UAE real estate profitability - not just in the residential sector

The office and commercial real estate sector in the United Arab Emirates is yielding more than long-term U.S. government bonds. When analyzing the real estate market and rental yields, one of the most commonly used metrics is the difference between rental yields and the ten-year interest rate on U.S. government bonds. Currently, rental yields for premium office space and the industrial/logistics sector in the UAE range from 6.75-7.5%. For certain high-end properties, yields are even higher, in the range of 8-8.5%. Even in residential and luxury hotel real estate, the overall outlook is stable, with average yields in the 6.25-7.75% range. With the current ten-year interest rate on US Treasury Department bonds at 4.52%, the difference between investment yields in the UAE and the US ten-year interest rate is positive.

Compared to London, where the average rental yield is 4-5.5%. In Asia, for example, in Shanghai, rental yields for class A premises are higher, and in some segments even reach 9-11%. It is worth noting that this is based on expectations of the uncertain position of the economic housing market at the moment. In London, while rents are forecast to rise over the next 2-3 years, they are not expected to exceed home sale prices.

Expected Future Difference Rising long-term US government bond yields will narrow the gap between premium office yields and the risk-free interest rate. The UAE, including other leading economies, is experiencing high interest rates and there is also the uncertainty of the geopolitical situation. Despite this, recent market reports show healthy sales demand and buyer interest in industrial warehouses and other commercial segments. Investor-friendly policies have been a huge plus for the creation of new businesses and further potential growth in the number of foreign residents. The UAE's status as the de facto tourism capital suggests that tourists want to return and in turn support the local real estate market.

Vijay Valecha is chief investment officer of Century Financial.