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Buying versus renting a residence is not a popularly ventured debate amongst expatriate households in Qatar. Approximately 65% of non-Qatari households occupy rented homes in Qatar. Renting seems the most viable option for most expatriate households due to lack of financial capital, need for flexibility and most importantly the uncertainty regarding their length of stay within the country. However, for those households which expect to remain for more than 5 years, have a minimum monthly income of QAR 15,000 and can afford to pay a downpayment of at least 30% of the capital value, buying can be a viable option to consider.Non-Qataris can buy residential property on a freehold or long-term leasehold basis Click To Tweet
Also read: Qatar Q4 2018 Real Estate Research
Non-Qataris can buy residential property on a freehold or long-term leasehold basis. Freehold areas include The Pearl, Lusail and West Bay Lagoon (Zig Zag Tower). Buying property on a freehold basis gives the owner a residency in Qatar which can be extended to the owner’s family for the duration of the ownership of the property. On the other hand, there are 18 leasehold areas (Mushiereb, Al Mansoura & Bin Dirham, Najma, Al Sadd etc) where buying property on long-term leasehold basis gives the owner the right to occupy or sub-let the property for 99 years with the option to renew once the lease period expires.
One way to help decide on whether to buy or rent a property is by means of a price versus rent comparison called the price to rent ratio. It’s a simple calculation of dividing the total price of the property by the total annual rental income, it estimates the number of years of rent required to buy the same property. In general terms, a property with a price to rent ratio greater than 15 years is considered more favourable for renting, below 12 years it is considered more favourable for buying and for 12-15 years, extra due dilligence is required before deciding to buy. As per ValuStrat Price Index (VPI), at the end of 2018, the price to rent ratio of an average residential unit in Qatar was 22 years: 24 years for villas and 17 years for apartments. This indicates villas in Qatar are more preferable for renting. For apartments, potential buyers need to discern which areas will give them more favourable returns. Comparing all freehold areas in Qatar in which one can buy an apartment, The Pearl is most desirable as it has the lowest Price to Rent Ratio of 15 years.Over 20 years, buying the 1-bedroom apartment could cost upward of QAR 2.1 million Click To Tweet
Besides using Price to rent ratio as a benchmark, potential buyers need to assess the overall cost of buying and renting a specific residential unit. Assuming a potential household wants to buy one bedroom apartment in The Pearl through a loan. The market value of an average 1 bedroom apartment in The Pearl is QAR 1.35 million whereas the average monthly asking rent is approximated at QAR 8,500. In this case, the following costs need to be considered:
- Downpayment: QAR 405,000 (minimum is 30%)
- Fixed monthly payment: QAR 6,501 (assuming 5.5% interest rate and 20 year payment term)
- Transfer fee: 1.25%-2.5% of market value
- Agency fee: Assuming 3% of market value
- Maintenance: Assuming QAR 3,000 annually
Over 20 years, buying the 1-bedroom apartment could cost upward of QAR 2.1 million. While renting a 1-bedroom apartment over the same period could cost QAR 2.05 million (assuming rental rates remain fixed for ease of calculation). In this example, the price to rent ratio is 13 years and for additional 2% of the value of the apartment, the household will be an owner of the property, which could be rented out or sold to gain a return on investment. In the case of a 2-bedroom apartment in The Pearl, the gap becomes 11% and for 3 bedrooms the difference becomes 22%. In cases where the gap is significant, the buyer can assess how that difference could grow if they were to invest this amount in a diversified portfolio and compare it with home equity they will build at the same time through mortgage payments.
Generally, due to falling prices, buying property is becoming more affordable in Qatar and if prices continue to fall relative to rent as it did in Q4 2018 when capital values in The Pearl fell by 8% over a period of one year compared to rents which only reduced by 5%, price to rent ratio will continue to fall reducing the cost gap between buying and renting. It is advisable for potential home buyers to assess current rental and capital values trend and discern which way to go: buying or renting.
Read next: Qatar Review 2018 – Outlook 2019
Disclaimer: This article is a guide only and uses approximate figures and current expense items for comparison. ValuStrat is not responsible for any new items of expense being added or changes in fees at any time. The costs and rents used are averages to illustrate the differences.