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Dubai and London: How yields lead investment opportunities

UAE. In times of economic uncertainty, cold-hearted international investors seek more diversification of their property portfolios; as London provides opportunity for property capital appreciation with prices continuously on the rise in the last five years, reasonable prices and growing yields in Dubai market make an equally attractive income generating opportunity.

Mutual Interest
For Middle Eastern investors, London has always been regarded as a strong investment complementary to their property portfolios in the region, especially in times of crisis. With property market in Dubai having experienced an extraordinary journey of boom, crash and recovery in the last decade, London property market was a safe deposit for capital growth seekers in the Middle East. Percentage of Middle Eastern buyers in super-prime London properties has increased from 11% to 16% in the year to 30 June 2015, second only to British nationals.

Looking the other way round, British have been among the biggest buyers investing in Dubai market ahead of many other international investors. In the first half of 2015, British investments in Dubai properties accounted for 9% of total transaction volume, second to Indian share only in the non-GCC segment. This investment exchange relationship between the two cities has proved solid in both directions.

While many British investing in Dubai properties are seeking capital appreciation more than using them as primary or secondary homes, many GCC individual buyers purchasing residential property in London make it as a base for their spouses or children to stay for education purposes in the city or as a holiday home.

Growing Returns
Nevertheless, as global markets lay under increasing pressure emanating from a persistent decline in oil prices accompanied by devaluing international currencies and political unrest, it is evident that many property investors in both London and Dubai are increasingly looking to income generation as their measure of value pushed by a healthier residential rental market that continues to gain significance as an asset class.

In key employment hubs, such as Dubai and London, where home ownership is beyond the reach of many workers, the increasing mobile and flexible workforce has led to rising demand for rented property.

While Dubai residential price fall continue to significantly outpace rental value declines, initial yields are growing. Dubai has seen its residential prices plunging around 12.2% over 12 months to June 2015 according to Knight Frank Global House Index while decline of mainstream rental rates has been cooling down over the same period at a low rate of 1.2%.

Yield returns, as a first hand result to such sale-rent combination, have strengthened over the same period with 9.9% increase to reach 7.42% in Dubai mainstream market in July 2015. This is good news for an income-seeking investor as yields are high compared to other relative safe havens (e.g. London).

Looking at the UK market, between January 2009 and June 2015, mainstream residential prices in London have increased around 71%, dubbing the city as a ‘safe haven’ for capital investors in the aftermath of the global financial crisis.

However, growth of sale prices has cooled down lately due to waning demand to reach 4% on a year-on-year basis in June 2015. On the other hand, rental rates have been increasing at a rate of 3.8% year to June 2015 in London.

As a thumb rule, mainstream yield returns are usually stronger than those produced by prime segment properties. As mainstream property rental yields stands at around 4% to 4.5% in London (June 2015), prime segment yields are approximately 3%.

In return, low prime property yields combined with hiking prices have pushed prime property seekers to look afield towards London’s periphery market and beyond to regional cities such as Birmingham, Manchester and Bristol where yields are better holding up.

In Dubai the magnitude of decline in prime residential prices in the year to June 2015 was smaller at 4.5% compared to the mainstream properties due to a higher demand on the first segment.

Bonds comparison
Putting line-in-line with other ‘safe-haven’ assets like government bonds, investing in property appears to be more fruitful in both Dubai and London.

The Dubai government bonds (DUGB 43s) were trading at $89.78 with a YTW (yield-to-worst) of 6.01% compared to 30yr UST yields of 3.10%, both figures for July 2015. On the other hand, bonds in the UK (UK Government Gilt 30 and 10 year bonds, for example) are resulting in lower yields which are usually below 3%.

Opportunities ahead

The rising significance of the residential rented sector is creating unconcealed opportunities for investors, especially where prices have reached reasonable levels. With selling prices in Dubai hit by stronger US dollar, declining oil prices and government intervention, it’s fair to say that there has been more resilience in Dubai’s rental market than in sales.

In order to make the right investment decisions, finding out what tenants want and need is crucial. Clearly, location, size, specification and amenities will define the strength of the property position and eventually its investment return, however, tenant appeal is mostly affected by accessibility of the community while investors should look for the maturity of the community sub-market in terms of tenant diversity, overall occupancy and levels of tenant retention.

Properties in Dubai Marina, for example, remain a much sought-after asset for investors. With luxury finishing, adequate amenities, and a highly accessible location, rental rates in the exclusive community rising above the market average.

If yields continue to strengthen in Dubai, a further inclination to buying is anticipated from buy-to-let and buy-to-live investors. Furthermore, an increasingly important institutional investment segment is yet to mature gradually. This in return will eventually help residential prices gather momentum in the near future.

Investors will still eye London market as safe haven, especially for Middle Eastern buyers where the city has been long home for vacation and study. However, a tightening yields and increasing prices will drive potential buyers towards outer London or in the regional cities where alternative profitable investment options exist.
 
About Knight Frank
Knight Frank has a strong presence in the Middle East with offices in Abu Dhabi, Dubai and Saudi Arabia. The Group advises clients ranging from individual owners and buyers to major developers, investors and corporate tenants.

Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, Knight Frank and together with its New York-based global alliance partner, Newmark Grubb Knight Frank, operate from over 370 offices, in 55 countries, across six continents and has over 12,000 employees.

For further information about the Company, please visit www.knightfrank.com or www.knightfrank.ae

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