Imagine Martians abducted you and took you to Mars, and quite unexpectedly then asked you to choose between two pieces of real estate.
Property A. is a small one-bedroom apartment on the edge of a large, old, prosperous city; cost $400,000, expected gross rental yield 5.3%. Property B. is a five-bedroom, four-bathroom villa in the centre of a new, rapidly growing, prosperous city; cost $400,000, expected gross rental yield 8.2%.
It would not be a tough decision. Property B. offers a 50% higher return on capital, and the accommodation is four to five times cheaper.
What if to the property market in the location of Property A. had been going up for 10 years, while Property B was located in a city with an entirely new property market yet to publish its real estate law and develop a mortgage market.
Again, advantage to Property B. Clarification of legal status and availability of finance are two major factors likely to push up capital values. Plus markets rise and fall, and after 10 years Property A. is ripe for a correction, i.e. a price fall.
Ah, but what if the supply of Property B. was huge while the supply of Property A. was hamstrung by a shortage of land and planning laws?
Well, for one thing location would still count for something as not all the property supply could physically be in the same place, so a good location for Property B. would be a hedge against oversupply.
Besides, what if building cost inflation had just taken off in the city of Property B. and not the other one? Then in order to build the ‘huge’ volume of homes developers would face higher and higher costs, and therefore have to raise prices, so early buyers would still have a bargain.
Moreover, inflation would eventually make development unprofitable and choke off supply, again leaving early buyers with a capital gain and a limited housing stock.
Coming down to earth, Property A. is located in London Docklands and Property B. in Emirates Hills, Dubai.
You don’t need to go to Mars to gain a sense of perspective but it does not hurt to step away from emotional attachments when viewing a potential investment.
Of course in one country the Government may fall within two years and be replaced by ultra-conservatives; political instability being another potential hazard of investing in the UK.
Saturday, May 1- 2004 @ 14:49 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.