Despite the 2008 meltdown which saw property prices crash by more than half, investors are slowly returning to Dubai for long-term investment in real estate even though the sector’s performance has been less than stellar.
Reasons? No tax, high rental yields and dirt cheap property.
PS Nair, a 56-year-old Indian businessman who moved to Dubai in 2005 to expand his export business, took full advantage of the real estate boom of 2004-2006 when the Dubai government amended laws to allow foreign nationals to invest in Dubai property. But too much speculation into a highly leveraged market ultimately left him with nothing but pieces of tradable papers that were worth zilch once the markets crashed and investors fled the country.
Dubai witnessed its bubble between 2004 and 2008 when prices and rents rose by 20 percent each month, driven purely by speculation and not by actual underlying demand. Today the situation is different. Prices have rationalised after the recession but the number of Indians involved in buying real estate assets in the UAE to earn rental incomes, flip properties and earn profits is still significantly large.
And why not? A fully furnished 1bhk in the heart of Dubai’s Sports City costs anything between Rs 45 lakh to Rs 50 lakh (depending on the dollar)! This is even cheaper than buying a house in Vashi or Thane near Mumbai.
So what is it that lured investors to return to Dubai?
Post the global downturn in 2008, property prices in the UAE saw sharp downslides of between 40-60 percent. Dubai witnessed an exodus of investors, a rise in bad debts and cancellation of projects. However, there was still a huge supply pipeline. Hence, even prime property in Dubai, which prior to the 2008 recession had touched pricing peaks compared to many developed markets, became pretty affordable.
Given the excellent physical and social infrastructure, comparable to most developed nations, and the quality of construction and design, the UAE property markets seem to be an attractive investment destination for many wealthy Indians,” Shveta Jain – Director, Residential Services, at Cushman and Wakefield, told Firstpost.
It is important to invest in a decent neighborhood with a reputed builder. Then one can expect around 8 to 10 percent returns in rentals, Rashid Menhali, a Dubai resident told Firstpost.He added that the market is also picking up due to the unrest prevailing in other Middle East and other neighboring countries.
This may be true. But it also helps that Dubai is one of the safest havens to park your black money. The bulk of purchases are made by wealthy Pakistanis and Indians to escape political strife and taxes. According to industry sources in Dubai, close to $100 million moves from India to Dubai every single day!
This money uses the ‘hawala’ route, an informal money transfer system, where rupee gets converted to dollar at a premium to market exchange rates. In the process, Indian black money is invested in Dubai property. And since Dubai charges no tax on rental income or any capital gains for purchased property, cash-rich Indians know their investments are safe.
The fact that cash buyers dominate Dubai’s property market is also evident from the data released by the Dubai Land Department, which showed property worth 8.4 billion UAE dirhams was snapped up by cash buyers in the first three months of this year. In contrast, just 1.99 billion UAE dirhams worth of assets were purchased using mortgages. This comes despite mortgage providers in the UAE slashing interest rates and banks increasing funding options.
Moreover the Escrow law adds another layer of protection to investors. The law ensures that the money paid by them, whether in instalments or upfront, goes into an escrow account against which a developer only withdraw sums proportionate to the construction that he has undertaken. “Hence, investors are protected from project cancellations, delays and loss of investments,” said Jain.
As per Indian laws, no more than $200,000 can be remitted under the liberalised remittance scheme per financial year, but prime property costs more than that. Secondly the Foreign Exchange Management Act allows an Indian resident to acquire property outside India only by way of gift or inheritance from a person resident outside India.
These legal hassles are often cumbersome. This makes hawala the best option.
Foreigners have always been the lifeblood of the nation’s real estate boom, and South Asian investors in particular have become the driving force behind demand. Indians form 35 percent of the total population in Dubai.
According to data from DTZ Research, most of the buyers from India are from the film fraternity, business and other high net worth individuals (HNIs) who are either looking for a return on investments in the form of capital appreciation/lease rentals from the asset or who intend to occupy themselves for the sheer clout of the iconic address.
Capital values of apartments in Burj Khalifa are currently close to a third of what was prevailing in 2008. As such, it offers good potential for capital appreciation in the near to mid-term for investors, especially when the real estate market has started to show signs of recovery.
According to various media reports, Indians own 100 of the 900 apartments in Khalifa. Of these, the most prominent ones are Raj Kundra, who gifted his wife Shilpa Shetty an apartment there. BR Shetty, who is managing director and CEO of the New Medical Centre Group of Companies in Abu Dhabi, owns the entire 100th floor in the tower, while Rizwan Sajan, Chairman of Danube Group, has purchased an apartment in the tower too.
Amar Dhir, an estate agent at property firm Castles Plaza, says the local demand is from the professional community, but foreign nationals from India and other Asian countries include only businessmen who are looking to rent out properties as they can easily get 7 percent plus yields annually as well as a 20 percent capital appreciation benefit. “Bankers, professionals, and MNC guys are the second class of buyers, but they are end-users and the demand from them is purely business, not speculative,” he added.
This is because the largest market for affordable housing in the price range of Rs 15-25 lakh is the Gulf region where there are a large number of expatriates who are either semi-skilled or unskilled, and the salary levels are not too high. The HNIs and technically-qualified professionals constitute 10 percent of the NRI population. They look for apartments in the range of Rs 2-5 crore purely for investment or as a holiday home.
Dubai’s real estate market is largely dependent on tourism and immigration and is highly leveraged. Once the investor demand declines (property prices will start climbing sooner or later) chances are the market might just go bust again.