Dubai - The Land of Oil and Sand

Dubai – The Land of Oil and Sand

Fast Facts

· No Income, Capital Gains or any Property Related Tax.
· Residence Visa is granted to any property purchase.
· Capital: Dubai
· Population: 2.2 million
· Currency: UAE Dirham

Economic Overview

Six thousand years ago, the city of Babylon was the wealthiest in the World. It was a city of incalculable wealth, both loved and loathed across the globe for its opulence and excess.

It was built in the desert on sand and rock & stood for thousands of years, even though many prophesised that Babylon would fall ahead of its time……….Does this sound familiar?

Dubai refers to one of the seven emirates in the United Arab Emirates (UAE).

The modern emirate of Dubai has been ruled by the Al Maktoum dynasty since 1833. The emirates' current ruler, Mohammed bin Rashid Al Maktoum, is also the Prime Minister and Vice President of the UAE.

The Economy of Dubai is valued at US$ 46 billion and has been described as "centrally-planned free-market capitalism." Although Dubai's economy was built on the back of the oil industry, revenue from petroleum and natural gas currently account for less than 3% of the emirate's gross domestic product. (You didn’t know that, did you? :)

So, for you ‘right-side brain thinkers’, let’s back up all these figures we’re throwing around and look at some graphs:

Now don’t get me wrong,13% GDP growth per year cannot be sustained……….and even if and when this growth recedes, would you still be happy with 5-10%? :)

Dubai is also an important tourist destination and port (Jebel Ali, constructed in the 1970s, has the largest man-made harbour in the world !!). It is also starting to develop as a hub for service industries such as IT and Finance, together with the new Dubai International Financial Centre (DIFC).

(It is rumoured that Dubai’s oil reserves will dry up by approximately 2020, and that is why they need to steer away from oil related industries. Thus far, they’re doing a fatastic job – And did I mention that Dubai was voted safest city in the World by Interpol for the past 4 years?!!)
Property Market Review

Now before I get lambasted on how Dubai is 1) built on sand, 2) the oil is drying up, 3) many property developments are behind on schedule and might never be completed, etc etc……let me just say that for every negative calamity prophesised (remember Babylon?), every one of them has been proved incorrect thus far.

People need to live and work in Dubai. And as a place to do business, as a trading centre, Dubai continues to exceed every expectation.

In March 2008, Standard Chartered Bank forecasted an average growth of 15% in Dubai real estate prices, with net new demand for 70,000 residential units and a supply of only 57,000……….boggles the mind, doesn’t it? :)

Dubai is gaining traction as a place to live and work, despite the stress, heat, noise, and high prices. Staff numbers are surging at the Dubai International Financial Centre, an international financial hub regulated to global standards with its law in English.

Rents continue to rise in line with prices, according to Global Property Guide research. Rental yields range from 10.20% on the smallest units, to 6.88% on the largest units.

Apartments

Size = 50 sq. m.
Cost = $206,400
Yield = 10.20%

Size = 100 sq. m.
Cost = $409,500
Yield = 8.23%

Size = 150 sq. m.
Cost = $605,400
Yield = 7.21%

Size = 200 sq. m.
Cost = $794,800
Yield = 7.00%

Size = 250 sq. m.
Cost = $897,000
Yield = 6.88%

(These apartments are the average of the following Development:

Burj Dubai, Dubai Marina, Jumeirah Beach Residence, Jumeirah Lake Towers & Palm Jumeirah)

Now before I get thumped by the ‘But Brigade’………But what about this?..... But what about that?…..but, but, but…..

Just look at the figures below !!.......and don’t come and tell me that transaction costs are high:

TRANSACTION COSTS

Who Pays? (Buyer)

Title Deed = 250AED

Registration Fee = 1%

Who Pays? (Seller)

Registration Fee = 1%

Real Estate Agent's fee = 1.00% - 5.00%

Average Costs paid by buyer

1.01% - 1.05%

Average Costs paid by seller

2.00% - 6.00%

So what are the benefits of buying in Dubai? And how do we go about it?

Foreign nationals (that’s us) are allowed to buy freehold properties in designated areas in Dubai. Gulf Cooperation Council (GCC) whilst nationals (that’s Dubai residents) are allowed freehold ownership anywhere in the Emirates.

Residence Visas are issued to property owners, which extend to their immediate families. These visas are renewable every three years during ownership. (So much for having to live in London for 5 years before you get a passport :)

Property Development can be either be bought using financing from the different commercial banks in Dubai (Foreigners can qualify for 90% mortgages) or staggered payments to the developer before completion. Once the development is completed and units can be handed over to the buyers, full payment of the purchase price must be made.

Combine this favourable buying process with No Income tax, Capital Gains or any Property Related Tax, and you have an almost perfect investment environment.

Conclusion

This modern day Babylon seems to defy logic with its incredible vision of wealth and splendour. But the questions remain:

‘When will it all end?’ ‘And will Dubai crumble and return to the sands on which it was built?

‘Or, will this city prosper and emulate the Babylon of old?

I for one back the latter.

(To view our current Dubai Developments, please click HERE

Property Review - South Africa

South Africa - The Rainbow Nation

Fast Facts:

- Africa 's Biggest Economy.
- The World's largest producer and exporter of Gold & Platinum.
- Capital = Pretoria
- Population = 47 million
- Currency = Rand

Economic Review

If you're a Private Investor sitting in New York / London, and you want to look at the 'possibility' of investing in Africa, where would you start? (I say possibility, because many people still see Africa as a basket case, and even the thought of investing there would warrant you a trip to the hospital and getting intimate with a straight jacket !!)

Normally, you would make a list of all the countries in Africa, and start from top to bottom.........but in the case of Africa, you would have start from bottom to top :)

South Africa (yes, the country and NOT the region) has since 1994 flourished under majority rule and is set to capitalise on this momentum for future generations.

Here's why:

1. South Africa is ranked 24th in the World in terms of GDP , corrected for purchasing power parity.
2. The Johannesburg Stock Exchange (JSE) ranks among the top 20 in the World.
3. The South African Rand (ZAR) is the World's most actively-traded emerging market currency, and was the best-performing currency against the United States Dollar (USD) between 2002 and 2005.
4. South Africa is also Africa's largest Energy Producer and Consumer.

So enough with the 'Colouring in the pretty Pictures and forgetting about the Reality' bit........let's get on with the hard facts, as Africa isn't called 'The Dark Continent' for nothing:

1. South Africa has one of the highest rates of income inequality in the world.
2. Unemployment sits at approximately 25%.
3. The Crime Rate is one of the Highest in the World, but it is the increase of violent crime that is the biggest worry.
4. With the crumbling of the Zimbabwean economy, refugees are streaming into South Africa with an estimated 2 million Zimbabweans already residing in South Africa.

So you may say, 'Please STOP' !!! With these statistics why would anyone in their right mind even have the notion of even looking at South Africa as an 'Investment Hotspot'???

I'll tell you why, and I promise to make it short........but Sweet :

1. The emergence of a black middle-class known as 'Black Diamonds'.

2. The 2010 Soccer World Cup.

3. The ratio of Disposable Income to Household Debt which is still only at 76%.

4. 93% of Land Claims have been completed.

5. Interest Rates are still at 25 year lows from a height of 25% in 1998.

Without trying to illustrate every point made above, I have focused on the correlation between interest rates and inflation below. And without further ado, let the pictures to the talking............ :)

Tito Mboweni (The South African Reserve Bank Governor) implements a monetary policy within an inflation targeting framework.......so what do these fancy words mean??? :

• In 'Layman's Terms - If inflation goes up, then interest rates go up.
  
• If inflation goes down, then interest rates go down.

So, to illustrate this, have a look at what the graphs tell us below:

So how do these graphs above explain the growth experienced in the Property Market?

• - If inflation goes up, interest rates go up and house price growth slows.
  
  
• - If inflation goes down, interest rates go down and house price growth increases.

Property Market Review

So, as mentioned in the Economic Review, there are 5 major factors that make South Africa a great place for property investment..........but what exactly are these 5 factors and how will they affect the Property Market??

Let's discuss these them one by one:

1. 'Black Diamonds' - An emerging black middle-class

- Of the 28,8m adult South African population, 21,9m are of black origin:

• Of those, 2m fall into the category called "Black Diamonds" - Black Diamonds are a group characterised by a certain amount of wealth, education and other middle-class determining factors.
• Black diamonds make up 10 percent of black South Africans, but are responsible for 43 % of black consumer buying power, amounting to a value of approximately R130-billion.
• Their growth has been recorded at 30% over the space of the last year.

2. 2010 Soccer World Cup (SWC) - The Biggest Event in the World

- Estimated 450 000 soccer fans are expected to visit South Africa for the SWC .

• These fans will spend in excess of R30 billion while enjoying the tournament.
• This 'cash injection' will push the economic growth rate up to 6%.
• 150 000 jobs will be created during the tournament.
• R5 billion for spending on stadiums (Renovate existing and New-built)
• R24 billion spending on Gautrain linking Pretoria , Johannesburg and OR Tambo International Airport.

3. 'The Ratio' - Disposable Income to Household Debt

Disposable income is the amount that you're left with after all taxes have been paid.

Household Debt is things such as mortgage / vehicle finance payments, credit cards and Loans.

1. South Africa 's disposable income to household debt is 76%.
   
2. So for every R1 that you make after taxes have been paid, you have to pay 76c toward payments and you are therefore left with 24c.

Now you think, WOW, 'For every R1 I earn I have to fork out 76c before I can start saving'??? (that's if you're the saving type :) That's rediculously high !! So, let's compare it to some other countries:

- Germany = 115%

- Japan = 140%

- UK = 142%

- Australia = 171% !!

As you can see, South Africa 's ratio pales in comparison to other countries around the World !!

4. 'The Zimbabwe Scenario' - To take or not to grab the Land

- 97% of South African land claims have been settled, thereby leaving the issue of 'Zimbabwe Land Grabs', becoming a reality in South Africa, as very unlikely.

5. 'The Interest Rate' - Currently at a 25 year low

• From a record interest rate of 25% in 1998, South Africa is experiencing 25 year low interest rates.
  
• The current Repo Rate (the rate at which the SA Reserve Bank loans money to Commercial banks) is currently at 10% while the Prime Rate (the rate at which Commercial Banks loan to the public) is at 13.5%
  
• With inflation being kept in the monetary policy range of 3-6%, any significant increases seem unlikely.

Just to give yourself a little bit of time to digest all the 'heavy' information above, let's look at some pictures !!

Look at the House Prices to Income graph below:

As you can see, compared to the UK , Australia and USA, South Africa's house prices are still very much under-valued.

• And coming from such a low base regarding property growth, is this where the party ends !! To quote the song from BTO.........'You aint seen nothing yet' :)

Conclusion

As South Africa moves into almost 15 years after the end of 'Apartheid', there are signs that the 'Lighthouse of Africa' still had a far way to go in order to be competitive on the world stage.

But with onset of a new era, with the new black-middle class, 2010 Soccer World Cup, comparatively low Disposable Income-Household Debt ratio, the 'Zimbabwe non-issue' and low interest rates at 25 year lows.........things are definitely on the up for the 'Rainbow Nation'.

(Sources: http://www.globalpropertyguide.com/ , http://www.wikipedia.org/ Reuters, http://www.absa.co.za/ & Daily Telegraph)