Los Angeles Vs Dubai. Who Wins?
November 29th, 2013 by Diane Moore
Los Angeles or Dubai? What commercial property possibilities are more beneficial? We have already heard a lot about these two commercial real estate destinations, and many investors feel a bit lost when trying to choose the right path. Therefore, in this article we are going to make the comparative analysis of Dubai and Los Angeles commercial property market to find out how to make the right decision.
Overseas foreign commercial real estate property has increasingly become a popular investment choice for the investors. When buying commercial real estate property abroad, it is important to obtain the most recent and accurate information regarding the aimed real estate market. Also, it is crucial to investigate the pros, cons, pitfalls and alternatives of that real estate market.
Los Angeles Commercial Real Estate
The Los Angeles commercial real estate market is heating up. Vendors have the upper hand. There are pros and cons to buying Los Angeles commercial real estate, and professional Los Angeles commercial real estate broker/agent with expertise in real estate market can help you overcome the possible cons.
Commercial real estate trends that favor the investor among Los Angeles commercial properties begin with low mortgage rates. While mortgage rates are rising, they are still typically low, and it is improbable that they will suddenly rise.
The 30 year fixed mortgage rate is around 3.78% presently. Mortgage rates are creeping upward but not racing. Mortgage rates will remain low for the rest of the year to improve the real estate market. A well managed Los Angeles real estate can offer lots of advantages, including income and capital growth. Many investors may also be able to use their commercial properties investment to reduce tax payable on their calculable income.
Pros of Investing in Los Angeles Commercial Real Estate
Commercial property profits are generated by appreciation. One study-prior to the real estate bust, calculated the long term annualized housing appreciation rate at 8.6%. That is relatively less than many stock market appreciation rates. Most commercial properties in Los Angeles enjoy prime locations and because of that they are likely to appreciate with time.
There are also lots of things that an investor can do to add value to his/her property, they include: increasing rents and reducing operating expenses. Conversely, with a triple-net-lease, you can always get tenants to pay for the day to day expenses of maintaining the house. With these factors, Los Angeles real estate investors can not only witness appreciation, but also not have to spend millions of dollars to achieve it.
High profit potential
You may be buying a commercial property at a cost that is higher than the usual prices of commodities. But in real estate trading you are able to vend a property at a higher cost so your proceeds will also be higher.
Investing in leverage
Commercial real estate investment allows you to lend money according to the value of the property. Compared to other assets that you can invest on, you will appreciate that it’s quite easier to obtain financial support for commercial properties. Other investments may call for a full payment before you can have access to them. In commercial real estate, you will only be required to pay 5-20 percent of the total price as down payment.
Although, when investor purchase apartment or house where he ends up behind every month after the mortgage loans, this hardly ever happens with real estate. As a matter of fact, most Los Angeles commercial property loans are tied to a debt service coverage ratio which requires a building net working income to be at all times higher than the loan payments, ensuring cash flow for the investor as well as security for the lending institutions.
Given that commercial property appreciation is only taxed when it’s sold; it allows the real estate investor to create equity tax free. You can also add a 1031 exchange and evade payment of taxes when you vend your property. Your proceeds are at all times secured at sale when you purchase more investment properties.
Investing your money in real estate is a secure investment for various reasons: the rental payment usually covers all or most of the operating expenses, mortgage loan as well as the maintenance of the building. Most commercial real estate rents normally get higher with an increase in consumer price index, thus, any increase that you incur in your working expenses is usually covered by the increase in rent to the tenants.
Leasing a property in Los Angeles indicates exceptional amenities close by. Restaurants such as Drago Centro, Bottega Louie and Water Grill and shopping venues such as south coast plaza and other attractive places like The Getty center makes it possible to pull in clients in the neighborhood who may be in Los Angeles on a totally different purpose.
Cons of Investing in Los Angeles Commercial Real Estate
Lack of liquidity
Liquidity in real estate refers to the capability of a property to be exchanged for cash without loss of value. Stocks have good liquidity. But, commercial properties investments do not have good liquidity. For example, if you have invested in a small office building in Los Angeles and the time has come to liquidate that office building, it cannot be done immediately without a great loss of value.
Leverage is not a bad thing, but too much of it can be a bad one. Leverage increases the expected return on a project, as well as the risk associated with that same project. Overextended borrowing put at risk over the success of a commercial real estate investment.
Dubai Commercial Real Estate
Dubai real estate market is very attractive to investors because it offers endless opportunities and offers some of the best commercial real estate properties in the world. Many investors want to purchase commercial properties there because Dubai has a good commercial property environment.
The real estate market in Dubai has grown rapidly over the years and is contributing much to the local economy. The local real estate is favored by factors such as tourism, good infrastructure, political stability and tax incentives, among other factors.
While Dubai continues to offer good commercial investment opportunities, the level of demand for these properties continues to increase at a high rate than other real estate markets. Some investors, including corporate firms, are setting base in Dubai since the tax regime is very favorable, and demand for properties is very high. As a result, Dubai is experiencing a massive influx of foreign investment money and large demand for properties. However, Dubai real estate market far from cheap.
Pros of Dubai Real Estate Market
Dubai is a Safe Haven
Real estate experts have always pointed out that Dubai has been, and will continue to be, a safe haven for commercial properties. There is political stability in Dubai and investors are assured that their property will remain safe. In fact, Dubai also has a stable economy in contrast to neighboring states and countries, whose economies are often affected by controversy and conflict.
This has encouraged more investors to purchase commercial properties in the country. In addition to a stable economic and political environment, investors are assured of getting a valuable visa for 10-15 years after purchasing commercial property in the area.
Dubai’s population is increasingly at a high rate due to an influx of foreign laborers seeking employment in the area. Dubai hosts several industries which require huge labor. As a result, many foreigners from different nations have flooded the country. Consequently, the demand for apartments or houses has increased significantly over the years.
In addition, businesses have increased their production capacity thereby requiring more warehousing space to meet their needs. This is one of the chief reasons why the warehousing sub-sector of Dubai real estate market is doing exemplary well compared to other real estate markets.
The government of Dubai does not collect property tax from investors. In addition, it abolished corporate, personal and sales tax. This means that investors do not pay tax on the income they get from their commercial properties.
This is very important for long-term investors since they will reap a lot of profit. Nevertheless, an investor must register his/her property with the Dubai Land Department by paying a registration fee equivalent to 2% of the purchase price of the commercial property. If an investor used mortgage to finance the purchase, he/she will pay an addition fee equivalent to 0.25% of the mortgage amount.
State- of-the-art Infrastructure and Technology
The Dubai property market has been buoyant because of the existing infrastructure and technology. The demand and prices for commercial properties have gone up since there are numerous employment opportunities in the area, constant flow of money and high standards of living.
As a result, investors in commercial real estate properties have a constant cash flow. In addition, property values are higher than in Los Angeles because the properties have been constructed using the latest engineering and design techniques. Income from oil also makes Dubai have a constant flow of money, which in turn favors investors.
Another good thing about investing in Dubai real estate market is that local financial institutions are providing 10-15 year mortgages to investors. The situation is different in Los Angeles because lenders are still trying to recover from the recent financial crisis.
As mentioned before, Dubai real estate market is prospering. Oil revenues in Dubai are flying high, and many foreign businesses are increasingly setting up base in the area bringing more and more workers with them. But is the local commercial property market getting over-heated? The local commercial properties market has its share of disadvantages.
Disadvantages of Dubai Real Estate Market
Laws Governing the Property Market are not Clear
Despite the positive picture of Dubai commercial real estate market, there is worrying trend in regard to laws governing commercial properties and the rights of tenants. The current laws are quite vague and could be interpreted in numerous ways. The number of rental disputes has increased due to this loophole in the laws of Dubai.
Construction is Beyond Demand
Real estate experts have a general consensus that construction of commercial properties in Dubai is a little bit ahead of demand. Currently, many investors have built and are still building properties in Dubai in the belief that consumption will increase. As a result, property prices have gone down because the supply has overtaken the demand for commercial properties.
Dubai real estate market is highly volatile. During the recent recession, Dubai real estate market was hit harder than other real estate markets in Middle Eastern countries. In some instances, property values and incomes reduced by over 60% while the leasing sub-sector declined from 50% to 40% during the recession. In addition, some property owners sold their commercial properties at a loss to reduce their exposure to risks caused by volatility in the sector.
Short Lifespan of Property
The life span of commercial properties in Dubai is very short, about 25 years. This is because the area experiences very harsh climatic and weather conditions. Also, investors will have to renovate their property regularly because of the weather conditions.
The weather in Los Angeles is favorable, and investors will only renovate their properties after a long duration of time. While this observation may seem insignificant, it is highly important since maintenance and repairs reduce profits by a large margin.
Just like many other nations in the Middle East, Dubai is flying high on oil revenues. The real estate market has grown much due to good infrastructure, increased population, tax incentives, increased investor confidence and a stable political and economical environment. Tourism has also favored the growth of the local commercial real estate market. However, investors should also be aware of the disadvantages of Dubai real estate market.
The market is highly volatile, lacks clear laws on property and the construction is beyond demand. In addition, investors in Dubai real estate market face high and regular maintenance costs due the harsh climate/weather conditions in the area. On the other hand, Los Angeles real estate market appreciates fast, has higher profit potential and is secure. However, it is not liquid and requires a lot of management expertise. Thus, apply these essential tips and choose your own commercial real estate path.
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