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Like any other investment opportunity, a thorough understanding of the investment terminology can be an asset to investors to study and analyze performance.
May 30, 2022 | Zahid Rauf | UAE | PropTech
The real estate market in the UAE is a lucrative playground for many investors. Generating one of the highest rental yields worldwide, UAE is termed a haven for real estate investors across the globe. The Dubai market has an average rental yield of 9% and the Abu Dhabi market averages at 7.4% , both values significantly higher than the current global average of 4% to 6%. A possible investment opportunity in Dubai can value up to 8 to 10% in return yields based on the performance metrics of the property.
Like any other investment opportunity, a thorough understanding of the investment terminology can be an asset to investors to study and analyze performance. A comprehensive comparison between multiple investment opportunities can only be made when every aspect of the property investment is discussed - from the aesthetics and amenities provided to the economics at play. Knowing the key difference between profits, yields, and return on investment(ROI) plays an important role in doing just that.
Three basic performance metrics that are not subject to change based on the time of investment are- Gross Yield, Net Yield, and Return on Investment (ROI).
As commonly used in property advertisements, Yield refers to the gross yield of a property. The Gross Yield of the property is the total rental income from the property divided by the cost of purchase. A simple mathematical representation will look as follows:
Gross Yield = (Annual Rental Income / Cost of Purchase) x 100 %
On the other hand, Net Yield refers to the value of income from the property after deducting the operating expenses. While this is more accurate of a value, it is rarely used in marketing pitches as yield numbers.
Net Yield = Income - Cost of Expenses
For example, if a property costs Dh100,000 and has an annual rental income of Dh10,000. The Gross Yield of the property will be 10%. While this value seems like an adequate representation of the returns from an investment, it does not factor in the costs and expenses incurred. In a scenario like this, maintenance and facility costs are around Dh7,000. The Net Yield, in this case, will be Dh3,000.
Return on Investment (ROI) is termed as the total return of income from an investment or the ratio between net income and investment. A high ROI means the investment's gains compare favorably to its cost. Calculated by dividing the net yield from an investment by the total investment made. Since this metric takes into account the expenses and costs incurred, just like net yield, it is considered more accurate of a value while comparing prospective investments.
Return on Investment = (Net Yield / Total Investment) x 100%
Taking the scenario of the example above into consideration, if the Net Yield is Dh3,000 and the Total Investment on the property is Dh100,000. The ROI value will equal 30% for the year in question.
While discussing lucrative investments another set of terms often used are expenses and acquisition costs. The cost of purchasing a unit of investment along with the transactional fees comprises acquisition costs in the UAE. This value includes taxes incurred, fixed registration trustee fees, and fees of middlemen involved such as brokers and consultants.
Acquisition Costs = Cost of Investment + Transactional Fees + Taxes
Expenses broadly include operational costs involved in a property including services charges, insurance, allowances for repairs and maintenance, and in some scenarios professional property management fees.
Expenses = Facility Management + Community Management + Maintenance + Insurance
These combined with parameters such as investment rates, type of property, and leverage used are factors while calculating optimum return on investment.
While the UAE market has grown by leaps and bounds within the past decade, there are still a few laws that restrict foreigners from inbound investments in the region. However, the introduction of the Abu Dhabi Law allowing 100% foreign ownership of real estate has increased the opportunities for overseas investment while introducing higher transparency for longer-term investments. This shift in the market will also pave the way for increased investment and economic activity in the region. Similarly, Dubai is another emirate racing towards economic growth through real estate investment. With the introduction of the 10-year investor visa and global REM events being held in the 2019-21 period, the presence of global investors in the Dubai market with investments of higher values has been further cemented.
As the region hurtles towards becoming an investor hotspot, the rental and buying prices are expected to only go up higher. Being aware of the laws and regulations along with the right parameters to select the right investment opportunity is key for those looking to expand and diversify their investment portfolio in the region.
