Derayah Financial (the first investment supermarket in the Middle East to offer all investment alternatives under one roof) has recently conducted a comprehensive and pioneering research on real estates. The research identified residential real estate in the three major Saudi cities among the most attractive when compared to other major cities in the world.
Derayah's recent report developed a new method for evaluating global real estates prices. It compares real estate's prices in 50 major cities around the world by taking the average price for a square meter of residential properties and comparing it to the average income of the inhabitants of these cities, thus calculating a new metric for each city: AAI (Area Afforded by Average Income of Inhabitants).
When taking this new AAI metric into consideration, the report concludes that residential real estates in Riyadh, Jeddah and Dammam are among the most affordable in the world. This is a good indicator that residential properties in the Kingdom are still attractive comared to other cities.
When using the AAI metric, the report also uncovers that Mumbai is the most expensive city in the list of cities covered by the report due to the high price of the residential square meter when compared to the average income of the inhabitants of the city. The average annual income of an inhabitant of this major Indian city can buy only 0.38 square meters of real estate property. Moscow, Hong Kong, London, Singapore follow as the next most expensive cities on the list.
On the other hand, the report states that Saudi cities such as Riyadh and Dammam, and some other cities such as Zurich, Cairo and Copenhagen are among the most attractive because the average annual income of inhabitants in these cities can buy more than 8 square meters of residential property. Therefore, these cities offer the best value and the highest potential for capital appreciation, and for generating income from real estates investments.
The report also mentions that for the year ended Q1 2010, some small European markets like Finland saw a Y-o-Y increase of 11% while larger markets like France and Germany saw modest gains to the tune of 0.50%. Foreclosures in the US continue to grow, resulting in Y-o-Y drop in residential real estates prices.
In Asia, according to the report, Hong Kong, Singapore and Taiwan saw massive increases, fuelling doubts that a bubble is under way in these markets and also in larger markets, especially China.
The report confirms that the Middle East saw similar divergences, with residential apartment prices in Riyadh, Saudi Arabia witnessing a 6% y-o-y increase, compared to still falling prices in places like Dubai.
From a rental yield perspective, the report states that Latin American countries like Peru and Brazil seem attractive when compared to global peers. Regionally, Egypt and Jordan offer the highest rental yields between 7- 8%.
Commenting on this report, Mohammed El-Kuwiz, Derayah's Managing Director, said: "Real estates is an important part of investors' portfolios both in the Kingdom and in the Gulf area. But due to the nature of real estates investments, it's hard for the individual investor to evaluate and analyse their efficiency as an investment class especially when adding the complexities of the current turbulences in world economy. This report is an effort by Derayah to offer individual investors all the necessary tools that help them make their own enlightened investment decisions".
El-Kuwiz also clarified that Derayah's report analysed the markets taking into consideration the residents' ability to afford real estates in each city. The report presumes that the more the residents become able to buy properties the higher the potential for adding value to the property and the higher the chance to achieve profit from investing in real estates.
He continued: "In this report, Derayah proposes a new metric to compare global properties: Area Afforded by Average Income of Inhabitants (AAI), which compares the average price per square meter in each city to the average income of the population of that city, after adjusting for tourist inflows".
El-Kuwiz believed that this metric, which is based fundamentally on affordability, is a good indicator of value especially for residential real estate, and leads to some interesting results, when applied to a global sample of large cities.
El-Kuwiz stated that real estate is undoubtedly a highly desired investment asset for investors in GCC countries and the broader Middle East. He adds: "Despite the desirable nature of real estate, there have been few analytical frameworks for evaluating the fair value of real estate, especially when looking at a local scale. The main criteria: Rental yield (the annual net rent received on a property divided by its market price). Although this criteria is widely used, El-Kuwiz believs it is quite flawed, in that many markets (such as Dubai) witnessed steep climbs in both real estate prices and rental rates simultaneously, which meant that looking at the "rental yield" metric would not have warned of the looming price bubble.
He also added: "While other factors should be taken into account when evaluating real estate values (such as economic growth, population density, and of course rental yields), we believe this metric can provide an interesting perspective in the continuing search for value in real estate investments".