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Managed Portfolio
Investment Strategies at a glimpse
The old wisdom behind portfolio theory is not to put all your eggs in one basket. The goal is to spread the entire risk in the portfolio across various risk factors by making many individual investments. If a single investment does not work out, this is offset by the rest of the portfolio.
“The goal of a portfolio is to avoid investment disaster and achieve better risk-adjusted returns.”
Investment
Strategies
Our portfolio strategies and their potential weighting depend on the individual risk appetite. Rebalancing the portfolio to its original risk weighting is an important aspect to minimize fluctuations in the overall portfolio value. This depends heavily on the investment strategies and adjustments must be made carefully and systematically. However, they also allow tactical adjustments or enable the withdrawal of a partial amount through liquidation or by mortgaging one or more properties. Here you will find a brief overview and their characteristics.
Core Strategy
Focuses on stable, income-generating properties in prime locations. Investors aim for steady cash flow and lower risk, often holding properties for the long term.
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Risk: Relatively lower risk compared to other strategies because it focuses on stable, income-producing properties in prime locations. These properties tend to have steady cash flow and lower vacancy rates.
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Return: Moderate returns primarily from rental income with potential for modest appreciation over time. Total returns are typically more stable but may be lower compared to higher-risk strategies.
Value-Add Strategy
Involves acquiring properties that require improvements or repositioning (e.g., renovations, better management). The goal is to increase value and rental income over time.
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Risk: Moderate to high risk as it involves purchasing properties that require improvements or repositioning. Risks include cost overruns, construction delays, and market conditions affecting property value.
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Return: Potential for higher returns than core strategy due to increased property value and rental income post-improvements. Successful execution can lead to significant capital appreciation.
Opportunistic Strategy
Targets higher-risk, higher-reward opportunities such as distressed properties, development projects, or markets with potential for significant growth. Investors seek to capitalize on market inefficiencies.
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Risk: High risk as it involves investing in distressed properties, development projects, or emerging markets with uncertain outcomes. Market volatility, regulatory changes, and execution risks are prevalent.
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Return: Potential for highest returns among strategies if successful, driven by significant property value appreciation or development profits. However, failure rates can also be higher.
Development Strategy
Involves investing in ground-up development or redevelopment projects. This strategy typically requires more expertise and carries higher risks but offers potential for substantial returns.
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Risk: Very high risk due to ground-up construction or major redevelopment projects. Risks include construction delays, cost overruns, zoning issues, and market timing risks.
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Return: Potential for substantial returns if the project is completed successfully and the market appreciates. Returns can include both rental income and capital gains from property sales.
Income Strategy
Focuses on maximizing current income through properties that generate high cash flow, such as multifamily residential or commercial properties with stable lease agreements.
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Risk: Moderate risk focused on properties generating high current income. Risks include tenant turnover, economic downturn affecting rental demand, and property maintenance costs.
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Return: Relatively stable returns from consistent rental income, with potential for modest appreciation. Total returns are driven primarily by cash flow rather than capital gains.
Growth Strategy
Emphasizes capital appreciation over income. Investors target properties in rapidly growing markets or sectors expected to appreciate in value significantly over time.
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Risk: Moderate to high risk depending on the growth potential of the market or sector targeted. Risks include market saturation, economic downturns affecting growth prospects, and regulatory changes.
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Return: Potential for higher capital appreciation compared to income-focused strategies. Returns are driven by property value appreciation rather than immediate rental income.
Geographical Diversification*
Spreads investments across different regions or countries to mitigate local market risks and leverage diverse economic cycles.
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Risk: Helps mitigate risks associated with regional economic downturns, regulatory changes, or localized market bubbles. However, currency fluctuations and geopolitical risks may still impact returns.
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Return: Diversification can lead to more stable returns over the long term by spreading risk across different markets with varying economic cycles.
Sector Diversification*
Spreads investments across different types of real estate sectors (e.g., residential, commercial, industrial) to balance income stability and growth potential.
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Risk: Reduces risk by diversifying across different real estate sectors (e.g., residential, commercial, industrial). Risks specific to each sector, such as vacancy rates or regulatory changes, still apply.
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Return: Provides balanced returns by capitalizing on opportunities across different sectors. Performance can vary depending on sector-specific factors influencing rental income and property values.
Risk Disclaimer
Dubai’s real estate is full of opportunities, but there are also risks to buying a property in Dubai. Please take a look at the key considerations and potential risks of buying real estate. It will help you navigate Dubai's property market with confidence.
1 - Understanding Market Volatility
One risk to consider when buying property in Dubai is market volatility. Like other financial markets, Dubai's real estate sees periods of growth and contraction. For example, after rapid growth from 2012 to 2014, prices gradually declined until 2020. Since then, the market has surged, with record transactions and prices reaching all-time highs.
This volatility can be influenced by global economic events, government policies, and oil prices. While the market outlook is positive, investors should research thoroughly and be prepared for potential price fluctuations.
2 - Seasonality
Investments in hotels require a deep understanding of the seasonal nature of the business. Profits cannot be guaranteed, and ROI calculations should be seen as guidelines. The success of a hotel largely depends on its management performance. The same applies to investments in seasonal commercial spaces like beach clubs, Airbnb apartments, and all other forms of short-term rentals where cash flows are not subject to long term contracts. Additionally, cultural and religious practices in the UAE, such as Ramadan, may significantly impact business performance by reducing demand during certain periods. Investors should be aware of these factors when evaluating potential returns.
3 - Legal Challenges
Whilst the process for buying real estate in Dubai is relatively straightforward, the property laws can be quite different from those in other countries. A failure to follow the correct legal procedures could risk challenges down the line, including fraud or disputes over property ownership.
It is vital that you consult with a registered real estate professional, use a conveyancer where appropriate, and ensure all legal documentation is in order, including the Title Deed and No Objection Certificate (NOC).
4 - The Potential For Oversupply
Another risk when purchasing property in Dubai is the possibility of oversupply. A surplus of new developments in a particular area could result in an abundance of available properties, which may impact rental returns and make it difficult to sell or lease a property. Investors should carefully evaluate the balance of market demand and supply within their selected area before making a commitment.
5 - Choosing The Wrong Financing Option
When securing a property mortgage, there are numerous options available, but selecting the wrong one could negatively impact your financial situation. For instance, a higher interest rate or unsuitable terms can significantly increase your costs, and some mortgages have restrictive early repayment conditions. To minimize risk, it is advisable to consult a reputable mortgage broker who can provide tailored recommendations based on your specific financial circumstances and goals.
6 - Mitigating The Risk Of Construction Delays
When buying a property in an unfinished development, construction delays are a potential risk. Developers set handover dates, but delays can push back when you can move in or start renting it out. To minimize this risk, buy from reputable developers and monitor construction progress. However, some developers may finish up to six months early, leading to earlier payments, so ensure you have the liquidity to take over the property sooner than expected.
7 - Currency Risk
Exchange rate fluctuations of the UAE Dirham can affect the value of your investment when measured in your local currency. The Dirham is pegged to the US Dollar at a fixed rate of 3.6725 Dirham, making it relatively stable against the Dollar. However, if your local currency fluctuates against the Dollar, the value of your investment may increase or decrease. Additionally, while the peg provides stability, there is always a future possibility of the Dirham decoupling from the Dollar, similar to how the Swiss Franc was decoupled from the Euro. This could introduce greater currency risk, so it is important to factor this possibility into your financial planning.
8 - Not Factoring In Additional Costs
When purchasing real estate in Dubai, it's important to be aware of additional costs beyond the property price. These can include government fees, such as a 4% transfer fee of the property’s purchase price payable to the Dubai Land Department, along with registration fees. There may also be agency commissions, typically 2% of the purchase price, as well as costs for legal services, property valuations, and mortgage processing fees if applicable. Furthermore, consider ongoing expenses like service charges and maintenance fees, which vary depending on the property type. Ensure that these costs are factored into your overall financial planning to avoid unexpected expenses. In Dubai, transaction costs are about 6-8% of the purchase price, compared to 12-20% of the price in other big cities.
9 - Ongoing Maintenance and Service Fees
When owning real estate in Dubai, it's important to account for ongoing maintenance and service fees. These fees are typically charged annually and cover the upkeep of common areas, facilities, and services within the property. The amount varies depending on the type of property, its size, and the amenities provided. For instance, luxury developments with pools, gyms, and security may have higher service charges. Additionally, unforeseen maintenance expenses may arise, so it's crucial to budget for both regular fees and potential repairs to ensure the long-term upkeep of your investment. Proper financial planning can help you manage these ongoing costs effectively.
10 - Navigating Risks with the Expertise of an Independent Portfolio Manager
Investing in Dubai's real estate market can be highly rewarding, but it also involves certain risks, such as market volatility, currency fluctuations, and construction delays. By understanding these potential challenges, investors can better prepare themselves to make informed decisions.
A well-managed and diversified portfolio can significantly mitigate these risks, enhancing your overall investment strategy. Consulting with an experienced and qualified independent portfolio manager is crucial for navigating the complexities of the market. Unlike brokers who may be influenced by commissions or conflicts of interest, independent portfolio managers provide unbiased guidance based on your individual Investment Policy Statement (IPS). This ensures that their recommendations are aligned with your specific financial goals and risk tolerance, allowing for sound investment decisions while minimizing potential risks.