Basics of real estate investing, examples of property investments in Abu Dhabi

The housing industry in Abu Dhabi has been in high demand over the last several years despite the pandemic and oil price drop. As a matter of fact, the total value of transactions in 2020 amounted to AED 74B (USD 20.1B), which is 28% higher compared with 2019. It is not surprising, since Abu Dhabi offers a wide range of budget-friendly and luxury spacious homes, freehold ownership for foreigners, and overall resilient market. Moreover, the latest government announcements about the remote work visa scheme, UAE citizenship law, as well as Golden visa have impacted the sales numbers immensely.

Therefore, if you have funds, investment in Abu Dhabi property would ensure the stable financial position and long-term profitable return as well. The real estate market knowledge is essential at this stage, as there are a lot of nuances and legal issues one has to research beforehand. One has to considered a host of factors, such as current and future market conditions, potential of the area, interest rates, etc. Below we will share the key aspects of investing in the real estate market in Abu Dhabi to help you yield the highest possible returns.

To begin with, there are four main types of real estate ownership in UAE:

• Leasehold means that you own a lease to the property for a specific time period up to 25 years. It is, basically, a long-term rental contract. Leasehold ownership gives a right to resell property till the expiration date of the contract, to rent it out and also redevelop it. Real estate in leasehold area of Abu Dhabi are significantly cheaper, however, they are available to GCC nationals exclusively. As a matter of fact, leasehold ownership is aimed at supporting local population and provides an opportunity to take a mortgage at lower percent and pay fees for housing and communal services at lower prices.
  
  

• Freehold is an unlimited ownership of property and built-upon land. The freehold property law was accepted in Abu Dhabi just in 2019. A buyer has a right to use property as they prefer – to rent, to sell, to bequeath, etc. Freehold zones in Abu Dhabi may seem more expensive, however, it is due to the fact that they are located in prestigious areas, such as Al Raha Beach, Al Reem Island, Al Reef, Lulu Island, Saadiyat Island, Yas Island, Saih Al Sidirah, Masdar City, Al Maryah Island, Al Falah, Fahed Island, Hidd Al Saadiyat, Palace Breakwater, Al Shamkha, Jubail Island, Nurai Island and Al Jurf, Ghantoot.
  
  
• Usufruct is very similar to the leasehold. The only difference is that an owner does not have a right to change the property in any way (e.g. renovation, redevelopment). Usufruct can be signed for up to 99 years.
  
• Musataha is a widely spread kind of ownership in Abu Dhabi. According to the Article 1353 of the Civil Code, musataha allows person to construct a building, alter the property, or to plant on a land plot which belongs to another individual, and the agreement between them can be signed for up to 50 years. It is worth noting that such ownership is available to UAE citizens and may be held by buyers of other nationalities and citizenships in designated investment areas.

Abu Dhabi Global Market is the free economic zone and financial center situated on Al Maryah Island. It is the second financial free-zone in the UAE following the launch of the Dubai International Financial Center (DIFC) in 2004. A freehold interest in land may be owned by GCC nationals and companies owned by them exclusively. As for foreigners, they may purchase property above the land, such as floors and units but not the land itself. Other categories of real estate interest in Abu Dhabi include:

• Property mortages;
  
  
• Strata interests – interests owned by more than one individual;
  
  
• Future interests in property, such as remainder interests and reversion;
  
  
• Leasehold;
  
  
• Easements – a contract which gives a non-possessory right over another parcel of property;
  
  
• Covenants;
  
  
• Joint estates – real estate interests which belong to more than one individual.
  
  

Real estate property within the area of Abu Dhabi Global Market has its own legislation – the Strata Regulations and the Real Property Regulations, which were published in 2015. Registration of property interests has to be completed in the ADGM Land Register. Anyone may undertake a search in the registry as it is fully public unlike the ADM Land Register (Abu Dhabi Municipality).

Purchasing a residential or commercial unit in order to rent it out later is one of the most popular and safest strategies on the real estate market. However, you have to understand that being a landlord involves a number of responsibilities, such as paying property taxes, mortgage and insurance, finding tenants, resolving any issues, and maintaining the property in order.

According to the tenancy laws of UAE, there are no specific regulations on minimum and maximum amount of rental charges. But a landlord should set a rental price that will cover certain expenses, bring stable income, and correspond with the purchase cost of the property.

In Q1 2021, the average gross yield in Abu Dhabi has reached 7.4%, with apartments generating 7.7% and villas – 6.9%. To be more specific, the most profitable area with affordable apartments has proved to be Al Reef with an average ROI of 8.2%, while Al Raha Gardens with its budget-friendly ready villas offers 9.4% of annual profit. The annual rental cost in Abu Dhabi also depends on the chosen district, the price per 1 sq. ft starts from AED 80 (USD 22). It is also worth considering short-term rents as they are even more profitable due to the tourist demand – minimum AED 170 (USD 46) per day, or AED 1100 (USD 300) per week.

There is no income tax in the UAE, and responsibility for paying utilities and housing fees falls on the tenants according to Resolution No. 13 of 2016. The landlord is charged for property maintenance, which roughly 2% of real estate value. For example, for a three-bedroom residence, which is worth AED 3.5M (USD 953 000), the cost of maintenance contract amounts to approximately AED 70 000, USD 19 000.

The cost of the rent and increases in charges can be mutually agreed between the tenant and landlord. One must keep in mind that in 2006, Abu Dhabi law imposed 5% annual cap on rent increases for tenant protection. In November 2013, it was cancelled by the Abu Dhabi Executive Council. And in 2016, Abu Dhabi Executive Council Resolution No.14 on Lease Agreements of Premises re-introduced this regulation on rent increases, and currently it is effective.

Let's take a look at an example with long-term rentals. For instance, you acquired a one-bedroom residential unit of 796 sq. ft in Al Reef. Such property costs AED 600 000 (USD 164 000). You can set rental fees in the size of AED 45 000 (USD 12 250). Considering ROI of 8.2% in that area, as well as maintenance fees of around 2%, the net profit from such investment amounts to AED 48 000 (USD 13 000) per annum.

We can say that home owners gain more money from short-term rent as it can vary between 20-40%. Guests pay a higher fee than long-term tenants, so even deducting extra-services, e.g. electricity, water and Wi-Fi, which can cost around AED 1000 (USD 272) in total monthly, owners will still get a high investment return. Moreover, short-term returns are continual as opposed to long-term which are fixed over a period of agreement. For example, if you rent a residence out for over three years, you will have no other profit between searching for a new tenant, while with short-term contracts you will make money constantly.

Due to seasonality, short-term gains can vary from month to month. December in Abu Dhabi is more profitable than May. With long-term contracts, returns are fixed and can be increased up to 5% maximum annually as mentioned above.

Flexibility is the key factor of short-term rents. As an owner, you are able to use your property whenever and however you like. You may switch from short-term to long-term rental or sell the asset at any time. A long-term tenant does not provide much flexibility – once the property is rented out you are legally constrained. As stated by Law No. 4 of 2010, a landlord can evict the tenant by giving two months' notice preceding the end of the rental contract.

However, short-term rental require more efforts, time and work from a landlord. You have to furnish the property and switch on utilities. Of course, you can use services of a property management company, which will take over these issues. In Abu Dhabi such services start from 5% amount of annual rent. On the other hand, long-term tenants are obliged to pay all the consumption charges directly to provider. They also purchase furnishings on their own, so a landlord has fewer expenses that way.

When selling or reselling the commercial and residential property in Abu Dhabi, you will have to pay only the land registry tax, which is 2%. It is shared equally between a seller and a buyer. The fee is calculated on the basis of the sales price in the contract and must be paid at the Land Registration Department of Abu Dhabi at the day of property ownership transfer. There are no other additional charges required from the seller.

As stated by UAE property report 2021 from Savills Research, a gradual increase in property demand has been observed across the emirate due to the introduction of the stimulus package by the Central Bank and additional 5% borrowing ability as a part of relaxation in LTV (Loan to Value). Despite Covid-19 pandemic, sales prices in Abu Dhabi remained stable. This is due to the optimization measures, involving hydrocarbon and banking sectors, implemented in 2016 and 2017. The other aspects included limited supply-side deterrents, rebates and stimulus packages.

According to the same report, high-end villas and townhouses are the most in-demand property types among end-users and investors. Low interests and high LTV ratios had a primary impact on this trend.

The total stock of Abu Dhabi is around 26 300 units, and by the end of 2021, approximately 11 700 units are scheduled to be commissioned as well, which supposedly will cause spike in sales. Most of the residential units are likely to be delivered in Al Reem Island, Al Raha Beach and Yas Island. It is worth noting that in Abu Dhabi rental rates registered average declines of only 4.5% as opposed to Dubai with its 10%. The highest demand for property has been observed in Saadiyat Island and Yas Island.

The weighted average residential value in Q1 2021 was AED 803 (USD 218) per 1 sq. ft, apartments stood at AED 878 (USD 239) per 1 sq. ft, and villas at AED 623 (USD 170) per 1 sq. ft. Annually, capital values were 3% lower than the same period in last year.

What with the resolving of health crisis, the re-scheduled Dubai Expo and the UAE's 50th anniversary, the economic situation heads towards bottoming out and gaining even more perspectives.

Such a scheme is widely spread on the real estate market, however in Abu Dhabi and across the UAE in general it is not an option. Flipping is one of the issues that caused the UAE housing market crisis in 2008. At that time, off-plan properties were bought and then sold for a quick profit, thus inflating real estate prices.

There are a range of restrictions and preventative measures against flipping houses being taken by the UAE government, banks and developers as well. For instance, the Abu Dhabi-based developer Aldar Properties established a regulation according to which buyers are required to pay 50% of the property value before it can be sold. The Central Bank has also introduced caps of between 60%-80% on home loans, and 50% on unfinished properties.

REIT is a private or public investment fund which is established to invest a certain percentage of its assets in real estate. Beside UAE onshore under the Emirates Securities and Dubai International Financial Center, such funds are permitted in the free zone of Abu Dhabi Global Market.

REIT is a perfect option for those who would like to get investment returns from property without the responsibilities of a landlord. It works in the following way – a company acquires or constructs a set of buildings (mostly apartments), which investors can purchase through the company, therefore joining the group. An investor has a right to own one or more property units. At the same time, management, maintenance, advertising, tenant search are under the operation of the investment group itself. For these services a specific amount from monthly rent is taken by the group.

The types of REITs in Abu Dhabi are the following:

1) Private UAE REIT – at least 75 percent of its total assets must be invested in real estate, whether in the form of construction, development or re-fitting, providing it is in preparation for sale, management, lease or disposal;

2) Public UAE REIT is required to:

• invest minimum 75 percent of its total assets in income generating real estate assets;
  
  
• receive minimum 90 percent of its total revenue from real estate, interest, dividends and capital earnings relating to such income generating real estate;
  
  
• distribute minimum 80 percent of its net profits to unitholders each year.
  
  

3) If the UAE REIT owns one or more real estate service companies, the UAE REIT Regulations now stipulate that investments in such service company(ies) cannot exceed 20 percent of the UAE REIT's total assets;

4) Borrowing must be restricted to amounts of not more than 50 percent of the UAE REIT's total asset value.

According to Haider Tuaima, the head of real estate research of ValuStrat, REITs provide an opportunity for any investors to enter a real estate market they could not afford otherwise. For instance, commercial real estate assets become available. This is a simple strategy to obtain significant and regular profit from property without purchasing an actual property itself. Moreover, due to shares in the REITs being traded on the stock market, the investor can exit or shorten their position at any time and as they choose.

Abu Dhabi has been in demand among foreigners who would like to live and do business in the Middle East. As a rule, expats buy property in Abu Dhabi in order to have their own residence and live in it. As for international investors, they seek good revenue from the property investment.

Tax-free system is undoubtedly one of the main advantages for foreign buyers and end-users. As opposed to the majority of real estate markets all over the world, UAE does not charge any taxes including the ones on property.

Abu Dhabi has been attracting a lot of tourists and businessmen due to a high number of attractions (Sheikh Zayed Grand Mosque, Louvre Abu Dhabi, etc.) and due to the emirate's perfect location for cooperation between European and Asian companies. It is worth noting that such individuals are most likely to be interested in short-term rental options.

Abu Dhabi attracts a lot of holidaymakers and business tourists due to a high number of attractions, summer weather, and shopping centers. Businessmen consider the emirate as a perfect platform for partnership between Asian and European companies. Such individuals most frequently search for short-term rental options.

The other key factors include:

• flexible payment plans from developers in order to attract more buyers;
  
• introduction of policies and reforms which allow freehold ownership for foreigners, as well as new business licenses;
  
• development, infrastructure, legal transparency and resilient market conditions.
  

Moreover, in 2021, Abu Dhabi launched the program "Thrive in Abu Dhabi" which is aimed at promotion of a pathway to citizenship for international talent working, creating, studying, excelling and investing in key sectors and specialties in the emirate.

Investors in public investments of at least AED 10M (USD 2.7M) are entitled to apply for a 10-year residence visa in the UAE. The investment may take many forms:

• A deposit in an investment fund inside the country;
  
• Establishing a company in the UAE;
  
• Partnering in an existing or a new company;
  
• Having a total investment of minimum AED 10M, USD 2.7M in all areas mentioned, on condition that the investment in sectors other than real estate is not less than 60% of the total investment.
  
  

A 5-year visa can be granted to investors if they meet the following conditions:

• The investor must invest in a property of a gross value of not less than AED 5M, USD 1.4M.
  
• The amount invested in real estate must not be on a loan basis.
  
• The property must be retained for at least three years.
  

Investing in real estate property is an efficient solution for reducing inflation. The demand and value for real estate is directly affected by the conditions of the state's economy. This means that there is a direct correlation between the level of the economic indicators of the country and the demand for rental real estate. If the levels are high, then the demand increases and vice versa. Of course, the prices of primary and secondary property market also grow which leads to the higher value of the investor's capital. Such factors will help landlords to avoid the negative impact of inflation on their financial state.

Another benefit of real estate investment is the presence of leverage. In Abu Dhabi, this may involve mortgage lending. The UAE Mortgage Cap law allows non-UAE nationals to have a cash down payment of at least 25% from the property value (20% for UAE nationals). And if it is a 2nd or 3rd property, at least 40% has to be covered by the buyer.

In terms of investment, even when you have not paid the full property price, you are already a full-fledged owner. Therefore, you may use the asset for living and renting it out as well. However, such a strategy cannot be applied to any other asset. For instance, when buying shares, you have to pay a full price at once, since just 25% of the value will not make you an owner at once.

1. In terms of economic situation, Abu Dhabi has proved to be stable and safe for investors with the average ROI of 7.3% and solid sales numbers.
2. A landlord in Abu Dhabi is exempted from paying utility bills and housing fees. This is a responsibility of the tenant in case of a long-term rent.
3. The only type of ownership giving unlimited rights for property to foreigners is freehold.
4. Short-term rentals bring more profit and are more flexible, however, a landlord has to keep in mind expenses for utilities and furnishings.
5. REITs provide an opportunity of entering the high-scale property market to investors on a budget.

Investment in Abu Dhabi real estate brings stable long-term profit and opens a way to the benefits of the UAE resident visa.