Now that it has become more clearer that Dubai is experiencing further rental declines and increased supply, the landlords are the ones bearing the brunt of the changed market situation. Tenants, on the other hand, can now enjoy options such as monthly payments, minimum security deposits, post-dated cheques and rent-free periods. One of the most common trends that has emerged is ‘short-term lets', and it appears it is here to stay, at least in the foreseeable future.
‘Short-term lets' is a concept borrowed from the hospitality industry and applied to the residential property sector. This concept satisfies a customer segment which does not want to pay high hotel room rates, or prefers a more homely and cosy place to live in. It also addresses the need for those who do not want the liability of a long-term rental contract, or the hassle of furnishing and maintaining the unit. In most cases a professional property management company or real estate agency is employed by the landlord to manage the entire process.
Short-term lets could be for a few days or a few months, but irrespective of the duration, rents are always higher since it needs to compensate the landlord for vacancies, higher agency fees, property management fees, utility costs and so on. From the tenant's perspective, the flexibility and the added benefits makes the extra rental reasonable. "Typically rents are higher for short-term leases for the convenience of flexibility and the units are often furnished," says Jesse Downs, director of Landmark Advisory.
Short-term lets provide a number of advantages to the landlord, with the higher rental yields generally cited as the prime one. However, in today's market scenario with occupancies on the decline, the monetary benefit may not be high enough to justify the additional risk, especially after providing for depreciation, agency fees and property management expenses. Landlords are now more concerned about the non-monetary benefits, some of which are explained below.
In case of seasoned investors who do not want the hassle of dealing with individual tenants, a short-term lease overlooked by a professional property management company is an ideal solution. The property becomes a revenue generating asset for the investor without much effort on his part. Also, while the risk of vacancies remains, in most cases, the property is occupied and managed on a regular basis, keeping security and maintenance worries to a minimum.
The other major benefit is the higher flexibility that the arrangement accords with regards to the future use of the property. The landlord may wish to access the unit for his personal use during the year. Also, in case the owner wishes to sell or renovate the unit during the year, he can easily do so.
"If the landlord is considering selling the unit, it can be easier to sell an apartment to an owner-occupier if the unit is rented out on a short-term contract compared to an annual contract," says Downs.
The landlord also benefits from the expert guidance and advice that he may receive from the real estate agency or property management company, with regards to the marketability of the property to ensure maximum occupancy rates. Also, the responsibility of finding a suitable tenant shifts from the landlord to the management company which would be in a better position to get the job done. The landlord also has the privilege to reserve days when he would like to use the property or lease it through another agent, with this service either available online or through the respective management company. At the end of every month, the rental income is paid into the landlord's bank account after deductions for management fees and other expenses.
The primary disadvantage from the landlord's perspective is the higher risk of vacancies, as compared to a long-term or annual contract. The demand for short-term rentals is more prone to volatility and a landlord risks having an empty unit for long periods of time.
For the tenant, the main advantages are convenience and flexibility of the short-term contract. Additionally, the contract and payment terms are generally well suited for individuals who have just relocated to the UAE. New arrivals often do not have bank accounts or cheque books and residency visas can often take time to process yet they are a must for the documentation process of long-term contracts. As such, short-term leasing is a bridge between hotels and long-term rentals, which can be expensive over time.
For a landlord to offer his property on a short-term lease, it is recommended to get in touch with a professional real estate agency offering property management services. This company will work on behalf of the landlord to make the property fit for a short-term lease, help find suitable tenants and will manage it to maximise occupancies and returns.
Typically, the company will start with a valuation appointment when the property will be evaluated, photographed and priced. Based on current market prices, a target rental will be set keeping in mind the landlord's expectations. Better Homes, Dubai, has certain norms in place for such properties. "When we first inspect a property, we offer our recommendations on location, type of property, standard equipment and furniture needed for letting purposes to help maximise rental income and attract tenants," says a Better Homes spokesperson.
The property is then furnished to the desired standard, with all required cleaning and maintenance completed and documentation finalised. Marketing of the property is then initiated. The landlord will need to ensure that all utility connections to the property are up to date and may also need to sign security, cleaning and maintenance contracts. Once the management company finalises with the tenant and the paperwork is completed, an inventory list will be drawn up and regular visits to the property will be conducted, ensuring regular cleaning and maintenance. According to Be tter Homes, "Upon signing of the maintenance contract, we coordinate and manage all repairs and routine maintenance works, as per the contract. However, if the repairs are undertaken outside the contract, the generated cost will be deducted from the landlord's rental income."
The management company assists the landlord in maintaining swimming pools and gardens, deep cleaning and external cleaning of windows, furnishing the property and arranging for electricity, cable and Internet connection services, with a fixed fee charged for every connection. Also, before, during, and after each letting, the property generally undergoes a full cleaning. The company also regularly visits the unit to ensure that it is clean and tidy and all appliances and electrical and water systems are in working order, so that it is ready for occupancy. Short Stay Dubai, a company providing a range of ‘self catering apartments and villas for tourists or business travellers', also helps find tenants for such properties. "We take care of landlords and tenants, throughout the tenancy contract. Our services include everything from collecting rent and handling all administration to assistance with more complex issues. We also serve as a personal point of contact for both parties," the company states.
Management companies typically charge between 15 and 20 per cent of the rental income as their management fee. Also, the landlord may need to purchase additional furniture, furnishings, white goods and kitchenware. These, however, depreciate over a three- to five-year period. Apart from these, the following expenses can be expected:
Administrative and marketing fee Maintenance, cleaning and security contract
Utilities installation charges and security deposits (electricity, water, sewage, phone, Internet, cable, cooling) These expenses typically range between 9 and 14 per cent of the rental income and differ based on the location and as per the landlord's requirements.
In the past, short-term lets were extremely profitable with rental yields much higher than that of long-term lets, providing for the additional risk undertaken. While rents and yields continue to remain higher, the risk of vacant periods has risen manifold with some months seeing occupancies of as low as 35 per cent.
With regards to the properties surveyed for the purpose of this article, an average annual occupancy rate of 86 per cent or more was required to make returns from short-term lets after fees and expenses comparable to returns from long-term contracts. An occupancy rate below this made the annual contract more attractive. Also, while rental yields on long-term contracts ranged around 10 per cent, short-term lets enjoyed up to 13 per cent yields on maximum occupancy.
The returns from short-term lets differ substantially with some properties making losses when compared to the long-term option. This mostly happens in case of properties that are harder to rent — where the unit is unfurnished, or if the property or location does not match with tenant preferences, or where there are external factors that hinder demand like when the building adjoins a construction site. Typically, the highest premiums for short-term leasing are for apartments in prime locations, with great layouts, fit-outs and furnishing.
It should also be noted that short-term leasing closely tracks population and employment growth. "When we are in a period of job growth and economic expansion, more business travellers and new residents come to the UAE and rent out these units," says Downs of Landmark Advisory. With the economic scenario improving, this segment of the market is expected to fare much better than it has over the last two years.