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Dubai investment opportunities: Villa's versus Apartments

02 Jul 2009

On a daily basis, investors, whether institutional or private, are faced with the daunting task of channeling and deploying their money towards productive assets with the objective of maximizing returns. The choice of assets ranges from stocks, derivatives, funds and bonds to commodities, collectibles, forex and real estate. Within each of these categories there exists a mind-boggling choice, making the job of fund managers extremely stressful, though rewarding. In real estate itself the choice is enormous – land, residential, warehouses, industrial, hotels, offices, marinas and malls all need to be considered. The following article seeks to compare two subcategories of asset classes – villas and apartments. Though both fall under residential property, they differ largely in terms of customer base, demand drivers, cost of construction, strata titles and most importantly price stability, rental yields and returns.

Investment Boutique has been tracking performance on apartments and villas since in Dubai the beginning of 2005 as part of its Housing Price Index (HPI). According to the HPI charts below, villa prices are currently down to Q2 2006 prices while apartments have only still reached the Q4 2007 level; indicating that apartments are handling the real estate slump better than villas.

The charts above actually indicate much more than this. Apartments seem to be the more stable asset class compared to villas which have witnessed huge price volatilities. Villa prices rose significantly at the start of the period – by 50% in 2005 and 30% in 2006, followed by a slower 10% in 2007 and 3% in 2008, when prices reached the zenith. Apartment price rises have been less volatile, rising only slightly in 2005, by 10% in 2006 and by 20% in 2007. It was only in 2008 that this asset class saw abnormal increases of up to 40%. On the whole, villa prices have more than tripled between 2005 and 2008 while apartment prices merely doubled.

Lease Rate Change from Peak to Present (May 2009)
Unit type	% Change
Studio Apartment	-50%
1 Bed Apartment	-39%
2 Bed Apartment	-27%
3 Bed Apartment	-13%
3 Bed Villa	-51%
4 Bed Villa	-37%
5 Bed Villa	-40%

As such, in 2009 the villa prices have moved downwards just as fast. This fact has been mentioned a number over the last few months in various reports by market analysts. According to Asteco, asking prices for villa rentals fell by 34% quarter on quarter in Q1 2009 while apartment rentals fell by 22%. Sale prices decline on an average by 43% for villas and by 39% for apartments during the same period. Also, Landmark Advisory has stated that villas prices fell 32% in the Q1 2009 while apartment prices fell by 23%.

Average Sales Price Change from Peak to Present (May 2009)
Community	% Change
International City (A)	-41%
Downtown Burj Dubai (A)	-54%
Business Bay (A)	-49%
Dubai Silicon Oasis (A)	-27%
Dubai Marina (A)	-45%
Jumeirah Lake Towers (A)	-33%
The Greens (A)	-48%
Dubai Investment Park (A)	-24%
The Palm Jumeirah (A)	-37%
Emirates Hills (V)	-60%
Arabian Ranches (V)	-48%
(A) Represents Apartments; (V)  Represents Villas

The same trend is seen reflected through Investment Boutique’s UAETD (UAE Transaction Database) which holds data based on actual transaction evidence provided on an ongoing basis by a growing consortium of contributors from the private sector. According to the June 2009 IB PropertyMonitor for Dubai, which is based on the UAETD, lease rates on 3 bedroom apartments have fallen 13% since their peak last year while rents on 3 bedroom villas have fallen by 51% since the peak. Also, while apartment sale prices have fallen by an average of 40% from the peak in 2008, villas have fallen by 54% on average, (as above split by community).

Apart from price stability, absolute returns on both asset classes would also influence investment choices. The chart below provides a useful tool to compare returns. Returns are largely dependent on when the property was purchased and when it was subsequently sold. In the case of property purchased in 2005, and sold between 2005 and 2008, villas gave a much better return compared to apartments. However, in case of property bought after 2006, apartments have fared better than villas.

Villas vs Apartments" height="234" src="content/cmsimages/v/villavsapratments-2020.jpg" width="340" />

Another important indicator influencing investor choice is rental yields. While rents are reducing quite rapidly, apartments and villas are still representing a gross yield of 7 to 7.5% as illustrated in the adjacent chart. While apartments have been giving a slightly better gross yield than apartments, maintenance costs and running costs on both assets may differ completely depending on type and size of apartment or villa as well as its location and its build quality.

While this factor does influence cash flow and thus investor choice, detailed information is not currently available to enable comparison. However, Investment Boutique plans to conduct thorough research on maintenance costs of different asset classes over the next few months. Another decision driver would be the upcoming supply of villas and apartment units. Investment Boutique maintains an inventory of upcoming supply and is currently in the process of updating supply numbers based on the current scenario of projects being cancelled and being put on hold.

A conclusion on which is better – villas or apartments, is difficult, as this truly depends on investor appetite with regards to risk and returns as well as what the future will hold for the rental market based on upcoming supply. However, the above analysis is expected to enable a more intelligent decision by investors.

Source: Safeena Rangooni Lakdawala (Senior Manager) - Investment Boutique