Short-term lets, long-term rewards

The short-term letting space has mushroomed in the last 12 months.

Investing in property has long been a popular means of both building wealth and earning income. The compelling combination of revenue generation in parallel with asset appreciation – which over a 10 to 15-year timeframe is almost a given considering the utility and necessity of a place to live – has meant that buying-to-let has become a common, if not essential component of a modern portfolio.

In Dubai, buy-to-let underpins the real estate sector, with figures suggesting as much as 70 percent of residential units coming onto the market in 2021 will end up in the rental sector. That’s a sizeable portion of an industry that contributed more than 7 percent of the city’s GDP in 2019.

There is, though, a new trend in the model that is attracting both amateur and institutional investors and reflects Dubai’s continued appeal as a destination for leisure and business travellers, as well as its successful rebound from the global pandemic.

Short-term lets have mushroomed in the last 12 months, designed to serve those coming here for work opportunities, to escape the lockdowns in their own countries and, in many cases, simply in the absence of any other viable options.

For keen-eyed investors, this has created a shift away from the traditional long-term let – security deposits, post-dated cheques, Ejari certificates, agency commissions – and towards a fully managed, fully furnished serviced apartment offering, one that competes with Booking.com as much as Dubizzle for its clientele. And it’s a sector that’s moving well beyond the casual sofa-surfing days of the original AirBnB model.

“In the last 18 months, we have seen a 200 percent increase in the number of properties coming on board with us,” says Mahwussh Alam, co-founder of One Perfect Stay, a company that manages an ever-expanding portfolio of luxury short-term lets in Dubai.

“Consumer demand increased in terms of occupancy, too, rising to 90 percent from June 2020. And 2021 has been a good year so far with the vaccination drive in full swing and people from all over the world itching to travel. We expect a ‘never seen before’ tourist return in the latter part of 2021 and we are getting more homes onboard to cater to that surge.”

Anna Skigin, CEO of Frank Porter, which offers a similar managed lettings service, has also experienced an uptick in occupancy and the number of properties investors are seeking to place with her – and much of it has been driven by Covid-19 and its global impact.

“We saw people come into Dubai and use short-term lets not just as a holiday home but as an office, too,” she says. “As we emerge from Covid, I think trips will be increasingly tied to remote working. You might come to Dubai for a vacation, but then stay on to work for a few weeks. For us, that means making sure our internet connections are at the right speed, creating more space for meetings, too. That will only increase.”

Short-Term Letting As An Investment

For investors, then, this new space offers a potentially rich, new seam of income. Returns on short-term lets tend to be anywhere between 20-40 percent more than the usual long-term rental yields, even accounting for week-on-week inconsistencies and Dubai’s high and low seasons. As with all investments, though, it’s important that due diligence is undertaken.

“Location is the most important part of a short-term let investment – places where business travellers want to be as well as tourists,” says Lynnette Abad Sacchetto, director of research and data at Property Finder.

“You want an area that has good transport links, has restaurants within walking distance, is close to the beach, has a pool, gym, things like that. That’s why the majority of Dubai’s short-term letting market is in Dubai Marina, Downtown and Business Bay, as well as JLT. This is where you will get your double-digit yields.

“Even if you are a novice investor, though, you shouldn’t just look at your net yield. You need to do a proper investment return calculation to look at operational expenses (OpEx) and capital expense (CapEx) and plan it out for 20 years. What can look good on paper might, when you fully lay it out, be no more than two percent. Maybe other areas, like Discovery Gardens, will give you more for your money. So it pays to do your homework.”

For Alam, the guest’s desire for a seamless, turnkey solution – no contracts, no deposits, no bills – might equate to a higher rate, but that’s where the costs for the investor come in – not least in furnishing it to the right standard and keeping it in immaculate, fully functioning condition.

“Then there are the ongoing overheads like utilities and the management company’s charges that need to be taken into account. That’s the reason one must go with professional companies who know the job well and can deliver with higher ADR and occupancy percentage,” she says.

The Long-Term Rewards

For those who get it right – the right property in the right location with the right management company – the rewards can be considerable, especially in the immediate term as Expo comes around and the world begins to open up again.

“Generally, it is right to say there are 20 to 40 percent higher returns – and that’s net – in the short-term market over longer-term lets,” says Skigin, who owns as well as manages a large portfolio of units in Dubai. “And a ‘short-term’ let is anything from one night to 365, so you’re creating a flexible product that can be for holidaymakers or people moving to Dubai and wanting a home before they make a longer-term choice.

“That’s why this is appealing because you can tailor the product to suit the market and how it changes. Clients can even put a property on the market to sell but still ensure it generates income as a short-term let before completion. We’ve actually had properties with us that have been up for sale for three years. So, this model works really well for a range of owners.”

Alam agrees, saying that investors and property owners are turning to a short-term strategy for two clear reasons: “First demand, second market shift,” she says. “There is no upfront agency commission, no long-term liability that comes in the shape of post-dated cheques – the one or two cheque payment is obsolete. The short-term market is now able to offer flexibility with luxury.

“So, the real players are thriving, sniffing the demand and adapting supply accordingly. Institutional investors with hundreds of units in inventory are now turning to short-term rentals to take advantage of the returns.”

It’s a market trend that Property Finder’s Sacchetto sees accelerating from here, and not just from overseas investors but long-term residents taking advantage of low interest rates and the new banking regulations that have reduced the loan-to-value requirements to 20 percent.

“When you look at how Dubai has reacted to the pandemic, you see the results in this sector. How proactive we were with lockdowns and vaccines, initiatives such as the remote working visa, the property investor visa, the retirement visa, the freelance visa… all of these have been massive for us. We had a success story we can tell the world – and it’s paying off.”