Real estate is the oldest and largest asset class in the world – partly because of its success at generating returns but also because of its perceived simplicity. Not everyone owns stocks and bonds, but everyone has lived in a home and paid rent to a landlord or bought and sold their homes when moving. As real estate is one of the largest segments of the UAE economy, many residents may think they’re real estate experts just from being a renter, but that’s far from the truth. Real estate, like any asset class, carries risk.
There’s a lot that goes into being a successful real estate investor, and many first-time investors dive straight into the market without taking into account the risks involved in Dubai real estate investing. Let’s look at six ways to minimize your risk and maximize your returns when investing in Dubai real estate.
1. Learn About the Real Estate Market in Multiple Areas
The Dubai property market is made up of multiple micro-markets with their own ecosystems and trends. The Dubai Marina property market will be drastically different from say that of Jumeirah Village Circle (JVC). The Marina will be primarily studio, 1, and 2 bedroom apartments meant for bachelors and tourists. JVC, on the other hand, will be primarily 1, 2, 3, and 4+ bedroom villas meant for families and residents. The upcoming supply may also be different as well, as the Marina is a more mature community while JVC has plenty of more room to grow. The phrase “location, location, location” is a popular phrase for a reason.
2. Ready Sale or Off-plan property?
It’s important to know what sort of property you’re looking to invest in. Are you thinking of building a property from the ground up or are looking to invest in a ready-made property? There are pros and cons to choosing either one. Off-plan lets you specify the property’s profile: its location, unit variety, and unit sizes, stories, and more but at the cost of fronting the capital to build it from the ground up. When it comes to ready sales properties, you can’t change much about them but you don’t have to commit months or years’ worth of capital to see it to completion, as it’s already built. Moreover, look at what the Dubai property market’s trends are telling you, off-plan properties have underperformed since the pandemic, with investors preferring to purchase ready sales properties instead as seen in the figure below which showcases residential transactions history between off-plan and ready sale properties. Today, ready sales properties make up more than 70% of total transactions in the Dubai market.
3. Select a Property Based on its Functional Attributes
You can own a property in Marina but if it doesn’t meet the quality standards of the building surrounding it, your rental income will take a hit. If the building’s quality is poor or mediocre, it may be prone to safety issues like fires or face regular regulator inspections and fines. If the fixtures and fittings are old or poorly implanted, renters will complain and later look at other options. If the property has no parking space and is far from amenities like supermarkets or restaurants, potential renters will steer clear away. If the property is located in an area where 2 years from now is no longer near the new city center – as is the case in a rapidly developing city like Dubai – it may risk becoming obsolete in terms of location. So, an investor must look at the functional aspects of the design of each project they invest in so as to reduce the risk of the property becoming obsolete in the future. Superior build, floor plans, the density of amenities, and design are essential factors while selecting a property in the residential property market.
4. Time the Real Estate Cycle.
Real Estate regularly goes through multi-year cycles of boom and bust periods, just like any other long-running asset class or trend. Real estate cycles are nuanced and there can be plenty of opportunities throughout the cycles to make successful investment decisions. For example, in Dubai, while real estate prices generally fell during the 2014-20 bear market, some areas like Dubai Marina/JBR performed better relative to the Dubai average. The real estate cycle is a concept that every successful real estate investor must understand. All four phases of the cycle – recovery, expansion, hyper supply, and recession – cause the real estate market to dramatically shift, so investors must keep their hand on the pulse and eyes on the data to find opportunities in each stage of the cycle.
5. Know Your Investment Horizon
Real estate is a large ticket investment and doesn’t have the sort of liquidity that other asset classes like stocks and bonds may have. That’s why investors must understand their own personal financial situation and plan for the holding period that may be years down the line. Real estate investing is a marathon, not a sprint. It provides a consistent stream of income that’s safe and reliable, unlike say crypto, where you have a chance – a very low one at that – of making a significant return (or loss) on your investment overnight.
6. Diversify Your Real Estate Portfolio
Diversification is the best way to mitigate risk. This is a universal concept in investing, whether it’s in stocks, crypto, and especially in real estate. Owning multiple properties in different areas at various rental price points helps to mitigate your risk. If one renter in Marina defaults on their rent, you’d still be generating income from another in Downtown Dubai. If property prices in JVC are in free-fall, but your property in Palm Jumeirah is sky-rocketing, you’re still benefiting from capital appreciation and higher potential rents/future selling prices. However, it’s expensive to own multiple properties, as real estate is a high capital, high reward asset class.
The bottom line
Real estate investing is a lot more complicated than it seems. It can take weeks to understand the fundamentals, months to analyze market data and trends, and years, or even a lifetime, to become a successful real estate investor. Minimizing risk enables you to maximize your reward, whether it’s in the short-term or the long term. At smartcrowd.ae, we enable our clients to mitigate as many risks as possible when investing in Dubai real estate. We analyze real-time market data when analyzing properties. Our staff has decades of combined experience in the Dubai real estate market space. Our property selection process ensures that we have some of the best properties in the market available for investment. Our crowdfunding model enables our clients to purchase multiple pieces of real estate across the city, ensuring a diversified portfolio that is always generating income for our clients.