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Plain definitions

Glossary

Every term used on this site, defined in one sentence that stands on its own, with the specific way people get it wrong written underneath. 47 entries.

ABCDEFGHILMNOPRSTUVWY

A

Accumulating versus distributing An accumulating fund reinvests its dividends inside the fund while a distributing fund pays them out to the holder, which changes the tax treatment and the administration but not the underlying holdings.

B

Basis point A basis point is one hundredth of a percentage point, so one hundred basis points equals one percent, and it exists because saying a rate rose one percent is ambiguous between one percentage point and one percent of the rate. Breakeven inflation Breakeven inflation is the difference between a nominal government bond yield and the real yield on an inflation protected bond of the same maturity, and it is read as the inflation rate the market expects over that period.

C

Cash on cash return Cash on cash return is the annual cash left after every running cost and every mortgage payment, divided by the cash the buyer actually put in, which makes it the only property return figure that answers what your own money earned. Chiller free Chiller free means the cost of district cooling is included in the rent or the service charge rather than billed separately to the occupier, which materially changes what a headline rent is worth. Correlation Correlation measures how two assets move relative to each other on a scale from minus one to plus one, and diversification only works to the extent that the correlation between holdings is below one.

D

Debt service coverage ratio Debt service coverage ratio is net operating income divided by annual mortgage payments, and a ratio below one means the property does not earn enough to pay its own debt. Double tax treaty A double tax treaty is an agreement between two countries setting out which of them may tax a given kind of income and at what rate, so that the same income is not fully taxed twice. Drawdown A drawdown is the fall from a portfolio's peak value to its trough, expressed as a percentage, and recovering from one requires a larger percentage gain than the loss because the gain is calculated on a smaller base. Duration Duration measures how much a bond's price moves for a one percent change in interest rates, so a bond with a duration of eight falls roughly eight percent when rates rise one percentage point.

E

Escrow account In Dubai, an escrow account is a project-specific account required by Law No. 8 of 2007 into which all off-plan buyer payments and project finance must be deposited, dedicated exclusively to that project's construction and protected from the developer's other creditors. Expense ratio The expense ratio is the annual percentage of assets a fund deducts to cover its running costs, charged continuously and reflected in the fund's price rather than billed separately.

F

Freehold Freehold ownership means owning the property and the land it sits on outright and indefinitely, which in Dubai is available to non-GCC nationals only over land plots the Ruler has designated for it. Fund domicile A fund's domicile is the country in which it is legally established, and it determines the withholding tax the fund suffers on its holdings and the estate tax exposure of the person who owns it.

G

Gross rental yield Gross rental yield is annual rent divided by the purchase price, expressed as a percentage, before any running cost or acquisition cost is deducted.

H

Handover Handover is the point at which a completed off-plan unit is delivered to its buyer, the final payment falls due, the title deed is issued and the service charge begins. Home bias Home bias is the tendency to hold far more of one's own country's assets than its share of the world market justifies, driven by familiarity rather than by analysis.

I

Index fund An index fund is a fund that holds the constituents of a published index in their published weights rather than selecting them, which removes manager judgement and most of the cost that comes with it. Internal rate of return The internal rate of return is the single annual rate at which a series of dated cash flows has a present value of zero, which makes it the only fair way to compare investments whose money moves in and out at different times.

L

Leasehold Leasehold ownership is the right to occupy a property for a fixed term of years while the freehold remains with someone else, after which the property reverts to the freeholder. Loan to value Loan to value, or LTV, is the mortgage amount expressed as a percentage of the property's value, and it is the single number that determines how far a price fall has to go before the owner's equity is gone.

M

Minimum hold period The minimum hold period is the number of years a property must be held for its income and growth to cover the round trip transaction costs, below which the purchase cannot pay for itself.

N

Net rental yield Net rental yield is annual rent minus every running cost, divided by the purchase price plus every acquisition cost, which makes it the only yield figure that describes money actually reaching the owner. No objection certificate A no objection certificate, or NOC, is a document from the developer confirming there are no outstanding service charges or breaches on a unit, and it is required before the Dubai Land Department will register a resale.

O

Off-plan Off-plan means buying a property before it is built, paying in instalments against construction milestones and taking ownership only at handover, which in Dubai is registered through Oqood rather than an immediate title deed. Oqood Oqood is the Dubai Land Department system that registers off-plan property sales contracts before a title deed exists, creating an official record of the buyer's interest during construction. Owners association An owners association is the body of unit owners responsible for managing and maintaining the shared parts of a building, and it is the body that sets and collects the service charge.

P

Payment plan A payment plan is the schedule of instalments by which an off-plan property is paid for, and because money paid later is worth less than money paid today, two plans at the same headline price are not the same price.

R

Real yield Real yield is the return on a bond after inflation, observable directly in the market as the yield on an inflation protected government bond, and it is the hurdle every other asset has to beat to be worth owning. Rebalancing Rebalancing is selling assets that have grown beyond their target weight and buying those that have fallen below it, restoring a portfolio to its intended allocation.

S

Safe withdrawal rate A safe withdrawal rate is the percentage of a portfolio that can be withdrawn in the first year of retirement, then increased with inflation, with a high probability of the money outlasting the retiree. Sequence of returns risk Sequence of returns risk is the danger that poor returns arriving early in retirement permanently damage a portfolio, because withdrawals during a fall sell more units and leave less to recover with. Service charge A service charge is the annual fee an apartment owner pays the owners association for maintaining shared parts of the building, quoted in Dubai as dirhams per square foot per year and levied whether or not the unit is occupied. Situs Situs is the legal location of an asset for tax purposes, which for shares is generally the country of the issuing company and for funds the country of domicile, regardless of where the owner lives or where the asset is held. Snagging Snagging is the inspection of a newly completed property to list defects for the developer to fix, carried out at or shortly before handover while the obligation to remedy them still sits with the developer. Stamp duty land tax Stamp Duty Land Tax is the tax paid on property purchases in England and Northern Ireland, charged in bands on the portion of price falling in each band, with surcharges for additional properties and for non-UK residents.

T

Tax residency Tax residency is the status that determines which country taxes your worldwide income, decided by each country's own statutory tests rather than by your nationality or your visa. Term premium Term premium is the extra yield investors demand for holding a long dated bond rather than rolling short dated ones, compensating for the uncertainty of committing money for decades. Title deed A title deed is the Dubai Land Department document proving ownership of a completed property, issued at transfer or at handover and naming the owner, the unit and its area. Tracking difference Tracking difference is the gap between a fund's actual return and the return of the index it follows over a period, and unlike the expense ratio it captures every cost and every offsetting gain. Transaction cost drag Transaction cost drag is the round trip cost of buying and selling an asset expressed as an annual percentage, calculated by dividing the total cost by the number of years held. Transfer fee The transfer fee is the charge levied by the Dubai Land Department to register a change of property ownership, set at four percent of the sale price and customarily paid by the buyer.

U

US estate tax for non-residents A person who is neither a US citizen nor US domiciled is subject to US federal estate tax on US situs assets above an exemption of sixty thousand dollars, at rates rising to forty percent.

V

Void period A void period is time during which a rental property has no paying tenant, and it is a cost rather than an absence of income because the service charge, mortgage and maintenance continue throughout. Volatility drag Volatility drag is the gap between the average annual return of an investment and the return an investor actually compounds, caused by losses reducing the base on which later gains are earned.

W

Withholding tax Withholding tax is tax deducted at source by the country where income arises before it reaches the recipient, and for fund investors it is deducted from dividends before they ever appear in the fund's return.

Y

Yield curve The yield curve plots the yields of government bonds against their maturities, showing what the market charges to lend for two years against ten or thirty, and its shape is read as a statement about growth, inflation and risk.