Generous capital appreciation, two-digit gross rental income on completion and minimal capital deployment pre-handover: All this is achievable in Dubai for off-plan investors who get their selection process and timing right.
While my previous article focused on the mechanisms of the Dubai off-plan market and considerations to be taken by investors prior to the commitment, this contribution will apply those principles in an exemplary case study of actual offerings that are in the market today. Please note that my article does not represent any kind of recommendation or offering with respect to the presented properties.
The investment properties chosen exemplarily are as follows:
Marquise Square, Business Bay
This project by the very reputable and experienced private Dubai property developer SRG is situated in the Business Bay area, directly adjacent to Dubai Downtown, home to the world`s tallest building and Dubai`s No. 1 urban center. SRG rightly focuses on smaller-sized units, which is substantiated by the fact that smaller, more affordable apartments are highly underrepresented in this luxury-dominated part of town.
In the still subdued market conditions of H2/2016 comparable and ready product of this type would yield an annual rent of approximately 85,000 AED, changing hands on a sale for an estimated 1.15m AED.
SRG offers a payment plan of 15% on booking, followed by two more 15%-payments within the following year while the balance of 55% becomes due on handover in November 2018.
In a nutshell, this project promises an attractive yield while the location, undersupplied target segment and strong developer translate into a comparably low-risk profile option.
Serena, Dubailand
Semi-governmental developer DP (Dubai Properties) launched this mediterranean-themed villa project targeting predominantly families looking for affordable, mid-sized homes with calm, green surroundings.
Located behind the sought-after Arabian Ranches community within the part of Dubai named „Dubailand“, Serena offers excellent access to the crucial transport lifelines Al Qudra Road, Sheikh Mohammed Bin Zayed Road as well as Emirates Road. Moreover, the new Academic City Road will pass just north of the community, offering another option and relief during rush hour times.
The location of the community will be attractive inter alia for residents working in Dubai Investment Park (DIP), Jebel Ali, IMPZ, Al Maktoum International and Dubai South as well as the Expo 2020 site, however, even Jumeirah is a mere 15 minutes away, traffic permitting.
The community center is planned generously, offering anything needed or desired on a day-to-day basis including leisure options (community pool and sports).
Our sample unit is a 3-Bed townhouse plus maid`s room, available at a payment plan of 10% on booking, 5% every six months while the balance of 60% falls due on handover in Q2/2020.
At present market conditions, property in comparable size, quality and location would be rented at 140,000 AED per annum, bearing a price tag of an estimated 2,600.000 AED.
The strengths of this proposition are its government backing, good location and accessibility as well as its positioning in the continuously undersupplied, lower-end and family-oriented segment.
Studio One, Dubai Marina
Studio One by Select Group is located in the periphery of the prestigious Dubai Marina area offering studios as well as 1- and 2-Bedroom apartments on 31 floors. The project is scheduled for handover in December 2018.
With regards to strategy, this option is comparable to SRGs „Marquise Square“, looking to take advantage of the undersupply of limited and thus affordable living space within the vibrant and glittering Dubai Marina. Therefore, ample demand for such units is to be expected by the young, typically single tenants that represent the demographic majority in this posh end of town.
Despite the decent price point, the tower offers the typical amenities (pool and health club) plus steam room and sauna.
The experienced developer – track record of 13 high-rise buildings in Dubai Marina only – has taken the deferred-payment option to another level, offering 10% payment on booking, followed by two more instalments of 10% within the following 12 months and a whopping 70% on handover.
Comparable units would generate 75,000 AED at present, yielding approximately 1,000,000 AED on a sale.
Table 1: Internal Rate of Return per Investment Option
Studio One wins this hypothetical comparison, clearly because of its highly attractive payment plan which gets reflected in the mathematical concept of the Internal Rate of Return (IRR) accordingly.
Assumptions and other Technicalities
Let me point out that in reality however, Dubai`s property locations and segments tend to perform very diversely which could generate a different outcome.
Please also note that for simplicity reasons I have only considered an immediate exit from the investment on handover assuming the present market conditions to prevail until handover of the respective properties. Ancillary costs and expenses have been accounted for.
Contrary to the above assumptions, however, I do expect leasing as well as transactional activity to pick up substantially within the considered time-frame, locations and segments as technical as well as fundamental data (future supply) indicate a likely market recovery from 2017 onwards.
In addition to an immediate cash-out, notably the scenario of increased rental rates opens the opportunity for the property owner to remain invested, thereby achieving double-digit ongoing gross yields.
Conclusion and Implications:
The strategy of off-plan investing involves trading a future delivery of the property against a discount on its pricing. As such, it is a powerful tool provided that the necessary precautions are taken (see this article) and the market follows an upwards trajectory towards delivery of the property.
That said, the timing of any off-plan investment is crucial and should be given the attention it deserves.
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