Why Real Estate investing in Dubai needs a radical change
Manar is a seasoned investment banker and finance professional with extensive experience leading structured transactions in the MENA region over the last 15 years.
Manar’s career began at Deutsche Bank (DB) AG’s Dubai office, where he eventually became the Head of MENA Structured Credit for the bank and the Global Head of Islamic Structuring. Following DB, he joined Falcon Group as Managing Director, Head of Corporate Finance and Structured Credit. At Falcon, Manar played a key role in repositioning the company’s product offering and transitioning its business strategy to focus on Large Corporates. Throughout his career, Manar has executed over USD 6B worth of transactions for corporates, family offices, quasi-sovereigns, and financial institutions.
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Dubai as a diversified, forward-looking economy, attracts a huge amount of investment capital relative to its GDP and population. Over the last 4 years, the city has delivered consistent growth in Foreign Direct Investments (FDI) across its various economic sectors.
Among its most significant contributors to GDP (7.2% in 2019) is Dubai’s vibrant real estate sector. The city is a magnet for real estate investing, predominantly by international retail investors. These are individuals, mostly non-residents, looking for a safe and good return in a city with one of the highest rental yields in the world, a stable USD-pegged currency, and a world-class, pro-business government supporting its prosperous future. It all makes a lot of sense.
However, until now, more often than not, some investors would resort to buying properties (apartments or villas) outright in projects under development. In 2019, the Dubai Land Department reported that close to $13B, or 58% of Dubai’s $22B worth real estate sales transactions, were sold off-plan. This path typically carries a number of issues.
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A classic trap?
On the surface, off-plan properties appear as good deals but a lot of the time, don't live up to the returns that are promised. Low down payments and other developer incentives, such as extended payment plans and waivers on transaction costs, are designed to mask what is all too often pricing that is higher than the secondary market in the same area. In fact, it is not uncommon to find certain developers in Dubai selling their own inventory at a considerably higher price than units available in the market in the same project or building from existing owners.
In addition, investors in off-plan properties usually wait for three years on average before making any rental income. The opportunity cost makes this investment inefficient from a capital allocation standpoint, especially in the context of a secondary market that offers the ability to earn healthy returns from day one.
Opacity
The average non-resident investor in Dubai does not have access to independent market information and typically does not carry out much research to determine what is fair value before deciding to make an investment. Although data transparency has improved a lot as of late, it is not always straightforward or cost-effective to find. As a result, investors either are not able to rely on comparative price points for the subject property they are interested in or, understandably so, they get lost in the ocean of options available on listing portals.
Too much admin
Searching for the right property, dealing with the broker/agent, negotiating with the seller, completing the paperwork and registration process, finding a tenant, dealing with the property manager, maintenance, service charges, ongoing payments, etc. – all of this is not exactly rocket science but can add up in terms of your time and effort. Time after time, we’ve heard investors say, “this is not what I signed up for!” after a few months of getting their unit handed over to them. Outright ownership can equal operational headache.
Concentration and other risks
Even with a small down payment, paid either to the developer or to secure a mortgage financing from the bank, when an investor buys a property outright, they lock their capital into one unit. This significantly increases risk. For off-plan units, you have the additional risks of construction, cash flow (i.e. having to pay the developer or the bank on a regular basis), and vacancy (i.e. finding a tenant after handover).
Access
Last but not least: affordability. Unlike financial securities such as public equities and ETFs, real estate is an asset class that has a high capital requirement. Whether you choose to buy off-plan or a completed property with a mortgage, for the average person both options are a big commitment. The majority of people either do not have the financial resources to make this commitment or simply shy away from doing so because of fear of losing their hard-earned savings. If there was a way to break down the minimum barrier to entry and make real estate investing accessible to everyday savers, who in today’s world are earning close to zero on their bank deposits, you would open up a massive greenfield segment of the market that was previously ‘priced out’.
Shaping the future
An obvious conclusion can be drawn: the traditional Dubai real estate investment product needs a radical improvement. Building your own property portfolio should not be so complicated.
To be specific, investors stand to gain immensely from having access to a menu of opportunities that are pre-vetted based on an institutional-grade selection process and transparently presented; a digital platform they can transact on with ease and less capital commitment. One that aims to deliver real efficiencies, both financial and logistical, combined with a simple and enjoyable user experience.
Such a platform could bring about a significant upgrade to the current property investment landscape in Dubai, becoming a digital-first marketplace where value accretion can truly happen for the consumer.
Tech can solve for access, by allowing you to raise small sums of money, without the heavy paperwork and the long KYC processes that traditional asset managers have to do. It removes opacity because it allows for market data to be processed and distributed to users at scale.
It solves for admin, the same way it solves for access. It also solves for concentration because it a) allows us to be smart about deal sourcing and b) to distribute these deals at scale.
As a parting thought, it is a widely held view that the real estate industry across the world has been slow to catch up with innovation. Innovation in engineering, architecture, and design continues to astound but when it comes to the consumer - how we buy, sell, and rent these marvels – there has been little change. What is inspiring of late is to see a flurry of PropTech startups, locally and internationally, trying to tackle all sorts of problem statements and re-imagining how we interact with the physical places around us.
COVID-19, although a year of unprecedented challenge for most of the world, has helped accelerate this transition across all facets of our work and life. It has been a time of huge opportunity for startups building new products and I am certain a lot of creativity in real estate tech entrepreneurs is yet to come. So, watch this space!
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