Have speculators become landlords as capital gains ebb?

In Propertyfinder’s recent 2017 Trends Report, one of our most respected brokers highlighted a new trend: the return of “shadow inventory” to Dubai’s residential rental sector. These are units that buyers had long keep vacant as they sought to benefit solely from capital appreciation, but with prices falling for the past three years, some are now putting their units up for rent.

These additional homes are adding to the supply here and are one of the reasons rents have dropped more than sale prices in recent times. JLL reported that a further 25,000 residential units are scheduled to be delivered in 2017 which if delivered, would increase Dubai’s total stock to 483,000 units. Although no one, including JLL, expect anywhere near that many will be handed over by year end.

Certainly up until two to three years ago, speculators dominated the Dubai freezone market, typically cash buyers, who sought quick capital gains and weren’t particularly interested in rental yields nor renting out their properties, even the completed ones.

But why would an investor not want the additional income that leasing a property would generate, especially with Dubai’s rental yields in the high single digits? There are a number of reasons.

Some of these properties were purchased for recreational purposes. Dubai with its year-round sunshine, fabulous facilities and welcoming nature has been and will remain a favourite destination for the well-heeled of the region and from around the world. For cultural reasons, some owners will not rent a property purchased for personal use, even if it’s vacant for 360 days of the year. Though household budgets are being squeezed, I don’t see that changing.

The main culprit was Dubai’s rental regulations with its rent caps and long notice periods to vacate, which are heavily weighted towards tenants. While great for tenants, they can limit an owner’s flexibility to do what they want with the property. Properties that are vacated on possession are often advertised and sold at a premium.

But with prices falling now for three years, many are reassessing and some have added their properties to the rental pool which has increased supply. These coupled with new project handovers and a decrease in employment within the petrochemicals and related sectors, has increased supply, causing rents to decline.

Again, good news for tenants but it hasn’t been all bad news for owners.

Some of the more savvy owners of studios and one-bedroom apartments are increasingly capitalising on Dubai’s transient nature and its popularity for business and leisure by furnishing their apartments and offering them for rent on a short-term basis. Such apartments, particularly those in Dubai’s most popular areas, can achieve net double digit returns even after one takes into consideration high vacancy rates and 20 per cent to 30 per cent management fees.

Renting out property for periods of less than six months is classified as holiday letting and therefore comes under the jurisdiction of Dubai’s tourism department, not the real estate regulator, and so rent caps and notice periods are not applicable. This gives owners more flexibility should they choose to sell or use the property.

Short term is becoming increasingly popular with owners of small apartments but is a less viable option for large apartments and villas which are not as popular with the shortterm demographic.

Despite the falling prices, some owners from the UK and Europe are liquidating UAE assets to take advantage of currency profits due to a strong dollar and historically low GBP/euro following Brexit. Typically, they are selling to mortgaged buyers looking to get onto the property ladder while prices within reach, being at their lowest point since late 2012.

So, despite a fall in property prices, a low oil price and a sluggish regional economy, it’s certainly not all bad news; rents are down which is great if you’re a tenant, prices are down which is good if you’re a buyer, the dollar is strong which is good news if you’re a seller, and there’s more short-term accommodation on offer if you’re passing through.

some of the more savvy owners are capitalising on Dubai’s transient nature by furnishing their apartments and offering them for rent on a short-term basis