Factor in view premium to calculate capital gains

Water views have been found to add substantial value to the selling price of apartments and villas.

Conventional opinion, backed by a litany of research, indicates that there is always a premium for real estate that has views. Water views in specific have been found to add substantial value to the selling price of apartments and villas. However, in Dubai, the premiums associated with a sea or Burj Khalifa view remains one of a subjective assessment within the realm of broker discourse.

Property experts in other markets have calculated exactly what the premium of a unit with a view is worth. For example in New York City, apartments with a view of Central Park trade at a premium of 118 per cent, whereas in Perth, homes with a view of Swan Lake are 90 per cent higher.

The reason for these exorbitant differences is a function of scarcity along with the psychological construct of the hedonistic value of the decision maker. For example, in Dubai, the supply of units with a full sea view remain scarce, allowing them to trade at higher levels relative to apartments with a non-existent view in the same postal code or even the same building.

In order to understand the dynamics prevalent in the Dubai market in relation to the 'view premiums', a granular price analysis was conducted that isolated units with a superior view. Using the Shoreline Apartments in Palm Jumeirah as a proxy, it revealed that apartments with a sea view traded at a premium of 25 per cent compared to road view units.
Similarly, in Downtown, apartments facing the Burj Khalifa were more expensive by 14 per cent. This sort of analysis shifts the debate from being a subjective assessment to a data-driven conclusion. Although, this study provided the basic construct of quantifying the 'view premium', other factors such as layout, floor and upgrades are necessary to fully understand the dynamics at play.

Buyers' willingness
As Dubai began its second wave of off-plan launches in 2012, developers adjusted prices upwards for units with a view compared to launches in the first wave of 2003. For example, Shoreline Apartments with a sea view were launched at a 10 per cent premium, whereas in 2013, in the Hills, units with a full golf course view were 24 per cent higher. Developers have become cognizant of buyers' willingness to pay for a view, consequently factoring it in their launch prices over time.

This implies that for the investor, going for the superior view is not necessarily as obvious as the real estate literature suggests; rather, it is a function of the premium that the developers are offering the view in the first place. If, as the data suggests, the premiums are already factored into the launch prices, then by definition, it implies that the choice for the investor at the point of launch is either one of neutrality or that any relative capital gains that are to be realised, occur over a longer period of time.

Using data from the Coastal Business Journal, we witness that over the last three decades, units with a view have out-performed dwellings with no view, as the premiums continued to expand exponentially. A similar dynamic can be witnessed in the Shoreline Apartments over the last five years as the spread between the sea and road view has increased by 63 per cent.

While the underlying thesis of paying for a view remains broadly true, it has become imperative to look at the differential in launch prices in order to ascertain the expected timeline to monetise such gains. Given the plethora of views that Dubai offers, it is critical to analyse such launch price differentials before coming to a conclusion. To be sure, the investment thesis for the view in the final analysis boils down to the price!

- The writer is the head of research at GCP Properties. Views expressed are his own and do not reflect the newspaper's policy.