Is Dubai hot, or what?

I met an Australian recently who had just arrived from Dubai. He was complaining that it was too cold here in England compared to the recent scorching 45 degrees in Dubai.

He had just bought seven properties in Dubai, which sparked a short but interesting discussion about whether it was not just the climate in Dubai that was overheated but also whether its property market is a good investment or just a place long past its prime and likely to collapse.

Needless to say, he had not thought about this issue before signing the contract. He had believed all the sales stuff about Dubai being the first city of the 21st century and property prices rising at umpteen per cent per annum forever.

It turned out that these were his only overseas property assets and that they represented almost all of his net available wealth. In other words, he had put all of his eggs well and truly into one basket. Whatever the strength of Dubai as an investment destination, this is a crazy thing to do. Real estate should only form a part of your investments. How big a part is open for debate and probably depends on your age, financial situation, timescale for your investment, etc.

Many people decide that they don’t want to know about the stock exchange and invest far more in real estate than an “expert” would probably advise, but few would have bet their entire life savings on property in Dubai.

My advice is that if you are buying six properties around the world you should have them in six different countries with six different currencies, six different climates and six different types of property.

I pointed this out, as tactfully as possible, but my new Australian friend did not seem particularly impressed with the idea. What he did want to know about was what I thought was going to happen to the value of his new properties in Dubai. Were they, as he had been told, likely to rise in value by 30% in the next 12 months?

He didn’t much like my reply because the short answer was a definite “no”! People buying into the market in Dubai are buying into a very special market indeed. In fact, it is unique. It is a market where the ruling family has announced it plans to create a huge business, conference and tourism destination where property (particularly property in good locations) rises in value. Whether the rises will be spectacular or steady (30%-plus or 10% per year) is too difficult to predict, but property would go up in value.

On the other hand, if the government cannot deliver on all of its plans there is the real danger that there will be nobody to occupy the tens of thousands of dwellings under development.

There are many countries in the world where the likely future value of investment property depends enormously upon how successful the governments’ development plans turn out to be. Brazil, Morocco and Cape Verde all spring to mind. But nowhere is the issue as stark as in Dubai.

Many of our clients own property in Dubai as part of their wider property portfolio. Those who bought a few years ago have seen the paper value of their property rise a lot.

Those who have bought more recently have not yet seen much growth and it may well be that the initial period of high capital growth is now over and that any future growth will depend entirely upon the success of the economy program in the country.

If you are bullish in your analysis of the future prospects of Dubai as a country and as an economy then, perhaps, a property in Dubai should be in your portfolio. If you would enjoy fringe benefit of occasional visits to Dubai to go shopping then that might be another good reason to choose to buy there.

But please, do not spend your entire life savings buying seven units in the same place!

John Howell, senior partner of the International Law Partnership, provides independent legal advice on buying property overseas. This article first appeared in Homes Overseas magazine.