Timing is everything – especially in real estate

Most of the questions people have when considering an investment generally revolve around timing – specifically, when to enter the market, when to exit, and how to optimise your move for maximum returns. Unfortunately, there’s rarely a clear-cut answer that applies across the board. What’s true of one market may not be true of the next.

The best approach in new markets undergoing rapid urban development, as in the UAE or other GCC countries, won’t be the same as in more mature markets such as the UK, which offers a blend of stability and long-term growth potential. Each place offers its own blend of opportunities and challenges.

First, it’s important to understand how your investment generates returns. You can then choose the best market location and entry and exit strategies.

Types of returns

Capital appreciation is perhaps the most obvious source of return. This is how much value a property gains over time – the difference between the purchase and sale prices. This increase can come from improvements made to the property, developments in the surrounding area, or simply an increase in market prices.

The biggest gains in appreciation are made over longer periods, typically as markets mature and areas develop, so plan to hold onto properties through varying economic cycles to gain the most.

If you’re looking for a more immediate return and prefer a steady stream of income, targeting rental income may be a better way to go, especially if you choose high-demand locations, such as city centres, the vicinity of universities, or business districts, where occupancy rates are typically higher.

Tax benefits of real estate

Real estate investment also provides tax benefits. Although not an income as such, it provides returns, albeit indirectly through deductions with management and maintenance costs, which can all reduce your taxable income. Depreciation is also a powerful tax benefit. It allows you to deduct the cost of buying and improving a property over its useful life, effectively lowering your tax bill.

In the UAE, while there’s no personal income tax, you can still benefit from tax efficiencies such as no property tax and no capital gains tax on real estate sales, which makes a big difference to potential net returns. In contrast, the UK provides a structured tax environment with potential reliefs and allowances that can be advantageous to savvy investors.

The last key element in real estate investment returns is leverage. Imagine you buy a property worth AED 1 million with just AED 200,000 down. You’re controlling a large asset with a fraction of the total cost, and any appreciation applies to the property’s full value, so you stand to gain a return on the total value while having invested only a portion of it.

Different investment approaches

The type of investment you’re targeting will also play a big part in what you can make and over what period.

Broadly speaking, there are four different strategies you can employ: buy-and-hold, buy-to-let and off-plan investment, with each having a distinct rhythm and set of rewards.

Buy to hold

Buying to hold, either for long-term rentals or capital appreciation, is ideal if you’re looking for steady income and capital growth. It works best in areas with proven long-term growth in property value and stable economic conditions.

The UAE’s major emirates, Dubai and Abu Dhabi are good examples. With healthy economic growth, and strong foreign interest, property values have increased massively over the last few years. In Dubai, for instance, residential property prices increased by around 44 percent in 2022 alone, a significant recovery and growth from the downturn caused by COVID-19.

This approach also works well in more mature markets like those in the UK, though the benefit is more subtle and steady compared to the faster-moving UAE market, so they favour longer holding periods of 10 years or more. The big benefit these markets have is their stability and predictability.

For example, residential property prices in the UK have risen by approximately 33 percent over the past 10 years. The growth has been cyclical and influenced by economic cycles and broader geopolitical events like Brexit, but ultimately, it’s trended upward, making it among the most reliable investment destinations.

Buy to let

This is another popular investment strategy. It brings fast and regular rewards, but finding areas with high rental demand is crucial. City centres with high employment rates, university towns, and tourist hotspots are typically prime spots. The UAE’s major cities like Dubai and Abu Dhabi, with their expatriate-heavy populations and thriving tourism sectors, offer high rental yields of 7 percent and upwards.

UK cities like Manchester and Birmingham, which are undergoing significant urban regeneration, are also strong candidates. In addition to their student populations and growing job markets, these cities benefit from extensive infrastructure projects and government incentives, which further boost rental demand and property values. This makes the UK a particularly robust market for buy-to-let investments, offering both high yields and long-term growth potential.

Off-plan investment

Buying off-plan works best in areas where new development is constant, such as the UAE, where numerous developers offer the chance to purchase at a lower price before the area reaches its full potential. The UK, with its new housing developments in cities like Birmingham, Manchester and Liverpool, also offers unique opportunities.

With a steady pipeline of new projects and government support for housing, off-plan investments in the UK present a strategic opportunity for long-term growth. With minimal reservation fees and 70 percent-80 percent of the price not due until completion, it’s a very flexible option with minimal upfront financial risk.

Managing risks and anticipating returns based on investment timelines

In terms of the timelines to optimise returns, each strategy demands a different tactic. For short-term holiday rentals, you can make good returns of between 10 percent and 20 percent in as little as one to three years, with up to 30 percent not unheard of in some hot markets.

Off-plan investing can take a little longer. You can generally expect a profit once a project reaches or nears its conclusion and available units become scarcer. This usually takes three years or so depending on construction speeds, but it’s sometimes worth holding for even longer to allow for additional developments or enhancements in the area, which push prices up even more.

If you’re buying and planning to hold, expect to be more patient. Most data on the optimal investment period points to investing for at least ten years, with better returns the longer you hold.

Steady, mature markets like Manchester, Birmingham, and Leeds in the UK offer great potential. Urban expansion and infrastructure improvements in these cities mean that combined returns from rental yields and capital growth can reach 10-15 percent per annum. Over the long term, this results in a significant return on investment. Rental yields of 5-7 percent per annum can cover mortgage payments, and leveraging investment amplifies returns by offsetting borrowing costs. This blend of factors makes these cities highly attractive for investors.

Appreciation in Dubai over the same period has also been substantial, with prime residential areas like Dubai Marina, Downtown Dubai, and Palm Jumeirah increasing by around 20-40 percent thanks to their popularity among foreign investors.

In terms of managing risks, short-term investments need the most insight and really reward buyers who can get the timing right. The trick is to buy in a market in its early stages of development at a lower price, then capitalise on its upward trajectory.

Cooler markets, on the other hand, are generally more stable with steadier growth and less volatility, so by buying and holding, you can get consistent capital growth over the years. But you really have to trust the process, ride out any short-term fluctuations, and stay the course to get the rewards.

Ultimately, none of this works unless you’ve done your due diligence. By getting the help of an experienced professional, you can mitigate risks associated with liquidity, unexpected market shifts, or legal hurdles that could impact profitability.