There are some developers in Dubai offering rental guarantees for their serviced apartments, their hotel rooms and in some cases their standard residential apartments.

An 8% or even 10% guaranteed rental yield over 3, 5 or even 12 years can all be found in the market and must be interesting to an investor but you need to ask

 “Why are they offering these deals?”.

A guaranteed rent period can carry a range of benefits, however, my advice is to take care and look very closely at the small print. I have done some research and as far as I can find, rental guarantee schemes from developers and operators are unregulated by the Dubai Land Department, unlike standard Landlord & Tenant agreements.

The way that developers often structure rental guarantees means that the rental income that investors are receiving isn’t in line with the market. They often do this by increasing the purchase price and then using part of the profit to make up the shortfall between the market rent generated and the amount they have guaranteed to investors.

When development is completed and ready for letting or a hotel opens its doors for business, it can take time to reach a healthy occupancy level. A guaranteed rent period can ensure an income regardless of this uncertainty.

It is often a net payment, so costs such as service charges, maintenance and agent’s fees may not have to be considered so we have no unexpected costs.

A developer isn’t likely to offer guaranteed rent payments unless they were making enough money to cover all associated costs, and then some! So make sure you check all the terms and conditions and that the offer works for you!

The guarantee is only as good as the operator. What happens if the operator changes? What happens if the property is mismanaged and the money is not available to pay the guarantee? It has happened here recently with a few properties.

With hotels or serviced apartments, there is often a clause stating that the rental guarantee period will start 6 to 12 months after the doors open and often there will be an extended period before the investor will start receiving their payments.

Most well run furnished apartments and hotels refurbish the property and replace all furniture and appliances every 7 years so you need to check if you are responsible for this.

What happens to the rent or income once the guarantee period ends. In almost all cases that I have seen, the income will drop.

A well-managed serviced apartment or hotel can generate strong rental returns and a reliable stream of regular income. The downside can appear when you want to sell. Serviced apartments and hotel rooms tend not to see strong capital gains and these properties will only be purchased by investors so that narrows the market dramatically.

Remember also that a buyers offer will normally be in line with yield, so a low performing asset will attract a low offer. At the same time, having paid a highly inflated purchase price to get the rental guarantee in the first place, when it comes time to sell owners may find the property valued lower than the price they originally paid for it.

Ask yourself, how does this deal stack up against buying a normal apartment at market price without a rental guarantee, one that will be a lot easier to sell, where you will have far more control over the costs and income and you will not be last in line to receive that rental income.

In conclusion, the best-case scenario is that you receive a regular income on your property net of all costs remembering that three years at 8% can be considered as 24% off the original price which may very well be closer to the market. Worse case is that you have overpaid for the property, the operator is able to find a way of defaulting on the deal and you can’t find a buyer if and when you need to sell.