July 23, 2024
Property

How to choose the perfect property investment strategy


The UAE attracts different kinds of property investors, and the availability of diverse options means home buyers can choose a unit that is best suited for either a short-term or long-term lease.

This decision is usually based on various factors such as rental yields, capital appreciation, location, market conditions, supply and demand and individual investment preferences.

While short-term lets offer higher rental yields and flexibility to property owners, annual rentals attract those seeking more stable and predictable income streams, according to experts.

“Short-term rentals, benefiting from demand from leisure and business travellers, are favoured over annual leases in certain jurisdictions where regulations prohibit non-residents from renting out properties for a year,” says Karina Meirmanova, head of real estate platform at property technology start-up Huspy.

“However, short-term rentals are subject to calendar cycles, with periods of low demand in the summer as we see here in the UAE.

“For international investors, short-term leases are increasingly appealing due to their easy accessibility, management, no lock-ins and the flexibility they afford for visiting one’s property conveniently.”

However, with annual leases, the long-term commitment to contracts means that investors have full visibility of longer-term income, she says.

The UAE’s property market continues to record strong growth on the back of government projects, the expansion of its economy and higher oil prices.

Last year, Dubai registered a 17 per cent annual jump in real estate transactions to 1.6 million across market segments, according to data from the Dubai Land Department.

The overall number included real estate deals from investments, mortgages and sales transactions to rental contracts recorded last year, up from about 1.3 million transactions reported in 2022.

Last year, the value of real estate deals in the emirate reached Dh634 billion ($172.6 billion), an annual growth of 20 per cent.

“On average, annual leases yield a 6.8 per cent return on investment, whereas short-term rentals can range between 10 per cent and 14 per cent annually,” Ms Meirmanova says.

In Dubai, the most popular areas for short-term lets are Dubai Marina, Palm Jumeirah and Downtown Dubai. Business travellers seek out properties around the Dubai International Financial Centre, Business Bay and Dubai Internet City, according to Peter May, vice president of operations at short-term rentals platform Silkhaus.

“More recently, we are seeing increasing demand from secondary areas like Jumeirah Village Circle and Dubai Hills,” he says.

In Abu Dhabi, Al Reem Island is a hit for business travellers, while Saadiyat and Yas Island are appealing to tourists, he points out.

Owners of short-term lets are not limited by an Ejari agreement and long-term binding contracts, Mr May says.

Short-term rental landlords include both homeowners and institutional investors.

“The returns for landlords are 20 per cent to 40 per cent higher than long-term leases. This depends on a variety of factors, including the location of the property, its size and market dynamics,” he says.

“However, with current demand in the UAE, the largest challenge is the lack of quality supply for short-term rentals.”

Industry standards for commissions on the monthly net revenue generated on each asset average between 15 per cent and 20 per cent, according to experts.

Property owners must register their unit as a short-term rental with the respective authorities in their emirate.

In Dubai, it is the Dubai Economy & Tourism Department which issues holiday home permits.

In Abu Dhabi, homeowners must register with the Department of Culture and Tourism. This process is online and includes a small fee.

The National looks at three property investment strategies and the experience of homeowners to weigh up what could work best for you.

On average, annual leases yield a 6.8 per cent return on investment, whereas short-term rentals can range between 10 per and 14 per cent annually

Karina Meirmanova, head of real estate platform, Huspy

Long-term investment

Jennifer Terry owns two apartments in the Green Community and The Greens and a villa in Dubai. She lives in the villa and rents out the apartments on annual leases. She purchased the apartments in 2017 and 2021.

She believes that if you own property in a prime location for tourists, such as Dubai Marina or Jumeirah Beach Residence, it’s easier to do short-term rentals.

However, as her apartments are outside these tourist areas, it’s easier to do an annual lease and it also involves less hassle, she says.

“We initially bought apartments because we thought smaller properties were easier to rent out. We also bought a villa because we wanted to live in it ourselves,” Ms Terry says.

“But we’re also looking at the potential of a villa for investment in the future, but this is only after the current prices drop a bit.”

She earns a net annual rental yield of 5.5 per cent on her studio and 6 per cent from a one-bedroom apartment.

She states that long-term leases offer a stable cash flow and a fixed income in the long term.

However, an investor’s return on property investment depends on when they buy the unit.

“I’ve been here for 10 years, so we’ve seen ups and downs in the market. For instance, during the pandemic, both villa and apartment values decreased by about 30 per cent, so we picked up deals,” Ms Terry says.

“We are always looking at the market and if there is an opportunity, we might buy more properties.”

It’s important for long-term investors to understand the potential and risks of different areas and only go for developers with a good track record, she suggests.

She always checks out deals on Emirates Auction for undervalued properties. If she has spare cash, she buys the unit after considering factors like location, property value, size and ease of renting.

For short-term flipping, if you buy off-plan and the market drops or the developer has trouble fulfilling their commitment, your deposit may be stuck, she warns.

“It’s easy to buy and sell property in Dubai. It has no tax and is very friendly for foreign investors,” Ms Terry points out.

Short-term rentals

Shilpy Garg owns two properties, a studio and a one-bedroom apartment, in Jumeirah Village Circle in Dubai which she has leased as short-term rentals.

She purchased both the units off-plan and they are managed by a holiday home company.

“We decided to invest in JVC because it is strategically located and we also live here, so it’s easier to manage the units in case of an emergency,” she says.

“The target audience is people who are new to the country and willing to rent such units for short stays until they find a place of their own. The units are also frequently booked by tourists who prefer to have a kitchen and more open space than what hotel rooms would usually offer.”

She opted for short-term leases after not having a pleasant experience while renting one of her Dubai properties on a long-term basis.

When the tenant vacated, the house was left in a very shabby state and there was no clear information about their exit, Ms Garg says.

“It may have just been a very rare occurrence but got me to rethink my future strategy. This made me think that I need to have better control of my property because they’re all premium. I eventually sold off that unit,” she says.

“When the house is not being used, I want to be able to go and see how it is being maintained. That’s all possible with a holiday home investment. The holiday home company takes care of the linen, toiletries, basic hygiene and deep cleaning of the unit.”

She believes this type of investment offers better returns over a two to three-year period.

She’s completed a one-year cycle for one of her apartments and it has generated between 10 per cent to 12 per cent net average returns.

Ms Garg also chooses short-term lets as it gives her peace of mind that her property is in safe hands.

“I decided to lease these units via a short-term rental stream because I love to travel and have stayed in such units in other countries, so I wanted to do something similar in the UAE, which is also a tourist hotspot,” she explains.

“I cannot afford to manage the units with a full-time job. It’s easier to go through a holiday home operator since they know how to pitch it to different portals and have all the licences and permits to create a strong booking pipeline.”

Ms Garg is more inclined towards the property market in Dubai compared to other investment offerings.

However, she does her due diligence and only invests with developers who have a good track record.

Her properties have been rented for short stays going up to two nights and long stays of even six months.

The income from each booking is split 80:20 between Ms Garg and the holiday home company.

The units are fully furnished. The holiday home company will usually give a checklist that the owner needs to fulfil. This includes furniture and a well-equipped kitchen, with a coffee machine, utensils and cutlery.

Ms Garg is also given access to the user portal where she can reserve dates for her own use or her guests.

Inside Dh56m property on Dubai’s Palm

Inside Dh56m property on Dubai's Palm

“The pros of long-term leases are you usually receive a cheque for a 12-month period and may not have to worry about anything after the lease is signed and the rent is credited to your account,” she says.

“But if the tenants are not the right people for your unit, they might leave it in a very shabby condition, in which case a security deposit may also not be enough to repair the house. Also, with Dubai’s fast-paced life, you may not want to open a case with the Real Estate Regulatory Agency, you just want to close the chapter and move on.”

The pros of short-term lets are that your property remains clean and will not depreciate. It will stay exactly like a hotel room, Ms Garg says.

The issue would be the uncertainty of bookings. If the market goes low and a force majeure condition happens, you may not have travellers coming to the country, in which case it’s a complete loss, she says.

Another nuance is that the owner must pay the utility bills.

“In my case, I wanted to give it a try and the model worked well. Last year, the UAE registered a record-breaking number of tourists and visitors,” she adds.

Flipping

Stephanie, who chose not to give her full name, has been flipping properties for two years.

She buys only off-plan properties and waits till the project is handed over to exit the investment.

Then, the profit is higher compared with when you sell at the start of the project, she says.

“Flipping property requires patience, it involves waiting for the right time to exit the investment. It’s not a guarantee of quick money,” Stephanie says.

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“Flipping usually stays within a network, so you usually sell to a contact. I’ve noticed that it is mostly done by investors from Africa and Russia.”

An investor will receive better returns by flipping property than by renting it annually and they also don’t have to pay any maintenance charges, she claims.

The usual holding period for those looking to flip the property is one to two years, but it depends on the construction schedule, she says.

Stephanie usually flips only studio and one-bedroom apartments and always buys directly from the developer upon project launch.

“Look for a developer who has a track record of finishing construction in two years, so you can flip the property,” she suggests.

“Also, make sure you have 24 per cent of the sales price ready to pay upon project launch and go for small developers because the bigger ones do not encourage flipping and the holding period is longer.”

To purchase an off-plan property, an investor needs to pay 24 per cent of the sales price: 20 per cent for the booking and 4 per cent for the Dubai Land Department fee.

Stephanie recently made a profit by flipping two apartments in a project in Arjan, Dubai. She earned a profit of Dh80,000 from one unit and about Dh100,000 from the other. She held the units for between eight to ten months.

Flipping is mostly done by investors who have spare cash. It’s like trading and the risk is quite high, she warns.

“The risk is that there may not be buyers after you book the unit. Then you lose money and may have to sell below what you invested,” she says.

Updated: May 02, 2024, 5:00 AM



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