ROI and ROE in Dubai property: two different numbers, and which one matters

Two acronyms that presentations often serve up as the same thing. They mean different things, and on the Dubai market the difference reaches a factor of nearly two.

ROI — the return on the asset

Return on investment is calculated from the full value of the property: annual income divided by price. It is a characteristic of the asset itself, and comparing apartments on it is valid.

ROE — the return on your money

Return on equity is calculated from what you have actually put in. This is where the Dubai specific begins: because of post-handover payment plans, rental income can start before the whole price has been paid.

An example in round numbers. The apartment costs 90. By handover you have paid 60 — the rest is paid in instalments over the next two to three years. In the first year the rent brought in 10.

• ROI: 10 ÷ 90 = 11.1%
• ROE: 10 ÷ 60 = 16.7%

The difference is in the denominator. It is the same asset; the return on deployed capital is higher because part of the price has not been paid yet.

Where the trap is

ROE looks better, which is precisely why decks prefer it. Three things it does not show:

• The obligation has not gone anywhere. The remaining 30 has to be paid, and it will be paid out of the same rental income. In three years ROE converges on ROI.
• Void risk. If the apartment does not let, the instalments still fall due — and there is less of your own equity in the asset, so there is less cushion.
• Costs are not included. Service charge, management, voids between tenants and rental tax where it exists are deducted before either figure is calculated — and in presentations they usually are not.

How to use them

ROI to compare properties with each other. ROE to assess your own financing scenario. And both calculated on net income after every cost, or they are just decoration.