Pitfalls and Precautions When You're Buying in Dubai

You can't afford to be lazy or ill-informed when you're making a big investment - you need to keep your eyes wide open.

Dubai is a thriving real estate market and represents an interesting investment opportunity. But make a mistake by choosing the wrong developer, or not factoring all the costs into your calculations, and you could come a cropper. You can't afford to be lazy or ill-informed when you're making a big investment - you need to keep your eyes wide open.

First of all, Dubai is a long term market. Don't buy for short term gain, or aim to 'flip' an off-plan purchase. Think about a five to ten year holding period, minimum; if you'll need the funds within this time - for instance, to fund college fees or retirement - then this isn't the right investment.

Secondly, kick the tyres. Don't buy on gut feeling. Do your research, both on paper (or the internet) and on the ground; meet developers, talk to agents. If you're buying in an existing development, talk to residents and find out whether the development is well maintained, whether the facilities are good, whether they enjoy living there, and whether there have been any snags. Make sure you consider all the possibilities; for instance, if one particular development caught your eye, ask brokers if other developments would offer the same lifestyle benefits or fit the same price range. Do your research properly before you decide.

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Check the agency and calculate all the costs

Vet brokers and developers yourself. Just because everyone (including us) says they're good doesn't mean you shouldn't check them out. As a minimum, ensure anyone you deal with is registered with the Real Estate Regulatory Agency (RERA). Dubai has really tightened up regulation since the credit crunch, but there are always going to be a few guys who try to get round the regulations.

Another mistake that some property buyers make is not considering all the costs before they buy. Whether you're buying as an investor or aim to occupy your property yourself, make sure you understand both the costs of purchase, and the ongoing cost of maintaining the property.

First off, make sure you have budgeted for the costs of purchase, which can come to between 4% and 7% of the purchase price. That's quite a big chunk of change!

Secondly, make sure you have a good estimate for the service charges and other utilities bills. Service charges for villas and townhouses are usually minimal, but they can be pretty high for apartments. Check if you're buying off-plan that the estimates you have been given are in line with what's actually being charged in similar existing developments or in earlier phases of the same development. And remember that electricity bills in Dubai are often higher than you might expect; air conditioning is energy-hungry!

Keep your money safe

You should also be 100% certain that you have, and will continue to have, the funds to invest. Dubai's legal system treats having debt you can't pay as a crime, not a civil matter. So be very, very careful if you're taking on significant debt, particularly if it's a UAE mortgage. Be aware, too, that if you withdraw from an off-plan purchase, the developer is entitled to take a significant percentage of the purchase price as compensation; if you've already paid a deposit and stage payments, you could lose the lot.

You'll want to make sure that any deposits you pay go into an escrow account. Developers in Dubai are legally required to have a separate escrow account for each project, and payments should be linked to completion of project milestones. You can easily check with RERA that things are being done properly.

You've checked your service charges. But have you checked what they cover? It's worth asking what percentage of service charges goes to a long term maintenance fund. Some older developments already need to have pretty major maintenance done on their lifts or air conditioning systems, and where the maintenance fund isn't large enough, that has led to substantial unexpected charges being made to home owners. A low service charge now might prove to be a false economy if that means not enough is being put aside.

Calculate ROI and your taxes

Investors also need to make sure they check that the return on a property is what they think it is. That's partly, again, about checking that all costs have been taken into account, but due diligence on rental values is also needed. Make sure, if there is a rental guarantee on a property you buy, that you check out exactly what rent the tenant is paying. Sometimes, developers subsidise the 'rent' you'll get for the first couple of years to boost returns; once you're out of the initial period, you might find the rent you can get on the open market is significantly lower.

Dubai is known as a huge "tax free" destination, with no income tax and no capital gains tax for individuals. But remember that unless you are moving to Dubai, you'll most likely remain liable for both these taxes in your country of residence. If you're relying on rental income to help defray your debt finance, check that you can claim these costs against tax - otherwise your calculations will go adrift.

Buying property is a big deal - it's going to be expensive if you get it wrong. So make sure you go into the Dubai market with your eyes open; look out for the potential pitfalls, steer clear of the possible traps, and make sure you get the right property at the right price.