Published On: May 3, 2024Categories: Real Estate10 min read1945 wordsViews: 18

Dubai’s property market is experiencing significant growth, making it an attractive option for buyers, but careful financial assessment and consideration of associated costs are crucial before making a purchase.

Dubai’s real estate market has been attracting buyers from the world over, due to its recent removal from the FATF Grey List, tax-free incentives, and the promise of substantial returns on property investments.

In the first quarter of 2024, Dubai already shattered records with over 34,000 transactions recorded by the Dubai Land Department (DLD). This figure marks a 20 percent increase compared to the same period in 2023, cementing Q1 2024 as the most active quarter on record for the emirate’s property sector.

Yet, the question persists – Should I buy property? The short answer from experts is normally yes. But, what is the first step? Building your savings, personal finance experts told Arabian Business. If you are looking to buy property worth AED1 million, here is all you need to know.

First things first, are you financially ready to be a homeowner in Dubai?

Dubai’s property market is experiencing significant growth, making it an attractive option for buyers, but careful financial assessment and consideration of associated costs are crucial before making a purchase

Dubai’s real estate market has been attracting buyers from the world over, due to its recent removal from the FATF Grey List, tax-free incentives, and the promise of substantial returns on property investments.

In the first quarter of 2024, Dubai already shattered records with over 34,000 transactions recorded by the Dubai Land Department (DLD). This figure marks a 20 percent increase compared to the same period in 2023, cementing Q1 2024 as the most active quarter on record for the emirate’s property sector.

Yet, the question persists – Should I buy property? The short answer from experts is normally yes. But, what is the first step? Building your savings, personal finance experts told Arabian Business. If you are looking to buy property worth AED1 million, here is all you need to know.

First things first, are you financially ready to be a homeowner in Dubai?

UAE-dirham-Dubai-real-estate
Property buyers will have to consider a few additional costs – other than down payment – that are part of the buying process and ownership. Image: Canva

“It’s essential to have a secure job with a stable income, manageable debt levels, and sufficient savings for a down payment and emergency fund. If you are borrowing money to buy your home, consider how long you will live there as there are considerable costs associated with buying a property and in the early years little of the mortgage debt is repaid. Therefore, if you only intend to stay in the house for a short period of time, renting may be more cost effective,” Stuart Porter FPFS, Wealth Coach and Chartered Financial Planner, said.

Porter explained that when an individual contributes a higher amount of their own funds towards a property purchase, the need for borrowing decreases.

A larger down payment provides a wider range of lenders to choose from and often grants access to favourable interest rates. It also results in lower monthly repayment amounts, he said, adding that the minimum deposit for buying property is controlled by the UAE Central Bank and depends on the borrower’s “status” as well as the property’s value.

“Expatriates buying a property valued at less than AED5 million can borrow up to 85 percent but this may not be available from all lenders at all interest rates,” he said.

Property buyers will have to consider a few additional costs – other than down payment – that are part of the buying process and ownership, he said. These include:

  • Mortgage application fee (typically 1 percent of the loan amount)
  • Mortgage broker fee;
  • Land department fee (4 percent of property value in total);
  • Estate agent fee (2 percent of the property value in total),
  • Registration fee for new buildings;
  • Utilities deposit and connection;
  • Home insurance (building and contents) life insurance to repay the loan on death, moving costs;
  • Community and service fees and a valid will to control how your property is distributed on death

“Buyers should budget an extra 10 percent of the property value to cover these incidental costs,” he said.

For expats looking to buy property worth AED1 million, the down payment is 25 percent, UAE-based financial advisor Mike Coady told Arabian Business.

“If you foresee a property purchase in the near turn, retain savings in a high interest savings account where you have the benefit of a return over and above inflation plus instant access.  If you have a time horizon of many years, then consider alternative assets such as equities and ETFs for potentially superior returns.  If you are saving towards a deposit, ensure you set a goal and calculate the savings required each month to build up the deposit required. A good financial adviser can help you with this and take into account, currency, growth rates, inflation and the changes in property prices over that time,” he said.

Coady recommends evaluating the stability of your long-term income and assessing the possibility of future expenses. He said it is best to review the broader perspective in terms of long-term financial planning, including retirement, upcoming education costs, and significant life events.

Property ownership should always be integrated into your overall strategy, aligning with other aspects of financial planning. Naturally, considering your potential time horizon in the UAE is a crucial factor to consider, he added.

What are the advantages of owning property in Dubai?

Dubai real estate
Property buyers must assess current finances before making the decision.

There are many financial advantages to owning property in Dubai, according to Coady, some of which include “potential capital appreciation, rental yields that are higher than many other global markets, and the absence of property taxes. The UAE’s strategic location and its growing economy also enhances the investment appeal significantly.”

He added that since property taxes are not imposed, there is notable “financial benefit.”

However, he said that it is important to be mindful of service charges applicable to community developments.

“If you sell the property in the future as a resident of a country that has local income and/or gains taxes you will likely pay the tax on the full increase since you purchased the property,” he said..

Echoing the sentiment, Porter added that owning property serves as a tangible asset that can “offer stability in housing costs compared to renting, as mortgage payments may remain relatively constant while rents can increase over time.”

Both Porter and Coady also explained that property buyers must, however, assess current finances before making the decision.

“It’s crucial to conduct a thorough assessment of your current finances. This includes evaluating your income, expenses, savings, and debt obligations. It’s essential to ensure that you have a stable income and sufficient savings to cover the down payment, purchase costs, and ongoing mortgage payments. Having three to six months expenses in the bank is essential to cover these costs no matter what,” Porter said.

In addition, Coady also said buyers must review their credit score as well as their monthly income versus surplus. “Ensure you have enough for the down payment, closing costs, and an emergency fund without jeopardising your financial stability,” he said, adding that credit scores can be improved through regular bill and loan payments, reduction of outstanding short term debt debts, avoiding new debt commitments, and checking credit report for errors. “Maintaining a long history of responsible credit use will improve your score,” he said.

Lifestyle considerations also play “a huge part” in the success of a property, he added.

“When looking to buy you need to first identify if you are purchasing to live in or as a rental. This would then impact the type of property you purchase such as an apartment in the city or a villa in the outskirts. Local amenities will also help the value of the property over the long term. Does it have a good school nearby, shopping and amenities within the community area? Easy transportation and time to work are all important points to consider,” Coady said.

Budgeting costs for buying Dubai property

Dubai-real-estate-down-payment
Home buyers must aim to save at least 25 percent of the property value for down payment. Image: Canva

Home buyers must aim to save at least 25 percent of the property value for down payment, he said.

“For ongoing mortgage payments, a common rule is the 28/36 rule, where no more than 28 percent of your gross monthly income should go towards housing expenses and no more than 36 percent towards total debt servicing,” he said, adding that apart from mortgage payments, it is important to set aside funds for annual maintenance, possible repairs, community service fees, and insurance.

“A rule of thumb is to budget 1 to 2 percent of your property’s value each year for maintenance and unexpected repairs.”

Porter added that mortgage and rent payments are “the biggest outgoing” in the family budget. “As a major fixed cost, it should be kept to a minimum as it needs to be paid in order to keep a roof over your head,” he said, adding that no more than 30 percent of the buyer’s monthly income should be allocated towards mortgage payments, inclusive of principal, interest, and insurances (life insurance and home insurance).

Porter further explained that budgeting and managing finances for homeownership requires creating a thorough budget that covers mortgage payments, property community fees, insurance, maintenance expenses, and utilities. He added that it is important to prioritise saving for emergencies and ongoing home maintenance while also considering long-term financial objectives.

Challenges of owning property in Dubai

Dubai real estate
Other challenges include maintenance costs and external maintenance of communal areas which could detract from the property’s value. Image: Canva

According to Coady, risks include property value fluctuations, changes in rental yields, and potential tenant vacancies if you’re an investor.

“Minimise these by choosing properties in desirable and up and coming locations, understanding market trends, and setting aside financial buffers for unexpected downturns. Market timing also plays an important part as buyers can benefit from anticipating and understanding market cycles. You should also take into consideration broader economic factors such as interest rates, economic growth, etc. which can affect property values and again, using these windows would make an ideal time for purchasing,” he said.

Other challenges include maintenance costs and external maintenance of communal areas which could detract from the property’s value.

Are there any alternatives other than buying property in Dubai?

dubai real estate investments vs stock market
There are four main asset classes for alternatives. These include cash, fixed income securities, property, and equities. Image: Canva

“Yes, alternatives include investing in real estate in another country, real estate investment trusts (REITs), stock market funds and ETFs, or starting a business. Each has its own risk profile and time horizon, so choose based on your financial goals and risk tolerance,” Coady said.

There are four main asset classes, according to Porter for alternatives. These include cash, fixed income securities, property, and equities. A balanced portfolio has exposure to each of these asset types, with each has its own advantages and disadvantages, he said.

“Property for example, has the potential for capital growth but is illiquid, so if you need cash quickly and all of your money is in property, you may have a problem. Residential real estate, which is what most people think about when considering an investment in property, is only a small part of the property sector. The sector includes: factories, warehouses, offices, shopping malls etc. However few people have the resources to invest in these assets themselves. Investors can diversify their property holdings by investing in these assets via collective investment schemes like exchange traded funds (ETFs) and real estate investment trusts (REITs).”

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