Dubai: Until about January 20, it was going swimmingly well for landlords in Dubai.
They had the luxury of choosing between going long-term – give their homes on annual rents, as they had been doing for years. Or they could do short-term – put it up as a holiday home to be leased out for days or weeks. Only the landlords had to make up their minds about which way to go.
And then on January 29 came an unwanted visitor in the form of the first reported cases of the coronavirus in the UAE… and then it all went belly up for short-stay landlords. Bookings were cancelled at the last minute, funds had to be returned, and the properties left without occupancy since.
For most landlords, it was the first encounter with the uncertain nature of managing short-term lets. All through the previous two years, they were surfing along on demand generated for short-stay options in Dubai, as more visitors to the city preferred their convenience over hotel stays. Even business travellers to Dubai were gravitating towards a few days of stay at a centrally located short-stay property.
If this decline in travel continues into the second quarter, I am staring at steep losses, because there will be little or no interest during summer
But all that has stopped with the coronavirus, and this is proving to be a steep – and costly - learning curve. A landlord with four upscale properties on the market said the short-stay market has come to a complete standstill, and he’s losing out on well over Dh5,000 a day because of cancellations. “If this decline in travel continues into the second quarter, I am staring at steep losses, because there will be little or no interest during summer,” he said.
“These days, I think it was better off leasing two or three of those units on annual rentals – that way income is secured. Even if rents are in decline.”
Lots of life left
But short-term rental operators are not willing to say that the virus has killed off prospects for the category. They believe that it’s not the right time for landlords to make up their minds one way or the other.
“The virus has decimated air travel – but no one is saying that air travel is finished for good,” said one short-stay rental firm owner. “Much the same for short-stay options… the concept is here to stay in Dubai.”
Tomas Dolezal, CEO of Elite Royal Apartments, is emphatic that the coronavirus impact on Dubai’s short-term business will be short-lived. “COVID-19 seems to be an event that comes once in a lifetime and will most likely affect both short-term and long-term yield this year should the situation not be resolved by early Q2-2020.
COVID-19 seems to be an event that comes once in a lifetime and will most likely affect both short-term and long-term yield this year should the situation not be resolved by early Q2 2020
“The tourism sector is affected the most – however, we are looking at a temporary disruption and the situation will get resolved as for MERS and SARS earlier.”
1. The landlord gets to lock in a steady income and yields for a full year. It also helps him counter short-term variations in demand and pricing.
2. It gives the landlord the chance to establish a closer understanding of tenant needs, which will come in handy at the time of renewal. In the current soft rental market, these tenant-landlord relationships count for a lot.
3. A longer term occupancy also ensures the landlord knows in advance of periodic maintenance needs, etc.
1. When rental market turns unsteady, the landlord will be forced to go in for drastic rent reductions to maintain occupancy.
2. He will be forced to compromise by having to offer multiple cheque facilities, rent-free periods, etc.
Other realities to contend with
Dubai’s property market and its landlords have other factors to deal with, over and above the virus. This year will see another 40,000 homes being added, a lot of which will end up in the rental market. There is no guarantee that enough demand exists for all of the new rental stock to be absorbed by prospective tenants.
The choice for landlords seem stark – opt for long-term rentals and you could fall prey to a soft market where rents will remain under pressure. Or they decide to stick with short-term rentals until demand recovers.
This was where renting them short-term was such a compelling option for the owners – they were assured of enough people coming to Dubai and which would generate income for them. Plus, they had the Expo 2020 Dubai to factor in.
This is why rental management companies believe landlords will remain convinced about short-term lets.
Analysts are looking at a base case scenario where a recovery could start in the second quarter and by August the “situation could be fully back to normal,” said Dolezal. “We will have the Expo 2020, which will allow for the tourism industry to recover the damages incurred during these critical months.
“I advise patience - there is a turbulence, but we have the Greatest Show – Expo 2020 - coming, where the economy will recover. I stay positive.”
1. The landlord can have a better grip on market movements and can price his rentals accordingly. For instance, during peak demand times, he can command a rent "surge" and get it.
2. Greater turnover of tenants comes with the chance of generating higher income, especially during peak phase such as during the New Year.
1. Higher turnover of guests will also mean having to pay more to ensure quality of the unit. More frequent maintenance checks are a must.
2. With short-term rentals, landlords can suddenly fall victim to a sudden drop in demand, such as what is happening in the local market because of the coronavirus outbreak. They will be left with vacant properties until the market recovers.
3. Most landlords use holiday home management companies, who are paid for each guest stay they generate. With longer term leases, there is the only the initial commission to the estate agent.
Vinayak Mahtani, CEO of bnbme, a Dubai-based short-term rental operator, says the short-term “pain” will outweigh the “risks” of long-term leasing.
“We have pivoted our business and marketing to accommodate and adjust for short-term to medium-term stays with full services at no additional cost,” said Mahtani. “Basically, if a family is stranded here and can’t go back to Europe, and hotels aren’t the best option for them, our apartments are ready for occupancy for however long they want.
“Once everything is back to normal, we believe that there will be a huge spike in the travelling sector and we will recover from the current downfall.”
Once everything is back to normal, we believe that there will be a huge spike in the travelling sector and we will recover from the current downfall
But can they convince enough landlords to take that short-term view? Market sources say that a depressed rental market is the best motivation for landlords to chase short-stays.
“There are multiple reasons for this,” Mahtani said. “The person wanting to rent is not sure themselves if they want to stay for a long duration. The primary reason for this are that people don’t prefer long-term commitments or are currently waiting to be able to travel back to Europe or Asia.
“Ideally, this is actually highly beneficial for property owners. Moreover, they also need to consider if the tenant will be able to honour the commitments over the next 12 months.”