, with the latter offering returns of about 6 per cent, said Mr Bsharat.
“The magic number with conservative risk is 7 per cent, but at 9 or 10 per cent people will take big risks in this town.” A report by the property consultants Cavendish Maxwell shows that yields have been boosted as a result of falling prices. Average apartment values have dropped by 6 per cent year-on-year, although in International City and Motor City they have fallen by 10 per cent.
Villa prices have been affected much more by an increase in new supply. Adam Wisher, the head of development advisory and research at Cavendish Maxwell, said that villa prices were 9 per cent lower year-on-year.
“If you look at older areas in The Springs, there has been a 20 per cent decline over the last 12 months. The area is still well occupied, but it’s slightly dated stock and people have more options now.” Cavendish Maxwell also surveyed agents about expectations for the next three months and found that 64 per cent expected further falls in villa prices, while 56 per cent expected drops in apartment values. More than half (56 per cent) expect villa sales to remain stable or even increase, and 72 per cent expected the same for apartment rents.
Jean-Luc Desbois, the owner of Home Matters Mortgage Consultancy, said that mortgage transactions peaked 18 months ago.
“From there, we’ve seen a gradual decline in transaction numbers,” he said, adding that this was the result of the implementation of the Central Bank’s more restrictive mortgage lending rules, which were introduced at the end of 2013.
“It’s been a slow summer, but if you look at the facts of the market today, we’ve seen prices come off by about 25 per cent, we’ve seen interest rates at record lows [and] better regulation.
“When you start seeing that rental yields are remaining stable as prices come down, surely that’s got to be a buying sign.”
Zarah Evans, managing partner of the real estate brokers Exclusive Links, said the lack of deals is a “major concern” that makes the interpretation of research reports difficult.
“We are working in a sentiment-driven market,” she said.
This lack of activity has also led to delays in completions, with Cavendish Maxwell stating that of the 18,000 units predicted to come on to the market this year, only 6,000 have been finished so far. As these are fed on to the market, this could depress prices further, it argued.
Mr Wisher said that even with improving yields, “some investors could be more focused on capital appreciation and waiting to call the bottom of the market”.
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