Dubai – Property Law isn`t well-developed in UAE

original published The National

The booming UAE property market looks like a can’t-lose investment. Should you bite?

If you’ve seen the eye-popping figures for property prices in the UAE in recent years, and have salivated over the seemingly endless stream of mega-projects planned for Abu Dhabi and Dubai, you’ve probably thought about getting in on the action ­yourself.
And who could blame you?

Estimates for the market in 2008 project an overall price increase of between 10 and 20 per cent.

Tales abound of investors who have flipped properties for a much bigger profit, in some cases doubling their money within months.

And analysts expect demand for housing to outstrip supply for at least a few more years as construction delays continue and new housing projects slowly come on-line.
An excess of demand and a shortage of supply generally means prices go up.

That recipe has investors licking their chops, buying up flats and villas in hopes of cashing in quickly on the boom.

At Cityscape Abu Dhabi, a massive property showcase held recently, the excitement was palpable.

The thing that excites us is that the need is there,” one Austrian couple told me, looking over an enormous model of developments on Reem Island, where they had bought two properties.

The population is growing rapidly, so there is a real need for housing.

That may be so. Yet with the glitz and uniqueness of these projects, not to mention their unprecedented scale, it’s easy to get lost in all the hype.
It’s also tempting to accept the argument that you could easily double or triple your money in a couple of years.

But while buying may turn out to be a smart move, there’s also good reason not to follow the UAE’s property-mad herd.

The first is that the property market looks and acts like a bubble.

Prices have been surging at a clip of 20 per cent a year over the past five years.

At the same time, investors and speculators make up a large share of buyers, which calls into question whether there is enough fundamental demand to justify current prices. As growth in supply eats away at excess demand in the next five or 10 years, the speculators could flee the market, driving prices down ­signficantly.

Abu Dhabi’s Department of Planning and Economy recently warned of just such a boom-and-bust scenario, calling property speculation a “risky business” that “may result in a sharp drop in the value of new units.”

Buying property is an especially risky proposition for expatriates because property rights law isn’t well-developed in the UAE.

If you are arrested and deported after having been found at fault in, say, a traffic accident, there is a chance you could lose your property.

Property investment also involves tremendous political risk. The Government could decide unilaterally to change laws or steer development in a way that negatively affects the value of your investment.

It’s like buying penny stocks in China,” one financial advisor told me. “Go ahead and do it, but be prepared to lose every last cent.”

All this talk about housing is fun, but it ignores one condition under which none of it matters: if you plan to settle down permanently – or at least for the next five years.
That gives you enough time to build up equity to offset the costs of taking on a mortgage and absorb any market swings.

The bigger your down payment, the more insurance you have; 15 to 20 per cent of the purchase price is a solid start.

Of course, you want to be confident that the value of the flat you’re about to shell out millions of dirhams for isn’t going to lose all its value tomorrow.

If you’re just looking for a good place to live, however, most of the predictions are just noise.

Until recent years, nobody aside from a few specialists viewed residential property as an asset to invest in. Houses were places to live and mortgages were forced savings plans that built up equity in a physical asset over decades.

The real estate craze in the US changed all that, as single-family home prices nearly tripled between 1990 and the height of the boom in the summer of 2006, according to the leading US home price index.

It wasn’t until 2000 that the Yale economics professor Robert Shiller put it all into sobering context, showing in his book Irrational Exuberance – which predicted the end of the tech-stock bubble in the US – that home prices had risen at just above the pace of inflation for the prior 100 years. He showed that the US market looked like a bubble and was due for a reversion to its historical mean, but few people believed him until things went south.

Which goes to show that it’s not necessarily smart to think about the house you plan to live in as an investment.
Nobody knows which way the prices are going to go, and most of us need a roof over our heads more than a ticket to vast wealth.

If you can afford to speculate in the UAE’s property boom, do it by all means, but don’t expect to double your money.

One thing I kept hearing from investors at Cityscape recently was that the Abu Dhabi property boom was different, unprecedented, and a unique investment opportunity. It happened in the US stock market in the 1990s. It happened again in the 1990s and 2000s in the US property market. Every bubble is different, but bubbles do have at least one thing in common: they burst.

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