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Dubai´s rental real estate: what to invest in for a stable income

Dubai is the administrative centre of the Arab Emirates, the largest city of the UAE and the investment capital of the Middle East. The local real estate market is on the up thanks to large-scale and ambitious projects, which, according to BetterHomes, has attracted buyers from 149 countries, most of all including investors from India, Saudi Arabia, the UK and Pakistan.

According to the Dubai Land Department, the volume of investment in local real estate during the first half of 2016 reached $7.6 billion. The great attraction for investors is the economic stability, the bright prospects for Dubai´s market and, above all, the opportunity to receive a stable annual rental yield of 5–7% in the local market.

The most popular property types bought by investors for rental in Dubai are residential properties, apartment hotels and offices.

Residential property: how to earn on appreciation

Between 2014 and 2016, prices for residential property in Dubai dropped by 15%, and in Q3 of 2016 they amounted to only 73% of the peak value they achieved in 2008. According to September 2016 data from the Global Property Guide, apartment prices in Dubai range from $4,400 to $6,000 per m². Rental rates have also fallen 10–15% over the past two years

However, experts are unanimous in their belief that the market has begun to recover in 2017. In some districts of the city prices keep falling, even though less sharply than before; while in the others they have already reached rock bottom and are now in a growth phase. This means that the optimal time to enter the market has come, given that buying property in Dubai for a relatively low price will allow you to earn as it appreciates in the coming time.

The return on investments from purchases of residential property for rent in Dubai reaches up to around 5–7% per annum. Villas in Dubai generate a rental income of 3–6% and apartments yield 6–10% per annum.

Renting out a studio brings $15,000 per annum on average, a one-bedroom flat brings about $25,000, a two-bedroom - $39,000, and a three-bedroom - $56,000 per annum. At the same time, studios and one-bedroom apartments yield more than larger flats: 6.8–7.5% versus 5% on average.

According to Propertyfinder Group, the apartments yielding the highest returns are those located in the new and developing districts of the city: Sports City, Silicon Oasis, and Discovery Gardens. Local rental yields reach 9% per annum: some of the highest in the world. The maximum yields in the Greens and Jumeirah Lakes Towers districts fluctuate between 7.5% and 8% per annum. Finally, in the most upscale districts with high property prices, such as Dubai Marina and Palm Jumeirah, the average yields are about 6% per annum.

Dubai Marina is one of the most upmarket districts in the city with high property prices
Dubai Marina is one of the most upmarket districts in the city with high property prices

An apartment measuring 55 m² in Dubai Marina costs around $326,000 (including all the purchase-related expenses). The property's maintenance costs are around $3,200 per annum, with the utility bills paid by the tenant. The annual long-term rental income is around $28,500 and the net yield rate is about 7.3% per annum.

Villas are usually less profitable than apartments in terms of leasing. However, exceptions also exist: for example, homes in the Arabian Ranches and the Springs districts yield up to 6.4% per annum and can pay off the initial investment outlay even quicker than certain apartments. Generally, the more spacious and expensive is the villa, the lower the rental income.

Apartment hotels: tourist and business owner demands growing

Dubai is one of the most popular tourist destinations in the world and one of the top locations for shopping and business travel. Over 15 million tourists visited the city in 2016, and by 2020 this number is expected to grow to 20 million people, with around 17.5 million visitors planning to arrive solely for the Expo 2020 which is to be held in Dubai from October 2020 to April 2021.

With the growing tourist flow, apartment hotels in Dubai's real estate market - representing an alternative to conventional hotels - are gaining in popularity. Serviced apartments combine the advantages of homeliness and hotel service, and are popular with both entrepreneurs looking for an alternative comparable to that of hotels and also families with children who need more space than a regular hotel room can offer. This type of accommodation is especially popular with Saudi Arabian tourists who often travel with large families. Another reason explaining the increasing popularity of aparthotels is that the cost of lodging there can be up to 30% lower in comparison with hotels of a similar level of luxury and space.

Apartment hotels combine the convenience of a flat and the comfort of a hotel room
Apartment hotels combine the convenience of a flat and the comfort of a hotel room

Serviced apartments are buy-to-own just like regular residential properties, and the owner can sell them at any time. In addition, the owner of such a property has the right to spend an average of two weeks there per year for free. Professional management companies take charge of all the duties related to property maintenance, upkeep and conduct the search for tenants.

The average annual rental yield from serviced apartments is around 8–10%. The apartments located in complexes on the coast - frequently chosen by foreign nationals as places to stay - can yield up to 0.4% per week if rented out over short terms.

Prices for one-bedroom apartments start at $200,000, whilst three-bedroom furnished apartments in a prime residential complex cost about $800,000.

For $220,000–270,000 you can buy a one-bedroom apartment in Discovery Gardens and receive a yield of around 9-10% per annum, less the maintenance costs, which amount to $30–35 per m² per annum when renting it out for $24,000–26,000 per year.

The best strategy is to buy property from a reliable developer who offers serviced apartments in the newly-built and abuilding hotels of Downtown Dubai. The properties bought from leading developers are easier to sell if needed, and, when the market grows, they advance in price quicker and more significantly than residential property from lesser-known companies.

Offices: top class space in the central districts is always highly prized

The main tendency that characterises Dubai´s office space market is its duality: the disparity between the prime properties and the remaining real estate. For instance, the rental rates for B-class office space declined by 5% in the first half of 2016 in comparison with the previous year, while that of A-class increased by 3% during the same period.

The vacancy rate is higher in certain city districts where residential properties are relatively old. For example, in the Dubai World Trade Centre, it reaches 20%. At the same time, the rental rates in such locations either remain stable or decline. For instance, during Q2 of 2016 alone, they dropped by 18% in the locality of Garhoud near the airport, and by 5% in Deira. Other districts of little promise are the Jumeirah Lakes Towers and Business Bay. Here, the supply of office space exceeds the demand.

In the free economic zones - TECOM's Dubai Internet City, Media City, the Dubai International Financial Centre and Dubai Design District - the situation is quite the opposite. The local top class office space is in demand with large international corporations. Tenants reserve the office spaces located in the Media and Internet City buildings when they are still under construction. The volume of vacant space in the Central Business District dipped by 7% between November 2015 and November 2016, reaching 15% , while in the centre of the International Financial Centre as little as 5% of the offices remained empty.

Between 2008 and 2016, the rental rates in the Dubai office space market declined by 50–76%, depending on the market segment. B-class office space rates fell the most, whilst prime property suffered less. As of late 2016, rental rates for office space in the city range from $175 to $700 per m2, depending on the building's characteristics and its location.

The highest are the rental rates for the new buildings of the International Financial Centre. Prices are growing continuously there and in early 2017 are well on their way to $1,076 per m². However, this is the highest figure there is: the average rental rate for offices in other popular locations amounts to $450–500 per m².

Annual office space rental yields range between 5.5% and 8.5%. Commercial real estate is more profitable in terms of lease than residential properties, that is, as long as the property maintenance costs are paid by the tenants and where the rental period is usually longer.

Due to an economic slump in the market, the demand for office space in Dubai has slowed in recent years, and companies are wary with plans to expand. Small offices are in higher demand. According to data for the first three quarters of 2016, less than 12% of tenants were choosing spaces over 950 m², while a year earlier this figure amounted to 30%. For instance, in the Index Tower skyscraper, located in the Dubai International Financial Centre, four floors were divided into small offices (from 50 m² to 300 m²) and most of them found their tenants immediately. The same strategy worked in Burj Daman.

Small offices are popular with tenants
Small offices are popular with tenants

According to analysts, in the first six months of 2017, the office space market in Dubai shouldn´t be expected to grow on the whole, but certain locations which are not falling in line with the general trend will be developing. Investors should also pay attention to the developer´s reputation, infrastructure development, the district´s transport accessibility and the availability of parking in the business centre.

In the 2017 Dubai market, Tranio recommends investing in:

  • residential apartments in the districts of Sports City, Discovery Gardens, the Greens, Jumeirah Lakes Towers and Palm Jumeirah;
  • apartment hotels in the newly-built complexes in Dubai Marina and Downtown Dubai;
  • A-class office space in the Dubai Internet City, Media City, Knowledge Village, Dubai Design District and the Dubai International Financial Centre.

Julia Gushchina, Tranio.com

Originally published on themarketmogul.com

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