The investment atmosphere today may seem complex and daunting, with a plethora of financial products being pushed in the market. Making sense of your expenditure, debts and investments can be slightly overwhelming.
Diversify and conquer
Fortunately, financial planning need not be confusing if one adopts a clear strategy. For those who prefer the simple, straightforward approach, it is best to map out the short, medium and long-term objectives and invest in a diversified manner, so as to minimise risks. Short-term investments have to be liquid and accessible for emergency situations and need not yield high returns.
These could be in the form of government Sukuk (Sharia-compliant bonds), income from savings accounts or term deposits. A medium-term strategy can afford to be aggressive, where one can pitch for higher returns, while spreading the risk between a basket of Sharia-compliant stocks, Sukuk or Sharia-compliant Exchange Trade-Funds.
Selecting property
However, a sound, long-term investment portfolio should be structured in a way that it absorbs risks and meets all your financial goals, right up to the retirement years. The only investment that serves a multiplicity of purpose, over various phases of one’s life, is property. Interestingly, for a large number of investors, buying property is easier than working the equity markets and can be a much-loved project.
Property is a tangible asset that can provide you with an income during your life-time, even as you pass on the asset to your children. It remains one of the more effective instruments to beat inflation in the long term. It is a hybrid asset with the capital appreciation of a stock, but the income-producing capacity of a bond/Sukuk. Returns on property are about one or two points higher than the inflation rate and because of its secure nature, banks are prepared to finance it.
Rental returns
In the long term, property investment can deliver solid returns. While share prices can decline by as much as 10 per cent a day, this kind of fluctuation is extremely unlikely in the real estate market. The opportunity to earn rental income is one of the most attractive features of property investment in the UAE. Rents in Dubai can range from Dh40,000-Dh100,000 a year for a one-bedroom apartment and even in a soft but stable scenario, the market can yield good returns.
Time it right
The question which often puzzles UAE investors these days is the right time to buy an apartment. While it’s true that the macroeconomic environment last year was not conducive, and that increased jobs cuts across the UAE have put a downward pressure on rents and sales prices, the situation is far from bleak. In Dubai and Abu Dhabi, sales prices and rents dropped last year, and while analysts expect to see further downside pressure this year, they believe the worst is over for the residential market. The UAE remains one of the most favourable environments for capital growth and income yield.
The sector has matured considerably, and the strong fundamental drivers of Dubai’s real estate are all expected to propel the market into another growth cycle in the run-up to the World Expo 2020. Interestingly, expatriates have a better opportunity to build their portfolios. They are in a position to expand their investments by buying in the local market, as well as their home countries. Records show that in the first half of last year, the top foreign property buyers in Dubai included Indians, British, Russian and Pakistani investors. They have shown great agility by taking advantage of opportunities in Dubai and in their countries. In fact, many expats have availed personal financing in the UAE to buy properties back home and further diversify their portfolio.
Note of caution
Handling property is not entirely a walk in the mall. It costs a sizeable chunk of money to complete a property transaction, pay broker fees and get it registered. Properties also come with running costs. There will be periods where an apartment may stand empty, even as you continue to pay a finance and maintenance.
Also, property is not a liquid asset. It takes time and extensive paper work to sell a property. For those seeking liquidity along with returns, it is better to invest in Sharia-compliant stocks, as shares can be bought and sold virtually and instantly.
Ultimately, building an investment portfolio and deciding your asset class should be based on your individual circumstances, needs and preferences. Remember to keep it simple and don’t invest in something you don’t understand.
The writer is the Head of Home Finance, Noor Bank. Views expressed in the column are the writer’s own and do not reflect those of the publication.
