Factors affecting returns from investment

HOMEAPP & DAVIMA RESEARCH HOUSE

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FACTORS AFFECTING RETURNS FROM INVESTMENT

When investing in real estate in the UAE there are some costs that reduce profitability of investment in real estate and should be considered. The effect can be quite substantial so that could change the investment decision and its time horizon if accounted for.  

Exhibit: costs decreasing return

Þ    Land tax (DLD): it is equal to 4% of the purchase price in Dubai and 2% in Abu Dhabi. It is to be paid by the buyer at the time of a transaction.

Þ    Agent commission: the buyer and the seller pay the commission to real estate agents for helping to buy/sell a property. It is usually 2% of the property value on a secondary market and is paid by either the seller or the buyer, or both. It is not to be paid when buying off-plan property.

Þ    Service fee: is paid for maintaining the community infrastructure. It depends on the community, building, developer, emirate. In some cases (e.g. for branded real estate) it can reach over 1% of property value.

Þ    When renting out for a short term, the following costs significantly reduce the rental income (sometimes more than 30% of the rental income in aggregate):

o   management company commission (for example, up to 20% of the rental income),

o   advertising fees,

o   utility bills (can be up to 2 thousand dirhams per month) for water and electricity, internet, chilling services.