New wave of supply also keep daily rates down – and landlords are worried
Dubai: A flood of new properties have been added to Dubai’s short-stay rental market since the start of the year, bringing down rents on these daily/weekly leases.
For the owners of these properties, it means they are looking at lower returns than the market has been used to in the last 3 years.
New supply of homes in the rental market was always going to cool off asking rates – but rather than in the 1-year rentals, these supplies are having an effect on the short-stay rates, say industry sources.
Along with the onset of lower demand – and lower rates - during summer, it makes for a tighter market – and there are some adjustments these landlords need to make. “Most of the supply increase is driven by individual owners and smaller operators—sometimes with just a handful of properties—along with a wave of new micro-management companies,” said Vinayak Mahtani, CEO of bnbme, a holiday home consultancy.
“The short-stay industry often appears glamorous from the outside, but many newcomers underestimate the challenges. While occupancy rates have held steady, it’s the average daily rates (ADR) that have felt the pressure.
"The influx of operators without a hospitality background has made pricing more erratic - the reflex to cut rates doesn’t benefit anyone in the long run."
Price drops have been fairly consistent across all key locations - no area has really bucked the trend...
That, in a nutshell, is the issue. Owners of these recently added short-stay properties are more likely to ‘slash’ to ensure minimum occupancy levels than more established operators. This trend will become more apparent during high summer, when rates typically are lower by 30%-40% than during peak seasons. If new entrants can hold their nerve and their asking rates, the summer situation can be managed, sources add.
Plus, “We are seeing a bit of drop (in demand) because of what’s happening in the region,” said Anna Skigin, founder of Frank Porter, a short-stay specialist. “It will level off once the regional situation improves.
“New rental supply has been happening for a while – it’s not as if the market’s taking a hit only now. (Demand during) May was still good.”
New rental supply has been happening for a while – it’s not as if the market’s taking a hit only now. (Demand during) May was still good.
The average daily rates in areas such as the Downtown, Dubai Marina, Palm Jumeirah and Business Bay range from $100 to $350 for studios up to four bedrooms. During the peak December to March season, these apartments commanded $250 to $750 a night, with Palm and Marina at the higher end. “Price drops have been fairly consistent across all key locations - no area has really bucked the trend,” said Mahtani.
“For landlords worried about revenue this summer, my only advice is: Do not judge the business month-to-month. You need a 3-year perspective to see the real returns in short-term rentals.”
Much depends on whether landlords will hold their nerve, especially as there will be more new supply added in the second-half of this year. Some property market sources estimate that some newly delivered apartment buildings these days could see as much as 10%-15% of the units put up for short-term leases. In the past, these would have been limited to 5 to 10 individual apartments at the most.
It’s easy to see why landlords are tempted to try their luck in short rentals than go for one-year leases. In each of the last 3 years, Dubai’s short-stay rental growth kept sticking to double-digit levels. And there’s also the temptation to hike rates during the peak season, in line with surge pricing.
“Well-managed units can outperform long-term leases, particularly when the product is competitive,” said Matthew Montgomery, Sales Director at the consultancy Espace. “In some cases, landlords are earning up to 15% RoI (return on investment) through short-term lets.
“Studios, one-bedroom, and two-bedroom apartments tend to see the highest returns, especially in areas with consistently high rental demand.”
That’s exactly what property owners with new units are tempted by. Even though Dubai’s one-year rental market is still giving plenty as returns to landlords.
“Long-term leases are still perceived as more secure, with some landlords opting for a single cheque for the full tenancy agreement,” said Montgomery. “Long-term rentals do come with some limitations such as the requirement to give tenants 12 months’ notice for personal use or sale.”
For many of the current generation of property investors, that’s another reason why they prefer the short-stay route – enter and exit at a much faster rate.
Now, only if short-stay rents held up during summer…
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