The Dubai property market is one of the most reliable in the world.
Dubai is the administrative centre of the Arab Emirates, the largest city in the UAE and serves as the investment capital of the Middle East. The local real estate market is on the up due to large-scale, ambitious projects, which attract buyers from countries such as India, Saudi Arabia, Pakistan and the UK.
According to the Dubai Land Department, the volume of investment in local real estate during the first half of 2016 reached $7.6bn. The great attractions for investors are economic stability 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.
Between 2014 and 2016, the prices for residential property in Dubai dropped by 15%, and in Q3 of 2016 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 – $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, though less sharply than before. In other areas, they have already reached rock bottom and are now in a growth phase. This might mean that the optimal time to enter the market has come, given that buying property for a relatively low price will allow you profit from both rental income and price appreciation.
The return on investments from residential rental property purchases in Dubai reaches up to around 5 – 7 % per annum. Villas generate a rental income of 3 – 6%, whereas apartments can yield 6 – 10% per annum.
On average, renting out a studio brings in $15,000 per annum, a one-bedroom flat brings about $25,000, a two-bedroom flat pulls in $39,000, and a three-bedroom flat will net $56,000 per annum. However, studios and one-bedroom apartments yield more than larger flats: 6.8 – 7.5% versus 5% on average.
According to Propertyfinder Group, the apartments that yield 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 are 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, such as Dubai Marina and Palm Jumeirah, the average yields are about 6% per annum.
An apartment of 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 year.
Villas are usually less profitable than apartments when leasing. However, exceptions 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. As a rule of thumb, the more spacious and expensive the villa, the lower the rental income.
Dubai is the fourth most popular tourist destination 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, which represent an alternative to conventional hotels, are gaining 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 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 so-called “aparthotels” is that the cost of lodging there can be up to 30% lower than hotels offering a similar level of luxury and space.
Serviced Apartment Returns
Serviced apartments are buy-to-own just like regular residential properties, and the owner can sell them at any time. Also, 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 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.
The prices for one-bedroom apartments start at $200,000, while 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.
One strategy is to buy a property from a reliable developer who offers serviced apartments in the newly-built hotels of Downtown Dubai. Properties bought from leading developers are easier to sell if needed and advance in price quicker and more significantly than residential property from lesser-known companies when the market picks up.
Commercial Real Estate
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%. Consequently, 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 far 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, while 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 in the International Financial Centre. The prices are growing continuously there and in early 2017 were well on their way to $1,076 per m2. However, this is by far the highest figure there is. The average rental rate for offices in other popular locations is just $450 – 500 per m2.
Annual office space rental yields range between 5.5% and 8.5%. Commercial real estate is more profitable for leasing than residential properties, provided the maintenance costs are paid by the tenants and the rental period is lengthy.
Due to a slump in the market, the demand for office space in Dubai has slowed down in recent years, and companies are wary about plans to expand. Small offices are in higher demand. According to data for the first three quarters of 2016, less than 12% of tenants chose spaces over 950 m2, while a year earlier this figure was 30%.
For instance, in the Index Tower skyscraper, located in the Dubai International Financial Centre, four floors were divided into small offices (ranging from 50 m2 to 300 m2) and most of them found tenants immediately. The same strategy worked in Burj Daman.
According to analysts, in the first six months of 2017, office space in the Dubai property market should not be expected to grow as a whole. However, as always, certain locations will buck the general trend. Lastly, investors should also pay particular attention to a developer’s reputation, infrastructure development, the particular district’s transport systems and the availability of parking in the business centre.