Is it cheaper to buy or rent property in the UAE?

If you can manage the initial down payment for the property purchase, buying can be more financially viable than renting

Home finances, rent or buy
Financial considerations before buying a property

Buyers should try to pay as much in cash as possible for a property, limiting the mortgage value to as little as they can afford. This means they not only pay less in interest but their monthly costs are also reduced. Ideally, the monthly mortgage payment should not exceed 20 per cent of the purchaser’s total household income, says Carol Glynn, founder of Conscious Finance Coaching.

“If it’s a rental property, plan for the property to have periods when it does not have a tenant. Ensure you have enough cash set aside to pay the mortgage and other costs during these periods, ideally at least six months,” she says. 

Also, shop around for the best mortgage interest rate. Understand the terms and conditions, especially what happens after any introductory periods, Ms Glynn adds.

Using a good mortgage broker is worth the investment to obtain the best rate available for a buyer’s needs and circumstances. A good mortgage broker will help the buyer understand the terms and conditions of the mortgage and make the purchasing process efficient and easier. 

Muhammad Iqbal has been living in a rented property for more than 25 years in the UAE. However, the Pakistani expat is now planning to buy a villa because he believes the return on property investments in Dubai surpasses global cities such as London.

Mr Iqbal, 65, has already shortlisted villas available on a freehold basis in Jumeirah Village Circle, Mohammed Bin Rashid City, Jaddaf and Ras Al Khor in Dubai for his first property purchase. He has a budget of Dh1.2 million and plans to pay in cash for the transaction.

"I have done feasibility studies between the benefits of leasing versus buying, and the latter is always the best option," Mr Iqbal, an accountant, tells The National. "The amount I spend on rent does not benefit me in any way."

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You will probably end up paying a lower amount as mortgage instalment than rent for the same property

He believes property in Dubai is more affordable now, and says the last time prices dropped was after the global financial crisis in 2009.

The Dubai property market is expected to become more affordable with declines of between 5 to 8 per cent this year and in 2022 as the emirate works to clear an oversupply, according to a report by real estate consultancy JLL.

The property market in the UAE slowed in the wake of a three-year oil price shake-up that began in 2014 and an oversupply of properties in the market.

The coronavirus-induced economic slowdown also slowed sales momentum. As a result, property prices were 8 per cent lower year-on-year in Dubai and 4 per cent lower in Abu Dhabi during the fourth quarter of 2020, according to JLL.

Mr Iqbal says property as an asset class is useful because it can be passed on to future generations. He is also keen on getting a residency visa linked to his property purchase because he plans to live in Dubai for the long term.

Muhammad Iqbal-DXB

Muhammad Iqbal pictured in his home in Dubai for a story on if it is better to buy or rent property in the UAE on April 21st, 2021. 
Antonie Robertson / The National.
Reporter: Deepthi Nair for Business

Indian expat Shruti Sayed rented an apartment for about four years after her family moved to the UAE, but purchased a townhouse in The Springs for Dh1.8m in 2015. She also bought a villa in Jumeirah Park for Dh3.5m in November 2020. Now, she plans to buy two investment properties, which will offer her a rental income to cover her children’s school fees.

“I am buying a one-bedroom apartment in Jumeirah Lakes Towers for between Dh600,000 to Dh700,000, while my husband is looking at a one-bedroom apartment in Downtown Dubai for Dh2m,” she says.

Ms Sayed, who handles the operations and sales side of her family’s investment migration consultancy, says she didn’t have a sense of belonging while renting property. If you own property, you have the freedom to alter it according to your needs and taste, she adds.

DUBAI, UNITED ARAB EMIRATES. 09 JANUARY 2021. Shruti Sayed her daughter Sara and son Ryan at their home. For a story on how to navigate child care costs. (Photo: Antonie Robertson/The National) Journalist: Deepthi Nair . Section: Business.

“You will probably end up paying a lower amount as mortgage instalment than rent for the same property. If you can manage the initial down payment, buying is definitely cheaper than renting,” she adds.

She believes capital appreciation, not rental returns, is the biggest benefit of real estate investment. Ms Sayed says UAE properties are undervalued and prices are quite low. She plans to wait for property prices to increase, sell her unit and buy another one with the profits.

Buyer sentiment in the UAE property market is buoyant because the government has implemented new visas and decided to offer citizenship to foreign investors, among other ground-breaking initiatives, real estate brokers say.

“We are still seeing the effects of the increase in loan-to-value ratios for mortgages and low-interest rates,” Lewis Allsopp, chief executive of Dubai-based real estate broker Allsopp & Allsopp, says.

“These two factors combined are encouraging many first-time buyers into the market and with prices still remaining affordable but slowly on the rise, buyers are jumping at the chance to purchase a home while they still can.”

The real estate professional adds that his company has seen many residents in the UAE buying second properties as an investment. He adds they have also seen “a lot of interest” from overseas buyers who are looking to move to the UAE or have been encouraged by the Emirates’ resilience throughout the pandemic.

Fees for purchasing a property in Dubai include a real estate broker fee of 2 per cent, plus 5 per cent VAT for the property brokerage, a 4 per cent Dubai Land Department fee and an appointment and administration fee of Dh4,580, Mr Allsopp says.

Meanwhile, to rent a property in Dubai, tenants will have to pay a 5 per cent deposit for an unfurnished unit or a 10 per cent for a furnished property. Tenants also pay a 5 per cent fee to the real estate brokerage, which is often subject to a minimum fee, and Dh225 to set up their Ejari contract, he adds.

In March last year, the Central Bank of the UAE increased the mortgage LTV ratio by five percentage points. This means expats are now able to borrow up to 80 per cent of their property purchase price and UAE nationals can borrow up to 85 per cent.

“This can put off potential buyers, depending on how long they see themselves in the region. This deposit is a large commitment, which could be used in another form of investment elsewhere,” says Christopher Davies, chartered financial planner at The Fry Group.

In comparison, renting allows flexibility. While renting a property, tenants can budget the overall annual cost of the property more easily. If their personal or financial circumstances change, tenants can either upgrade or downgrade their property easily, Mr Davies adds.

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This deposit is a large commitment, which could be used in another form of investment elsewhere

If you buy a property with a mortgage, when you finish paying it off, the home is yours and you no longer have a monthly housing expense, says Carol Glynn, founder of Conscious Finance Coaching.

“However, I would caution against considering your home as an investment. It is an asset you will use for your own purpose, it is not income-generating,” she adds.

If the house appreciates in value, the owner can earn a return or break-even versus what they paid in mortgage, interest, fees, renovations and maintenance when they sell it.

However, housing markets can be volatile. In a down market, the value of the property could fall below what the buyer paid for it.

“The cost of purchasing a home can add up to 9 per cent of the property value, so make sure you factor this into the total cost of the purchase,” Ms Glynn says.

“Also, if a buyer is purchasing property in a new development or off-plan, there are many unknowns to consider, such as quality of build, if the development will be finished as per the advertised plans, or if there is infrastructure to support the new development.”

Meanwhile, if you rent a property, maintenance costs are usually the landlord’s responsibility. Tenants are less exposed to the rise and fall of the property market in general, Mr Davies says.

They are also in a position to take advantage of lower rents during downturns in the market, Ms Glynn says. Moreover, the Dubai Land Department's draft law to keep rents unchanged for three years will also benefit tenants.

“Rental laws protect tenants in the UAE. For example, a landlord must give 12 months’ notice for you to vacate and the conditions under which you can be served notice to vacate are limited,” she adds.

However, if you rent, you are “essentially paying someone else’s mortgage for them”. The rent you pay is an expense as opposed to payment towards an asset you own, while tenants can't make changes to the property in the same way they could if they owned the asset, Ms Glynn says.

“The cost of moving can also be prohibitive for tenants. Agent fees and deposits are usually 10 per cent of the annual rent, plus the cost of movers, changing furniture if the old does not fit in the new home and potentially landscaping if the garden is not already landscaped,” she adds.

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I would caution against considering your home as an investment. It is an asset you will use for your own purpose, it is not income-generating

However, property purchases are usually illiquid and do not provide much portfolio diversification for investors. The past 12 months have taught everyone that situations can change rapidly and, as such, liquidity and flexibility are great benefits not always offered by many property purchases, Mr Davies adds.

Investors should consider other investment opportunities if they are better suited for their risk profile and goals. Mr Davies warns aspiring property purchasers not to overstretch themselves and make sure they can afford the purchase.

“Diversifying your investments across a number of uncorrelated assets may help to provide a more steady return over various market conditions, which could provide access to capital when needed,” he adds.

Financial experts classify buying an investment property as “high risk”.

“Buying off-plan, for example, can be a cost-effective option but in any country is a high risk as the investment is untested and there are many unknowns inherent in an off-plan investment,” Ms Glynn says.

Although there are certain “lower risk” communities that have proven to hold their value over time, both in terms of resale value and rental income, they tend to be at the higher end of the cost spectrum, she adds.

“Do your research, understand what you are buying, the location, the local facilities, how other properties in the area have performed in the past, what are the maintenance costs and community fees. Talk to residents in similar properties if possible to understand any issues they may have experienced with buildings and facilities,” Ms Glynn says.

Fees involved

Buying a property

  • 2 per cent real estate broker fee
  • 5 per cent VAT for the property brokerage
  • 4 per cent Dubai Land Department fee
  • Appointment and admin fee of Dh4,580

Renting a property

  • 5 per cent security deposit for an unfurnished unit
  • 10 per cent deposit for a furnished unit
  • 5 per cent fee to the real estate brokerage
  • Dh225 fee to set up Ejari contract
Financial considerations before buying a property

Buyers should try to pay as much in cash as possible for a property, limiting the mortgage value to as little as they can afford. This means they not only pay less in interest but their monthly costs are also reduced. Ideally, the monthly mortgage payment should not exceed 20 per cent of the purchaser’s total household income, says Carol Glynn, founder of Conscious Finance Coaching.

“If it’s a rental property, plan for the property to have periods when it does not have a tenant. Ensure you have enough cash set aside to pay the mortgage and other costs during these periods, ideally at least six months,” she says. 

Also, shop around for the best mortgage interest rate. Understand the terms and conditions, especially what happens after any introductory periods, Ms Glynn adds.

Using a good mortgage broker is worth the investment to obtain the best rate available for a buyer’s needs and circumstances. A good mortgage broker will help the buyer understand the terms and conditions of the mortgage and make the purchasing process efficient and easier. 

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