Why real estate is a solid investment, right now and always
From Robert Kiyosaki’s legendary Rich Dad Poor Dad, often considered a landmark among personal finance books for real estate investing, to PWC’s Global Outlook for Real Estate 2018 (1), carefully considered investment in real estate has a well-deserved and age-old reputation for combining stability with excellent yield. In recent decades it has assumed even greater prominence as a highly lucrative component of investment portfolios due to its growing role as a productive part of the economic equation. And this trend is manifested across markets, whether in developed or emerging economies. In many ways, the Dubai real estate market, and that of the UAE, in general, can be seen as a particularly great example of this trend.
A global surge in urbanisation, the positive disruption by emerging technologies and the role of the construction industry is a big reason for the focus on real estate. Further, lowered entry barriers due to financial instruments like REIT and crowd-funding are making access to real estate investing more widespread. However, the inherent strength of the industry derives from how intimately the industry is related to the average human being’s life. From basic necessity to lifestyle aspirations, owning a home is a near universal need and goal. And it is this ubiquitous quality of real estate that has helped it survive downturns and more, to emerge as an investment class that delivers both ongoing returns and long-term capital gains.
Historical strengths that continue to make sense
As per PWC’s Global Outlook Report, with inflation and rising interest rates plaguing economies and other investment tools, real estate continues to attract capital, underscoring its steady appeal over other asset classes. In fact, real estate has been the traditional hedge against inflation. (2). Inflation means a decrease in the value of money over time, while the price of good and services increases. When looked at in the context of real estate, inflation becomes a powerful wealth-building tool. The key lies in the fact that the majority of big expenses (mortgage, property taxes) stay fixed for most of the time one owns the property, while rents and home values continue to rise, due to inflation. And the differential is what creates wealth, as opposed to any other investment class.
A recent comprehensive study, presented in a paper entitled The Rate of Return on Everything, 1870-2015 (3), reported on economic trends and returns in 16 advanced economies over the past 145 years. This comparative and exhaustive study pitted equities, residential real estate, short-term treasury bills, and longer-term Treasury bonds. Each asset class was adjusted for inflation, and all earnings were included along with appreciation in value. For instance, equities were considered with ongoing dividends included, and rental income was, likewise, considered for real estate. Real estate proved to be the most lucrative of the lot, over time. In addition, it was found that real estate had the lowest risk of loss the longer it was held, along with the highest likelihood of building capital equity.
Real estate investment: A coming together of positives
There are several reasons for real estate’s enduring charm as an investment, especially over the long-term, when compared to other asset classes like stocks. There is enough historical data to prove that in real estate your risk of loss is minimised by the length of time you hold on to your property. Sunil Gomes, CEO, Gemini Property Developers opines that real estate markets, globally, have always recovered from their dips in uncertain times. As the market improves, so does the value of your home, whilst always still maintaining an intrinsic value as bricks & mortar. And if you have held on to that asset through the troughs, you continue to build equity, with returns and appreciation back on track, he adds. Real estate also has a high tangible asset value, feels Sunil. He believes a property will always be value in your hand, where other investments could leave you with little or no tangible asset value such as a dip in stocks to net zero value, or depreciation in an asset like a new car.
Real estate also offers compelling value to help de-risk a financial portfolio. Real estate provides opportunities, returns and a level of reliability that make it an unparalleled asset as part of a diversified investment portfolio. Sunil points out that as a tangible asset, real estate also has a significant advantage of being able to be easily leveraged to access bank loans as well as very flexible revenue streams. He sees the capacity to generate ongoing rental revenue, often highly resilient to even extreme downturns, as a crucial advantage. In essence, the asset class combines long-term growth, ongoing income, resilience against bear markets and multiple regulatory advantages – a unique profile for an investment instrument.
To summarise, top benefits of investing in real estate that contribute to its continued status as a preferred solid investment include:
- Steady returns & capital growth: Safe-haven property markets offer regular yields from rentals and reliable capital growth
- Inflation hedge: Historically a sound hedge against the risk of inflation, real estate value continues to beat upcoming inflation levels.
- Diversification & de-risking of financial portfolio: Real estate assets are often less impacted by economic forces and retain their tangible asset value
- Leveraging: Real estate offers the opportunity to maximise your investment capital. Leveraging your capital by securing a high Loan-to-Value (LTV) ratio mortgage against the property enables you to achieve returns that would require a much higher level of personal funding with other investment classes.
Tax planning: In most global markets, property purchases can be intelligently structured to take advantage of tax benefits, a benefit not available to other financial instruments, once again strengthening the ability for you to maximise the potential of your available capital. A crucial advantage of real estate for tax planning is “depreciation”. This tax term allows an owner to write off part of the value of their asset itself every year, significantly reducing the tax burden on the money made, thereby protecting your wealth while growing it.
Real estate in Dubai: a sound investment
The UAE real estate market has been performing particularly well when viewed across the long-term since it opened its doors to freehold property ownership. Despite fluctuations, that are intrinsic to any maturing real estate market, the UAE realty market has responded positively to both stimulus and reforms. Sunil from Gemini anticipates that the inherent strengths and unique value proposition that the UAE real estate sector presents, particularly in the context of the broader global economy, will be a significant factor in ensuring the next expansion in the market. With several recent economic & visa policy changes, the upcoming Expo 2020 and the UAE’s continued focus on the “Happiness” of its citizens, Sunil feels a new demographic of existing and visiting expatriate population will likely drive better performance for UAE realty than comparable markets globally.
Industry experts, speaking at recent Cityscape Global 2018 held in Dubai, were highly optimistic about the UAE real estate sector in the coming years. Their assessment of opportunities was buoyed by the hands-on approach being taken by the government, interest in affordable housing and mid-priced units, as well as the ‘next level’ innovations being pursued in luxury developments. Perhaps even more significantly, investors from China and the Kingdom of Saudi Arabia share in this optimism (4), along with continued interest from a burgeoning middle class in India looking for tax-effective investments.
The recent approval of 100% foreign ownership in specified sectors, the announcement of 10-year visas and the extendable 5-year retiree visa, as well as the steadily rising number of middle-class professionals that are moving to Dubai, to pursue career opportunities in emerging sectors, are all apparent positives. The Dubai Real Estate Market Overview Q3 2018 (5), issued by JLL Research anticipates a synergy between greater interest among the resident population as well as a substantial influx of international capital in response. The now fast approaching Expo 2020 and the UAE administrations visionary and highly ambitious Vision 2021 introduce several points of stimulus that are likely to add to the synergistic effect as well.
Sunil from Gemini is of the opinion that the UAE Banking Federation’s recent move to remove the 20% lending cap, as well as reassess the regulatory definition of the term ‘real estate’, will yield finer market control, ensuring optimal growth that can be stable, strong and long lasting.
The real estate sector has the inherent strength that it is a bridge between the cyclical nature of economies. Individual investors, developers and macro-economic administrators tend to be aligned in the views when it comes to this investment class. When such a confluence of interest, is accompanied by striking opportunities and demographics, as is the case currently in the UAE, it is even more lucrative than usual. For a location that has already enjoyed highly robust phases of growth, the UAE real estate market currently represents a very compelling and solid investment opportunity that should prove irresistible to astute investors.