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Why Dubai has a high rental ROI - examples

Published 08.08.2021

High rental ROI in Dubai - why?

A high number of foreign investors are considering the option of acquiring property in Dubai. Approximately two-thirds of the emirate population are not UAE citizens and do not have their own housing; this is not to mention the tourists coming to local resorts.
In such conditions, the demand for Dubai residential property is consistently high. However, even amid the above-mentioned factors, one has to assess the probability of the yield decline in the long term.

It is essential to think over an investment strategy that covers all potential opportunities and risks in order to manage your capital efficiently. Next, we will share with you tips and insights of the property rental business in Dubai.

Why Choose Property Rental Business

There are multiple sectors in Dubai worth considering for investing funds. These include bank deposits, the stock market and operating businesses. Meanwhile, a majority of wealthy foreigners choose to invest in rental property. There are several reasons for this:
  1. Autonomy. Unlike opening your own business or dealing on the stock market, when the investor has to keep his finger on the pulse constantly, the owner does not need to be in the emirates to manage his rental property. He can hire a management company, which will take care of all the issues regarding the search for tenants and the maintenance of the property.
  2. Simplicity. In order to buy a unit and rent it out, you do not need to have special knowledge as opposed to transactions on the stock market.
  3. Stability. The UAE is an economically developed country. Even during the crisis, the price conjuncture and demand on the local real estate market are easily predictable.
Note! Real estate redevelopment and resale is not suitable for most investors. These schemes require a lot of involvement in each project and extensive specialized knowledge in the field of construction.

As the statistics show, typical foreign buyers of Dubai property are well-off entrepreneurs from the UK, India, Pakistan, Russia, Canada and China. The main source of income for such investors is located outside the UAE, and real estate is a kind of leverage for them.

The average annual inflation rate in the UAE as of February 2021 is 2.01%, and the average ROI of real estate is 4-8%. For instance, the average yield on apartments at Emaar Beachfront is 7% per annum, which is sufficient for covering inflation and generating additional income.

Most investors do not intend to resell their real estate but use it as a long-term asset to preserve their funds from economic and political risks in their country.

In Dubai, one can purchase both completed and off-plan property. Off-plan units are more profitable, although they carry a number of risks associated with possible construction delays and price fluctuations, to name a few. In most cases, wealthy foreigners choose ready-to-move-in residences. As of April 2021, 69% of transactions registered in DLD were from completed properties.

Unit Types and Budget

The most in-demand types of real estate in Dubai are 1-bedroom apartments for AED 1,102,000-1,470,000 (USD 300,000-400,000). This is an average price of the middle-segment real estate in the popular areas of the emirate such as Emaar Beachfront and Marina Beach.

UAE banks willingly cooperate with foreign investors providing special mortgage programs for up to 25 years. Loans can finance up to 50% of the property cost. Thus, one can acquire profitable property with a start-up capital of AED 551,000 (USD 150,000).

The starting price of office spaces with a maximum area of 322 sqft is AED 250,000 (USD 68,000). The average return on such units is 4-6%. With a budget of AED 2,000,000 (USD 545,000), one can consider acquiring more lucrative office and retail spaces in areas such as Downtown Dubai, Business Bay and DIFC.

Location

When buying property, it is important to assess the long-term prospects of the selected location. The average payback period for real estate in Dubai is 7-12 years. And it is essential that the demand for residences in your chosen area does not decrease during this period of time. It would be perfect if your property met the needs of several categories of renters. Let's take a look at Emaar Beachfront as an example.

Emaar Beachfront is a major developing coastal area in Dubai. According to the master plan, it will consist of 27 towers and feature the necessary infrastructure including schools, kindergartens, shops, supermarkets, café, restaurants as well as a landscaped beach area.

The developer of the project is one of the largest UAE companies – Emaar Properties. It is well-known for iconic projects such as Burj Khalifa and Dubai Mall.

Note! The more reliable and experienced developer you choose, the more likely it is that you will purchase high-quality property within the agreed time frame.

The area of Emaar Beachfront is surrounded by major attractions: the famous artificial island Palm Jumeirah, one of the largest shopping malls in the emirates Dubai Mall and The Walk 5,577 ft long. Moreover, the 442-foot Dubai Harbour Lighthouse and what is set to be the largest marina in the Middle East with 1,400 berths and two cruise ship terminals are under development. It takes just 20 minutes to reach the main business districts of Dubai including Business Bay, Downtown Dubai and DIFC.

This location and infrastructure may be of interest to several groups of tenants at once: families with children, office workers, international entrepreneurs, tourists and foreigners who came to the emirates in search of work.

Tenants and Rental Income

The income of your property also depends on the reliability of the tenants. The most preferred candidates are the middle class with a positive credit history. If you intend to rent out a commercial property, then it is better to give preference to companies with extensive experience and a positive business reputation. The probability of bankruptcy of these tenants is lower than that of small private companies.

Apartment buildings or, in other words, multi-family residential properties are not the best choice for investors with no real estate experience. The owners of apartment buildings are forced to interact with a large number of tenants, which requires significant labor costs and high-quality property management.

Note! The best option in terms of profitability and management potential would be a long-term tenancy.

Long-term rental in Dubai is concluded for a minimum period of one year. All issues and rules of tenancy, including terms, conditions for early termination of the contract and the frequency of payment are drawn up in the contract. Rent can be paid once a year, quarter or month. Payment is made by bank checks or transfers in the name of the lessor.

The issue of cost-sharing between the tenant and the landlord in Dubai is regulated quite clearly: the tenant is obliged to pay all utility bills and deposits for communications while the lessor is responsible for paying for the maintenance of the complex and the property.

The rent is regulated by RERA (Real Estate Regulatory Agency). The increase in the cost of living can be introduced no earlier than 2 years after the start of the lease. According to Decree No. 43 of 2013, a one-time rent increase can be made by 5%, provided that the current rent is 11-20% lower than the regional average for a property of a similar type. If the current rent is less than 10% below the average, then further price increases are unacceptable.

According to the RERA requirements, the lease cannot be prematurely terminated unilaterally (provided that this procedure is not regulated in the contract). Early termination of the lease is possible only by agreement of the parties or according to a court decision.

The best option for foreign investors is a long-term lease. In this case, the payback rates are 1–2% lower compared to short-term housing leases, but at the same time the risks decrease significantly. You will not have to worry about searching for new tenants (the longer your property is empty, the less income it generates) and about the price surges.

Mortgage

In Dubai, foreigners have the right to purchase a property only in specially designated areas only, which are called freehold. Local banks provide mortgage loans to expats. One can take a mortgage both for a completed and off-plan unit. The loan can be obtained for a period of up to 25 years, provided that the borrower does not reach the retirement age (65 years) before the completion of the loan repayment.

Average interest rates on a loan in the emirate are 3-5% per annum. Depending on the bank, interest can be charged at a fixed or floating rate. The lender retains the right to early repayment of the loan but in this case, a penalty of 1% will have to be paid.

Note! An application for a mortgage in Dubai will cost 1% of the property value, however, in case of refusal, this amount will be refunded.

It is better to take out a loan for a longer period. The longer the term, the lower the payment is; moreover it decreases the risk of facing negative market conditions and unfavorable refinancing conditions. Of course, the longer the loan term, the more interest you will have to pay to the bank, but even with an average loan rate of 3% per annum with a minimum yield of 4%, you will still remain in the black.

As for on-lending and refinancing, these options should be avoided. When issuing a mortgage, Dubai banks assess, among other things, the total loan burden of the borrower in relation to his assets. If the loan burden is too big then lenders can give a mortgage on less favorable terms (increased loan rates and a reduced loan amount).

Tax Optimization

In terms of taxation, Dubai is one of the best jurisdictions for expats. The emirate does not provide any taxes and fees for real estate ownership. All your tax expenses will be made only at the purchase stage.

When purchasing a property you must pay:
Tax
Rate

Dubai Land Department transfer fee
4% of the cost
Registration fees
AED 2,000 (USD 545) for properties up to AED 500,000 (USD 137,000); AED 4,000 (USD 1,100) for properties over AED 500,000 (USD 137,000) + 5% VAT
Fee for the issuance of a certificate of ownership
AED 258 (USD 70)
Value-added tax (VAT)
5%
Services of a real estate agent
2%
Property appraisal (when reselling property in the secondary market)
AED 2,500-3, 500 (USD 680-955)

Exiting the Project

Frequently the average tenure of an investment property is 5-20 years. It takes 12 years on average for a property to pay off fully and start making a profit.

Liquidity is one of the key investment risks. Even if you buy a home with a 6-8% yield, there is no guarantee that after 10 years you will be able to sell it at the current market value. An example of such property is workers' camps and parking lots. The demand for renting such real estate is very high, but there are not many people who want to own an expensive property of this kind. If you want to sell this asset then you will have to reduce the price significantly. This factor negates all other benefits.

According to DLD data, the average annual growth in the value of a residential real estate in Dubai is 1.2%. With an ROI of 4-8%, this will be a profitable stable asset that can be sold on beneficial terms.

Another liquid instrument is commercial real estate. Office and retail premises add on average 2-3% in value annually. The starting profitability of such units rarely crosses the threshold of 4-6% but the lease of commercial spaces can be concluded for a period of five-ten years. This makes the asset more stable and reduces the impact of negative factors.

Highlights

  1. Purchasing rental properties is one of the best ways to invest in the Dubai economy. Local housing is in demand from tenants. In addition, participation in the rental business does not require special knowledge and the constant presence of the owner.

  2. The starting budget for starting investment can be from AED 1,102,000 (USD 300,000). If you have large assets, you can consider both residential and commercial property. Local banks issue mortgage loans to foreigners. Borrowed funds can finance up to 50% of the cost.

  3. The return on a real estate directly depends on its location. The more developed your chosen area, the more categories of tenants will be interested in it.

  4. There is no property ownership tax in Dubai. Payment of taxes and fees is required at the stage of purchase only.

  5. The average payback period for property in Dubai is 12 years. In order not to lose your savings, it is of utmost importance to sell your asset on time at the current market value.

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