Rent or Buy

The question is now being asked all over the UAE and the rest of the Middle East: should you buy a property in Dubai?

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By  David Ingham Published  October 8, 2003

Freehold|~||~||~|Ever since the government of Dubai confirmed in 2002 that foreigners would be able to buy property on a freehold basis, everyone has been asking whether or not they should get into the market. Since the announcement was made, a number of practical questions have been raised, answers to which are now starting to emerge.

For example, when Emaar and Nakheel say that properties will be sold to foreigners on a freehold basis, what does ‘freehold’ actually mean? Other questions that prospective expatriate buyers have been asking relate to the residence status of homeowners, rules on the resale of properties and how they can raise the money to buy a place. Then, of course, there is the question of how much a property might be worth in the resale market.

There has been huge speculation over the exact meaning of the term ‘freehold’ under which properties are being sold in Dubai. AJ Jaganathan, chief executive officer, Emaar Properties, makes clear that it means a buyer has full ownership of his property and land “unless something cataclysmic happens and the land disappears.”

Lisa Dale, attorney at Al Tamimi & Company, explains further. “A freeholder is considered to be the absolute owner of the land and buildings comprised in his title; he has the right to occupy, use and enjoy his property forever (‘in perpetuity’) or until he transfers the title to a new owner, and his heirs are entitled to inherit his title upon his death,” says Dale.

Nevertheless, she continues, a freeholder may not have total freedom to do what he wants on his land. “The most obvious form of external curtailment of a freeholder’s ownership are public controls, in other words a freeholder must comply with all applicable laws which combine to control the use of, and activities upon, his property,” Dale explains.

“For example, the use to which land and buildings may be put, and the erection of new buildings on land, is invariably subject to governmental approval procedures such as the necessity for planning permission and a building permit. Further control is imposed through environmental and ‘non nuisance’ laws, and so on.”

In the case of an independent property, such as a villa, the above definition seems to make things clear. However, in the case of a tower, with multiple apartments, the situation is slightly different because there is no single owner of the units within the building.

In such cases, Al Tamimi & Co argues that the type of ownership each apartment owner enjoys is more akin to what is widely known as ‘commonhold.’ In such situations, apartment owners within the building have certain shared obligations. “For example, Estithmaar Realty has drawn up a Declaration setting out the method of management, rules of occupancy and service charge obligations binding upon all property owners at Jumeirah Beach Residence,” says Dale.
||**||Resale and residence|~||~||~|
When it comes to reselling a property, the industry is unanimous that this is legally possible. However, according to Paul Turner, general manager at ASTECO, there are some details to be aware of.

“When purchasing in the secondary market, one must check to see whether there is any restriction with the developer on assignment to a second buyer. Some of the developers have a clause where a property can be sold to a second buyer only after the first buyer has paid the full amount to the developer and has taken possession of the property,” he explains. “Developers also have administration fees and other payments to be made while transferring ownership.”

This last detail is important to bear in mind. Emaar told Arabian Business that its administration fee upon ownership changing hands is barely equivalent to 1% of the value of the property.

Recently, however, there have been reports circulating that properties resold on the Palm are subject to a fee equivalent to 10% of the purchase price. The apparent objective of the move is to prevent speculative behaviour. As always, check with the developer.

The visa situation, a cause of doubt for many when freehold was first announced, has now become clear. Every owner of a property receives a residence permit that entitles him or her and their immediate families to stay and reside in Dubai.

If he or she is in work or finds work, however, the normal three year employment visa then has to be applied for. The government of Dubai also retains its right to revoke an individual’s visa in case of criminal behaviour. Should such a scenario occur, we will then know what the legal status of that person’s property is.
Assuming you want to buy, there is the question of raising finance. Dubai Islamic Bank, Amlak and, in the last few weeks, HSBC are the only institutions to have entered the home finance market.

Dubai Islamic Bank offers home finance packages using a principle called Istisnaa’. Various criteria are used when the value of packages is being decided.

Is the buyer local or expatriate; government or private sector employee, or a business owner; resident or non-resident? DIB claims it’s currently the only home finance provider that provides assistance to non-residents.

Nationals receive higher amounts than expatriates, up to 75% of the property’s value in certain circumstances; expatriates working in the private sector can borrow up to 65%. Monthly instalments can not exceed 50% of a person’s monthly income. Profit rates (there is no interest in Islam) are fixed at 8%, on a reducing basis, for loans over five years and up to a maximum of twelve, and at 7% on loans below five years.

Firas Jamal, head of business development at Dubai Islamic Bank, says that customers opting to go with DIB are certainly getting a good deal. He takes a Dhs699,000 three bedroom apartment in Jumeirah Beach Residence as an example. Following a 35% down payment of Dhs244,000, a buyer can pay off the remaining loan of Dhs454,000 at a rate of Dhs4,918 per month. “For Dhs60,000, you’ll get a one bedroom on Sheikh Zayed Road,” says Jamal.

Jamal says that DIB’s service is proving to be very popular because of the fixed repayment rate. However, the bank is fundamentally conservative, capping its financing at an absolute maximum of 75% of the purchase price and refusing to finance the premiums on homes sold in the resale market.

Amlak, a division of Emaar Group, is much more of a traditional mortgage company than DIB. It offers loan periods of up to 25 years for UAE nationals and 15 years for expatriates. It will extend loans up to 90% of the property’s purchase price, up to a maximum of Dhs5,000,000, for UAE nationals and resident expatriates, and 70% for non-residents.

The presence of so few players in the market is something that Emaar Properties’ Jaganathan admits he would like to see change. “I think the market could do with other institutions offering finance,” he says. “The banks have not got into it for a variety of reasons, but… I’m sure some will step up to the plate very soon and that’s a good thing. Competition has been good for Emaar and I’m sure it will be good for Amlak as well.”
||**||What is it worth?|~||~||~|
Ultimately, any buyer’s decision is going to come down to financial factors. The main rationale for buying a place, that money spent on expensive rents can now be invested, is certainly a powerful one. “An expatriate in Dubai has always rented and rents are generally known to be very high,” says Emaar’s Jaganathan.

“The renter has always had this lack of options in terms of what he can do; he now has an option. If he sees himself here fifteen or twenty years, he can look at an alternative to renting. That’s a very clear argument and we have a built a product based on that [The Greens, see following article.]”

Therefore, rather than receiving nothing for your money, spend that money acquiring an asset. The prices of properties, as low as Dhs275,000 for a studio and Dhs599,000 for a two bedroom apartment compares very favourably with major global centres such as London and New York.

The logical question that flows that from that, of course, is how much is that asset is worth in the long run. Those who work in the industry will tell you that there is plenty of upside potential in the market. “I believe there is already a resale market,” says Emaar’s Jaganathan, although he agrees that the market is very much in its infancy.

He points to the predicted growth of Dubai as a factor that should drive demand for homes. “Looking at past numbers and predicted numbers, you’re going to see a growing purchase base coming into the market in addition to the pent up base that already exists. It’s difficult to say values, but I think a base for it exists.

Paul Turner at ASTECO is certainly no doubt that the resale market will grow. “It is definitely a wise decision to buy in Dubai, as it’s a new market and prices are very reasonable compared to other cities in the world, and of course everyone has the opportunity to get into this market right at the start,” he says.

Ultimately, the price of property is decided by the number of people that want to buy versus the amount and quality available. Developers point to Dubai’s burgeoning population as evidence that the market has long term potential.

On the other hand, developers are currently building like crazy, which could keep prices down. There is also the possibility that Dubai’s current popularity could wane at some point in the future. At this early stage in the market’s development, those who decide to buy are, to some extent, playing the role of pioneers.||**||

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