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Low mortgages make some apartments cheaper to buy than rent in Dubai

Posted on 10 April 2011 with 7 comments from readers

The financial case for buying rather than renting in Dubai is currently tilting in favour of buying with mortgage interest rates down from eight per cent a year ago to around six per cent. But you still need to do your calculations carefully as this is not true for all apartments.

Service charges make a big difference. Take a modest one-bedroom apartment at The Greens now available for purchase at AED550,000 or for rent at AED50,000 with a service charge of AED11,000.

Renting vs buying

This unit will cost AED33,000 in mortgage (although in practice less with the 25 per cent deposit) plus the service charge, making a total of AED44,000 (actually AED35,750 with the deposit paid). To rent the same unit is AED50,000.

Then look at a four-bedroom penthouse in the Shoreline apartments on The Palm Jumeirah. You can presently rent this unit for AED250,000.

To buy the same property for AED4 million would mean finding AED240,000 in annual mortgage payments (or AED180,000 with 25 per cent deposit paid), plus a AED100,000 service charge making a total of AED340,000 (AED280,000 after deposit paid).

Clearly the buyer of a Palm Jumeirah penthouse would still be better off renting than buying because the landlord gets to pick up the horrendous service charge. Indeed, the same unit would have to sell for AED2.5 million to cost as much in mortgage payments annually as renting it.

Service charge impact

Therefore residents looking at buying rather than renting in Dubai are well advised to check service charges as this can make all the difference.

Of course, if you could find a property where the asking price was depressed due to a high service charge that would be a very different proposition. Then you could gamble on either rising house prices reducing the proportional impact of the service charge in future years, or an elected community board eventually lowering these charges.

However, in the meantime high service charges look likely to ruin the case for buying in certain areas of Dubai, while those apartments with lower service charges will command a modest premium and still be a good deal.

Posted on 10 April 2011 Categories: GCC Real Estate

7 Comments posted by readers:

Comment by nigel - 10 April 2011

100k service charge? seems more tightening to come here in dubai.

I note with the release of new stock in jumeira triangle/j village/silicon oasis/global village etc the number of expat families flocking out for bigger/better/cheaper is creating big overhang in the more established communities of Meadows/JI/Springs/Greens/AR etc.

Figure the same must be happening in the singles market affecting the large volume of apartment stock released this year.

Good time to be a tenant in dubai vs other markets where +ve rental growth is breaking records.

This trend to have a very positive long term impact on Dubai as business/trading hub. Low cost base and good infra is an amazing combination which other nations must envy. Great long term options, short/medium term pain, good time for uae to consolidate and reform policy to make it even easier to raise capital and conduct tax free regional activities.

Comment by conrad - 10 April 2011

hi nigel is there any thing else you could tell us about the market as i am thinking of buying a flat but i am aware there is a cloud on the horizon.

Ed Note: You need subscription to our newsletter, we discuss this in detail in most editions.

Comment by Andy - 10 April 2011

I think what Peter means by service charge is the community fee which alone is way beyond what any state in the US charges for yearly property taxes. Before anyone buys anything do your home work on them community fees because the community fees are separate from the building fees of which you also have to pay. Many of the annual fees for a 2 bedroom unit in Jumeira Lake Towers are a good 30,000 Dhms. per year. I know this for a fact because I along with everyone else found out the hard way once they handed us the keys to our units at Saba Tower II. If you live around the Burj Khalifa area you are looking at 35-50K per year in annual community fees so if you are a landlord you will need to take that into consideration as well too.

Imagine a unit for 1.5 million Dhms. to where you make a 25% down payment of 375,000 cash and borrow 1,125,000 at an annual rate of 6% (assuming you can get one at this rate). At 6% interest you are paying 67,500 Dhms. per year in interest alone and then you add the 40,000+ in community fees (assuming you live near Burj Khalifa) and you get over 107K Dhms. Per year between fees and interest along. This is also before you pay your monthly utility bills which are not included.

Things will look attractive once the banks lower interest rates and once the government lowers their community fees as well. For the 8000-9000 Dhms. per month of which one has to pay per month in Dubai for misc. fees/interest one can live like a king in Thailand. No wonder Marc Faber is in Thailand.

Comment by sandman - 11 April 2011

ED – when you add in the following;
– Mortgage App Fee
– Valuation Fees
– Life Insurance Fees + Premium
– Brokers Fees
– RERA Registration Fees – Title + Mortgage
The situation looks pretty grim for a buyer.

With the current lack of clarity on the Owners Associations getting registered, taking control of the services, fees, and getting a handle on the maintenance liabilities – who in their right mind would buy in Dubai???

Maybe a villa where you own the land & building outright – and only pay community fees.
Provided that – rents stabilise, values stabilise, cost reduce, interest rates stay low, laws dont change for the worse…….lots of ifs here.

another couple of years to go yet…….watch the US RE market……..not looking good

Comment by philcu - 17 April 2011

No need for scaremongering comments. Just get all the fees together and do the math. Which is basically the thesis of the article.

My banker told me that sale prices in Downtown Dubai have gone up 7% in the last couple of months.

Comment by philcu - 18 April 2011

A Dubai mortgage broker: “more people looking at buying Dubai property now than at any time in the last 5 years”

Ed Note: So that includes 2006-8, the boom years! – these guys will just say anything!

Comment by Nigel - 23 April 2011

Exactly, these guys (bankers & RE) are paid to say these things.

What the folk in here are sharing are personal anecdotes to help those afar to form a balanced view on investment options here in the UAE. Scaremongering comments could be a lot worse than this! There are some very sad stories about…

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