Dubai rentals: Let it be

Demand for rentals in Dubai is still as high as the prices… for now. Here's how to capitalise on your investment in the short term.

Driven by a rapidly growing expat population and an injection from Asian, Russian and GCC investors, Dubai's buy-to-rent market is thriving.

The emirate's stable political climate, strong economy and popularity as a tourist and residential investment location make it an attractive market where prices in popular areas can demand steep premiums.

In a city where the average rental return is about 17-20% compared to the normal 2-3%, this type of investment, until now, has ensured investors a regular income while also enabling their investment property to appreciate in value while someone else is paying off the mortgage.

Sky high
The high demand for apartments and, until recent years, lack of regulation have resulted in soaring rent prices.

Now, with a tenant appeal process and rent caps in place for almost three years (first 15%, then 7%, then 5%), it's become more difficult for landlords to hike rentals, although some rents have continued to skyrocket.

According to a report by recruitment consultants Kershaw Leonard, the cost of renting apartments and villas in Dubai rose from 8% to an amazing 77% between 2007 and mid-2008, depending on the size and location of the property.

Although a recent Morgan Stanley report predicted a 10% decline in the property market by 2010 as supply outpaces demand, that claim is dismissed by many developers.

Wisam Amid, managing director of Xische Studios and an experienced hand in the buying-to-let market, says the risk is worth it in the long-run.

"It's a personal choice. If you wish to take the risk on a trusted developer, then a rental option would definitely yield some return. If the supply exceeds demand, it would still yield return but over a longer period."

Getting it right
In Dubai's busy and competitive market, it's important to get the right property in the right location. Other factors like access, facilities, utilities and, of course, rental charges can make or break a good investment.

You also need to have a back-up plan. Look into buying a place where you might want to live, should the letting plan fall through.

When renting your flat out you will have two options: you can either rent it out yourself by placing advertisements in classifieds, or hand it over to an estate agent to deal with. Wisam favours the former.

"If I were to get an agent, I'd always feel that I was paying an extra amount that I could've saved," he says. "Nonetheless, the time and effort required to do it yourself often outweighs the cost of giving it out to an agent. In my opinion, if you're well informed and have the time, you should do it yourself."

Location, location, location
Look into the property's location. Some of the more popular buy-to-let freehold areas include International City, Arabian Ranches and Dubai Marina. Ensure you analyse the neighbourhood, the surrounding amenities and its accessibility.

"If you're looking to invest in the short term, then anywhere on Shaikh Zayed Road is a good investment. It's the lifeline of the city," says Allan Paris, a mortgage advisor.

"I'm biased towards Jumeirah Lake Towers. It's in a good location, easily accessible, self contained and will have a lake, which will increase the aesthetic value and consequently rental prices."

Do some research into emerging investment locations like Business Bay. By investing in these upcoming areas and buying off plan, there's more potential to bring in excellent return rates.

Another advantage of buying off plan is that buyers save money on real estate agent's fee and legal fees while the developer takes care of the property transfer procedure, maintenance and utilities like water, telephone, and electricity connection.

"If you're looking into investing long-term then go for developments on Emirates Road," says Allan, referring to areas like Arabian Ranches and Dubailand. "The centre of Dubai is shifting; there are a lot of developments coming up on Emirates Road, making that the new centre."

Apartment vs villa
Another factor to consider is the market you're looking to rent to. Apartments are the most popular rental, particularly one- and two-bedrooms. Families tend to buy villas that are located out in the Meadows, The Springs and Arabian Ranches.

"If you're looking into percentage returns, a one-bedroom apartment is the better option," says Allan. "If you buy a villa, you pay more for it and get a lower return. In terms of maintenance costs, villas are a lot higher as they have gardens and swimmings pools."

Rental yield for villas is about 4-5%, while apartments can easily fetch anything between 8 and 12%, depending on their location.

Going short-term
The final step for buy-to-let investors is deciding which strategy works best for you. Do you want to focus on the tourist or expatriate market?

Short-term letting attracts the highest income during high season, and long-term rental means a steady income from rent year round.

Thanks to the booming tourist industry, there's money to be made through short-term rentals but beware of the extra cost of constantly having to find clients.

Some owners choose to rent long-term during the low season then switch to short-term during the high season to accommodate high paying tourists. You should also be aware of any restrictions your development might have on this.

All thing considered, buying to let in Dubai is a sound option with high rewards. Get the formula right, and you'll be on your way to earning that little bit extra off your property investment.

Why Buy-to-let in Dubai?
If for no other reason, then do it because of the increase in Dubai rental yields. Yields in Dubai reached up to 10.2% for small apartments of 50 or 60m², while in the rest of the world the 2008 Global Property Guide show a 3% decrease.

Bigger apartments on average generate lower yields. The next reason? No taxes! However, while there is no capital gains tax, there is a 10% 'municipal fee' on residential leases.

Finally, buy-to-let in Dubai because the total transaction costs are low here. Total cost is about 3-7% of the property. Other related fees include a 2% registration fee and real estate agent's commission (1%-5%).