Dubai: Jet to Let Guide to Dubai

Dubai is the second largest of the seven Persian Gulf states that constitute the United Arab Emirates (UAE). The name Dubai also refers to the modern, highly developed and lively city with a prosperous business centre, high temperatures and coastal resorts that have attracted the wealthy from around the world. Visitor numbers are growing and extremely elaborate property developments look set to further establish Dubai city as a true gem of the Middle East.

Why invest in Dubai?

Dubai offers a virtually crime-free location, modern buildings and many business opportunities. The tax system has been a key incentive for foreign investors. With no Corporation Tax in the selected ‘free zones’, many overseas companies have chosen Dubai as a country in which to locate and expand their businesses.

In addition to this, the personal tax system in Dubai is extremely favourable for investors. This doesn’t mean that the taxman in the UK will not want some of it, but with professional advice you can minimise your tax bill and take advantage of the opportunities that are on offer here.

The story so far…

After the 1971 declaration of independence from the UK, the UAE was formed. The UAE consists of seven emirates (Abu Dhabi, Dubai, Sharjah, Ajman, Umm al-Qaiwain, Ras al-Khaimah and Fujairah) and Dubai is the second largest by area after Abu Dhabi. 80 per cent of the country is uninhabited desert and the majority of the people live in the city of Dubai.

Dubai is the creation of two decades of development that has transformed what was once a minor port into a leading centre of business and commerce and a growing tourist hotspot. The ruling family decided to change the country from an oil-focused economy to concentrate on services, particularly tourism, and the city that has emerged as a result is remarkable.

Development is continuing at rapid pace with approximately 15 per cent of the world’s cranes currently located in Dubai, making it the fastest growing city in the world. Each new development is more incredible than the last. The three Palm island developments, The World, and now the $14 billion development known as the Dubai Waterfront are amazing projects. The Waterfront project will be seven times larger than the island of Manhattan and add over 800 kilometres of coastline. The size of this development is difficult to overstate. The many man-made islands dotted with houses and hotels, 70 kilometres of canals, a new city centre and one of the world’s tallest buildings will accommodate over 400,000 people in an area over 270 square kilometres. This will be packed with luxury hotels and resorts, including an underwater hotel, as well as shopping centres and entertainment venues.

Dubai offers a fantastic quality of life with modern medical services, excellent schools and outstanding shopping and entertainment facilities. The people at the leading edge of this rapid change describe it as the city where dreams come true. Will this be true for the jet-to-let investor?

Where is it?

The UAE is in the eastern part of the Arabian Peninsula. The country’s total area is approximately 82,880km squared and its neighbours are Saudi Arabia to the west and south, Qatar to the north and Oman to the east.

The UAE coastline is 1,318km along the southern coast of the Persian Gulf and for about 90km along the Gulf of Oman – an area known as the Al Batinah coast.

What is the weather like?

Dubai is a hotspot for more than property – summer temperatures often exceed 48°C. The climate is subtropical and arid and summers are extremely hot with high humidity near the coast. The temperature generally ranges from 20 to 35°C with an average night-time temperature of 15°C.

Language

The estimated population of the UAE in 2006 was over 2.6 million of which only about 20 per cent are thought to be UAE citizens. The remaining inhabitants are other Arabs, Iranians, South Asians, East Asians, Europeans and Americans.

The UAE is an Islamic country and its official language is Arabic. English is used as a second language in business. Persian, Hindi and Urdu are also spoken.

Currency

The currency across all of the UAE is the Dirham (AED), which is made up of 100 Fils. The Dirham is pegged to the US dollar at AED 3.671: US $1.

Politics

The UAE is a federation of seven emirates, each of which is ruled by a hereditary monarch. Individual emirates control their own economy and decide what to do with oil revenues, although a substantial amount goes towards the UAE central budget. The current President of the UAE is His Highness Sheikh Khalifa bin Zayed bin Sultan Al Nahayan, who acceded in 2004 and is also the ruler of Abu Dhabi. The Prime Minister and Vice President of the UAE, and ruler of Dubai since 2006, is His Highness Sheikh Mohammed bin Rashid Al Maktoum.

Dubai is similar to other gulf states in that it’s dominated politically by ruling families, in this case the Al Maktoums, who hold all of the key positions in the city state’s government. The Al Maktoums are largely popular, as Dubai has experienced exceptional prosperity since the 1970s under their rule. This is due not only to the discovery of oil but also to the phenomenal development of recent years.

There are no political parties or voting rights within the UAE, no Income Tax and the standard of living is high.

The UAE has a form of Assembly known as the Federal National Council. (FNC). Steps towards greater democracy have been taken with the announcement that FNC members will be elected.

The UAE was a founding member of the Gulf Co-Operation Council (GCC), created in 1981. Members of the GCC include Saudi Arabia, Kuwait, Bahrain, Qatar and the Sultanate of Oman.

Economy

Historically, the UAE’s economy has been largely financed by oil revenues. To reduce dependence on oil export earnings, the government launched a strategy of economic diversification and, as a result, non-oil sectors now contribute more than 94 per cent of its national income (GDP). Dubai’s contribution to the UAE’s overall economy is about 29 per cent.

Other strong sectors have been financial services, construction, trade, technology and communications and tourism. The Emirate has established free trade zones to boost investment and more are in the pipeline. Dubai’s economy is booming and its current rate of economic growth is among the best in the world.

Tourism

Tourism remains an important economic activity in Dubai and all across the rest of the UAE. The country has made considerable investments by constructing world-class hotels, leisure facilities, restaurants and motorways.

Some 6.2 million tourists visited Dubai in 2005, up about 14 per cent from the previous year. Hotel revenues were almost $9 billion in 2005. Tourism is forecast to continue expanding and Dubai plans to increase arrivals to 15 million by 2010. A new project is planned to expand Dubai’s airport capacity to 70 million passengers per year by 2009.

Economic growth

In 2005, the UAE’s economy grew by 6.5 per cent and the GDP per capita was $29,100. Economic growth has been very robust over the last few years and between 2000 and 2005 real GDP averaged a remarkable 7.25 per cent. The Economist Intelligence Unit forecasts growth of 6.4 per cent in 2006. Dubai has now fully established itself as a regional hub for trade and finance.

Interest rates

Short-term interest rates in Dubai currently stand at 4.19 per cent.

Unemployment

According to the Ministry of Labour, the number of unemployed nationals has increased from 8,000 in 1995 to 35,000 in 2005. While the official unemployment rate is zero, the reality is that the rate is considerably higher for UAE nationals.

Inflation

The UAE has managed to keep inflation low in the last couple of years, despite expected rises. The rate of inflation was 4.5 per cent in 2005 and it’s forecast to drop slightly in 2006.

Foreign direct investment (FDI)

The UAE government understands the importance of FDI and established free trade zones in an attempt to attract large international businesses. Presently, the UAE (particularly Dubai) is home to many large information technology and media companies such as Microsoft, Compaq, IBM, CNN and Reuters.

Currently, there are 15 ‘Free Zones’ in force in the UAE and 12 more are planned. The UAE Free Zones, which allow 100 per cent foreign ownership and tax exemptions on all company earnings and private income, are home to approximately 5,000 companies.

Economic summary

There is no doubting the huge economic advances made in Dubai over the last five years and the FDI table above is a clear illustration of this. It’s an attractive place to do business, fiscal policy (tax) is favourable and the government’s free trade zones and grants are attracting big international companies. Dubai has managed strong economic growth with inflation under control. The growth story will continue as the country strives to take a dominant regional lead in information technology, financial services and tourism.

What does this mean for the property investor?

The property market is led by overseas property investors and expatriate workers. Property prices have risen dramatically over the last few years, driven in part by demand and lack of supply and in part by development companies raising prices. At this stage, the jury is out on Dubai for the jet-to-let investor as few investors are selling on the open market (rather than to other investors) so it’s difficult to judge how long they take to sell and at what price.

There is no shortage of property in Dubai and the supply side of the price equation is certainly not inelastic. So getting in at the right price is crucial. Picking up a resale cheaply may offer more opportunity for a bargain than buying off-plan. As with all investments, you also need to have a clear exit strategy.

So, what is the catch?

Dubai has relatively few social issues in comparison to its Middle Eastern neighbours. Crime is virtually non-existent and the population is a glowing example of cultural harmony, but there are a few things to bear in mind:

Transport

According to the 2005 Gulf Traffic Survey, only 13 per cent of people using cars or public transport felt safe on the roads. Dubai’s public transport system was rated bad or very poor by 74 per cent of users. Of all methods of transport, the abra (water taxi) was the most dependable with almost 86 per cent of users rating them as good or excellent.

Human rights

Labour issues in the construction sector have attracted the interest of human rights groups after workers from India and Pakistan caused $1 million worth of damage in riots in March 2006 in protest about low wages and poor conditions.

Terrorism

Although not presently an issue any investor who keeps an eye on world affairs will understand that Dubai, particularly given its Western leanings, is a possible future terrorist target. Investors must look at all potential risks when investing in any market and have a plan for all eventualities.

The property market

Property investment in Dubai first hit the headlines in 2002 when Sheikh Mohammed issued a decree allowing foreigners to buy freehold property in the country. Since then, prices in this new market have risen sharply, doubling in just three years.

One factor which has supported the property market in Dubai is the country’s acceptance of other cultures. Dubai is one of the most popular overseas locations for expats and is the most westernised of UAE cities evidenced by the 100,000 Britons who live there out of a total population of just over one million.

The property market has developed because of:

• a fast growing economy;
• subdued inflation;
• strong employment opportunities;
• a very high demand for properties from investors and expatriates;
• the relaxing of the law allowing foreign freehold ownership of property.

More than 80 per cent of Dubai’s inhabitants are foreign nationals, who work in the country under short-term contracts that are generally for one year. At current growth rates the economy needs more workers, which in turn increases the demand for rental property. Dubai’s population growth is one of the highest in the world and it’s projected to double to two million residents over the next few years.

While the demand for property still remains high, there has been little supply over the past four years, which has put a squeeze on rental demand and prices. Rents have risen by an average of 38 per cent in 2005 and this, together with new property rights for foreigners, has encouraged many to buy rather than rent. However, in November 2005, rental price increases were capped at 15 per cent until the end of 2006. The government is bridging the gap between the current shortage of supply and the completion of the huge amount of new property in late 2006 and 2007.

Research suggests that 85 per cent of off-plan apartments and 50 per cent of off-plan villas were bought in 2004 by speculators, most of whom intend to sell before completion. Some of the off-plan units are reported already to have been resold up to five times to other investors, despite delivery being a number of years away. Those investors have made a sizeable profit as property prices have risen up to 100 per cent before completion.

Supply and demand is the key concept in economics and property investing. So far, the see-saw favoured the high demand side allowing investors to make good profits, but supply is increasing fast. A huge number of large-scale residential building developments have been started which will release a massive number of units onto the market in the next few years, but even with the projected increase in population over the next four to five years it remains uncertain as to whether the demand will be sufficient to absorb this huge supply. It seems likely that the market and prices will cool as the mass of new developments comes on stream.

Property hotspots

It’s fair to say that the whole city of Dubai could be viewed as a hotspot, and after considering the opportunities it presents, it’s easy to see why it’s such an attractive option for jet-to-let investors. The cost of property is generally cheap in comparison to Europe and the UK. Apartments in the less upmarket locations can be as little as $60,000 and villas are available for around $150,000. The majority of properties are bought off-plan, with continual construction of new apartment buildings ensuring a steady supply of opportunities.
In addition to Dubai’s land reclamation projects at Dubai Waterfront, The World archipelago and the three Palm islands of Jumeira, Jebel Ali and Deira (the largest man-made offshore structures in the world), new developments planned include International City with its wide range of different architectural features and Golf Towers, which will be particularly appealing to the golfing fraternity. Dubailand will be the biggest theme park with 45 different projects plus 8,000 properties with a broad range of prices, starting as low as $55,000.
Some of the more expensive apartments in the new Sports City development (scheduled for completion in 2008) are currently selling from $100,000 to $500,000. At the high end of the market are apartments within the world’s tallest tower, the Burj Dubai. Prices go up to $700,000 and are set to increase during the construction phase. In Marina Terrace, this figure rises to $1 million, with Jumeirah Beach highest at a maximum price of around $1.8 million, while properties on the three Palm projects and in The World command prices from $10 to $38 million.

The buying process

The new law introduced in February 2006 has made it possible for foreigners to own the freehold title to property but only in specially selected areas. Non-residents are permitted to buy plots through a contract with one of three developers owned by the Dubai government – Emaar, Nakheel and Dubai Real Estate.

Purchasing a property in Dubai is a lot simpler than it may seem at first glance. A buyer is required to sign an agreement with a developer to pay the property price with all transaction costs. The developer then submits a letter to the Dubai Lands and Properties Department on behalf of the buyer, stating that all payments have been completed. Only after this letter has been accepted will the property be registered in the buyer’s name. This purchase transaction will likely involve a deposit payment on signing the contract and the balance on completion. If you trade the contract before completion (i.e. sell the property), the developer is likely to charge a fee, so make sure that you know how much this is likely to be before signing the contract.

The majority of British investors in Dubai invest off-plan. In essence, the contract for sale outlines the terms and conditions of the agreement and in particular details what you have bought, when it will be ready, at what price and how you will pay. Clearly, in a fast growing market such as this, many speculators have made a considerable amount of money by following the principles of gearing in rising markets.

The alternative to this is the resale market, which is growing considerably. You can find properties in Dubai on the internet and through newspaper advertisements which are often being sold by speculators who bought off-plan some time ago. If you have your heart set on a holiday home in Dubai, then this may be a route to research, as investors who are keen to sell may be prepared to negotiate on the price. After some research on the market, you will find yourself in a strong negotiating position, particularly if the property has been on the resale market for some time.

Transaction costs

The following transaction costs are typical:

• Mortgages – presently local lenders are charging around one to two per cent of the total value of the loan as a processing fee.
• Legal fees – usually about two per cent.
• Taxes – when the Dubai Lands Department registers the title, buyers will pay a tax that is equivalent to 1.5 per cent of the purchase price of the property and if you have a mortgage, you will pay 0.25 per cent of the value of the loan.

Annual costs

There are no annual property taxes in Dubai, but service charges and maintenance costs can come up to one per cent of the property price.

Taxes

Dubai is virtually tax free. There is no income, withholding or Capital Gains Tax and, with the exception of banks and oil companies, no Corporation Tax is payable by companies. The taxes imposed in Dubai include import duties (mostly at rates up to ten per cent), a five per cent residential tax assessed on rental value, and a five per cent tax on hotel services and entertainment.

Dubai contains a number of economic ‘free zones’, with various economic incentives to encourage investment and commercial development.

Summary

Strengths

• Presently a stable political system.
• No tax.
• No annual property taxes.
• Cultural tolerance.
• Large international community.
• English widely spoken.
• Relatively low prices.
• All-year-round climate.
• Low interest rates.
• All-year-round climate for short-term lets.
• Growing population and requirement for accommodation which has a positive effect on rents and prices.

Weaknesses

• Not a democracy.
• Poor public transport.
• Flying time from UK (six hours).
• Human rights issues.
• Potential oversupply of property.
• The resale market is yet to be tested.
• It can be too hot in the summer!

Opportunities

• Development of Dubai as a regional centre for business and finance.
• Development of world-class tourist facilities.
• Opportunity to relocate any business interests due to the favourable tax regime.
• Huge choice of good quality property.

Threats

• Terrorism.
• Islamic fundamentalism.
• Oversupply of property as expansion continues unchecked.
• Is the rental demand sufficient for the number of properties and do expats buy or rent?
• Change of leadership/government in the country; will this make a difference to how westerners are accepted?

Comment

Dubai is very much flavour of the month and what is happening there is truly amazing and a real testament to the vision, foresight and energy of the rulers. It’s a happening place and its likely that Dubai will achieve its goal of being a regional hub for business and tourism.

Speculators have made big money in Dubai as apartments have changed hands three or four times before construction – it has the feel of the Klondike Gold Rush of the late 19th century.
Like all investments, you have to conduct your own due diligence and research and not be influenced by glossy marketing brochures and the prospect of making big money.

Good profits can be made by the savvy investor now and in the future, but like all investments which are ‘hot’ and potentially speculative, just make sure that you are not the one holding the parcel when the music stops.

Facts at a glance

Geography

Population: UAE: 2,602,713 (2006 estimate), Dubai: 1,070,779 (2004 estimate)
Language: Arabic
Ethnic groups: Emirati Arabs, other Arabs, Iranians, South Asians, East Asians, Europeans, Americans
Local currency: UAE Dirham divided into 100 Fils

Political system

Political structure: Federation of seven emirates with hereditary monarchs
Head of State for UAE: President Sheikh Khalifa bin Zayed bin Sultan Al Nahayan
Prime Minister and Head of State for Dubai: Sheikh Mohammed bin Rashid Al Maktoum

Economy, UAE

Unemployment rate in 2001: 2.4%
Inflation rate in 2005: 4.5%
Inflation rate, February 2006: N/A
Interest rate in Dirham, March 2006: 4.19%
GDP growth in 2005: 6.5%
GDP growth forecast for 2006: 6.4%
GDP per capita (income $29,100 per person) in 2005

Taxation

Income Tax: 0%
Corporation Tax: 0%
Capital Gains Tax: 0%

Corruption statistics

Corruption rate: 6.2
Corruption rank: 30th

Industry and technology

Major industries Petroleum and petrochemicals, Aluminium, Construction materials, Tourism

The Dubai property market

Hotspots: City of Dubai

Property taxes (transactions)

Processing fees: 1–2%
Legal fees: 2%
Land registration: 1.5%
Total costs: 3–5%

Property taxes (annual)

Annual taxes: 0%
Maintenance costs: Vary

Mortgage

LTV: 60–80%
Currency: US dollar and UAE Dirham
Maximum term: 25 years
Current interest rate: 6.00–6.95%

Investor resources

Embassies

British Embassy in the UAE
22 Khalid bin Al Waleed Street
PO Box 248
Abu Dhabi
Tel: +971 2610 1100
Fax: +971 2610 1586
Website: www.britishembassy.gov.uk

UAE Embassy in the UK
30 Princes Gate
London SW7 1PT
Tel: 020 7581 1281
Fax: 020 7581 9616
Website: www.uaeembassyuk.net

Useful websites

Central Bank of the UAE
www.centralbank.ae

Dubai News
www.dubai.com

National Bank of Dubai
www.nbd.com

Tourism in Dubai
www.dubaitourism.ae

UAE Federal Government Portal
www.government.ae

UAE News
www.uaeinteract.com

© Lawpack Publishing 2006

“The Jet–to–Let Bible”, Dominic Farrell
Reproduced with the permission of Lawpack Publishing.

Further information on this topic can be found in “The Jet-to-Let Bible”, by Dominic Farrell, ISBN 1 905261 11 X

For information and advice on investing overseas, contact Bewarethesharks.com on +44 (0) 151 482 5525 or visit www.bewarethesharks.com
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