While Dubai’s residential property is a popular asset class among investors and homebuyers, investment in the serviced apartment segment has also grown in recent years, as both purchasers and developers are capitalising on the growing strength of Dubai’s tourism sector. “With the city attracting more than 14.9 million visitors last year, the industry is experiencing strong demand for hotels and serviced apartments, which had a market-wide occupancy of 78 per cent last year,” says Julien Laloye, a consultant at TRI Consulting. “This is expected to continue as Dubai aims to achieve 20 million visitors by 2020.”
Noting that Dubai’s population growth rate stands at five per cent annually, Niall McLoughlin, senior vice-president of Damac Properties, says the demand for new homes far outpaces the change in supply.
“With a current freehold residential stock of just under 500,000, more than 20,000 to 25,000 units would have to be added annually to meet the future demand arising from the growing population, expected to reach around 3.3 million people in 2021 and 5.2 million in 2030,” says McLoughlin.
With the continued growth of the tourism sector and in the lead-up to the World Expo 2020, demand for serviced apartments will only increase. “The current supply of hotel apartments in the deluxe category stands at 9,519, according to the Department of Tourism and Commerce Marketing, which is much less than what is needed for the anticipated 20 million visitors per year by 2020. So again, the supply-demand imbalance exists,” says McLoughlin.
For investors, serviced apartments are attractive assets because of the hassle-free structure. “Serviced residences are increasingly gaining popularity as an ideal investment choice — both for residents and investors,” says Ranju Kapoor, General Manager of Hamptons International. “[Based on] our study, serviced residences can bring good returns of up to eight per cent. The study further revealed that the attractive returns, partnered with hassle-free ownership, effortless management and Dubai’s status as a global hub for tourism and leisure, are driving the demand for serviced residences.”
In addition to higher returns, investor can also stay in the property for a period each year — usually one to two weeks, which makes it appealing for overseas investors who could use the property as a holiday home. “Investors in serviced apartments are primarily from the UAE, GCC, India, Pakistan and Europe,” says Kapoor. “A majority of investors buy single units as a yield-based and long-term investment, while high-net-worth individuals purchase multiple units as part of a portfolio.”
McLoughlin says anyone from a regular visitor to a savvy investor is a potential buyer of serviced apartments in Dubai. “Investors who reside in Dubai may want to benefit from high returns. Others may be end users who prefer the ample space of an apartment, but with the added benefit of bespoke services, such as housekeeping, and amenities such as a health club,” says McLoughlin. “For investors who reside abroad, a serviced apartment represents a hassle-free and lucrative opportunity, with booking, maintenance and housekeeping taken care of through a rental pool. The apartment can also be used as a vacation home and is [therefore] more suitable for families.”
Dave Bansal, a senior global property consultant at Gulf Sotheby’s International Realty, says there is limited supply of serviced apartments in desirable freehold areas and from reputable developers. “Dubai is expanding and there is substantial investment in infrastructure,” says Bansal. “The up-and-coming communities will gradually gain popularity to the point where demand will surpass supply in these areas.”
He adds that investors for this product can get a net return on investment ranging from 6.5 per cent to 9 per cent, depending on the project. “Communities along Shaikh Zayed Road are prominent for serviced apartments, including Dubai International Financial Centre, Downtown Dubai, Business Bay, Dubai Marina, Jumeirah Beach Residence, but eventually it will move towards the newer communities along Al Khail and Al Qudra Road,” says Bansal.
Laloye says the number of serviced apartment projects on a sale and leaseback model is limited, but is growing in popularity. “We believe there will be continued demand in the market for this product and, thus, new projects will be launched to fulfil that demand,” he says. “A number of developers have recently launched sale and leaseback projects, such as The First Group in Jumeirah Village Circle, Dubai Marina and Business Bay, Damac in Business Bay and iSuites in Dubai Investments Park. Several of these projects offer guaranteed returns to investors, with Deyaar guaranteeing returns of seven per cent over two years, while Seven Tides offers 10 per cent for Dukes and Anantara on the Palm Jumeirah.”
McLoughlin says Damac will open two projects this year: Damac Maison Bay’s Edge and Damac Maison Royale The Distinction. “Buyers can invest in an individual hotel room for a future stream of income and a free stay once a year.”