Should I start a holiday home or buy a hotel apartment in Dubai?

Buy an apartment in Dubai and put it up for short-stay/holiday home rentals? Or buy a serviced hotel apartment and do the same?

In the last two years, buy-to-rent out as a holiday home has been one of the most popular investment choices, with well above the average returns of close to double-digits. And in many cases, even higher. That Dubai was one of the most visited places in recent times – a fact that made holiday home lets even more in demand – also helped big-time.

Serviced hotel apartments in comparison seem to have turned in a less-than-stellar performance for their investors. According to a new report by Reidin-GCP, between 2019 to now, sales of ready hotel apartments have made up a ‘tiny portion’ of sales compared to what’s been happening on regular apartments (and which could be used for own purposes or rented out, including as holiday homes).

So far this year, sales of hotel apartments make up around 7.69 percent of the total deal flow in Dubai. In fact, their sales have ‘never made up more than 10 percent in the ready apartment sales space at any point over the last four years,” the Reidin-GCP report notes. “The highest market share serviced/hotel apartments have had came in 2020, when they accounted for 9.16 percent.”

Now, 2020 (at least the second half of it) was an outlier because it was the start of the ongoing Dubai property market boom. Any residential unit that was available in the market seemed to have a buyer. This wave lifted demand for hotel apartments too. By now, that mini-wave for hotel apartments has abated.

What could be the reason?

“The fast spread of Airbnb options in the city is the biggest threat to demand for hotel apartments,” said an industry source. “The short-stay rental market will only continue to grow, at a faster pace.”

Some sources say that more short-stay homes could be added to Dubai’s existing space in the next 6-12 months than at any time in the recent past. More owner-landlords are becoming favourable to that option than leasing out for a full year. That will eat into demand for holiday homes, which at the time of freehold’s launch in Dubai was seen as a siezable investment category and a favoured choice for Gulf families.

Another factor could be the high service charges associated with hotel apartments, which the owners have to bear in full. These fees are more than double what’s there for typical residential apartments or holiday homes.

“The average difference in service charges between hotel/serviced apartments and regular apartments is 64.92 per cent,” says the Reidin-GCP report. “The biggest difference is in Downtown Dubai, where hotel/serviced apartments have average service charges per square foot 139.34 per cent higher than their regular apartment counterparts.”

Plus, with some hotel apartment contracts, the developer asks for a share of the annual rental proceeds, which could go up to 40 per cent.

Throw all these costs in and the returns for the actual owner stands vastly reduced.

“The nature of any holiday apartment contract is that the buyer must put it into the rental pool, which is managed by the developer or developer-affiliated company,” said the source “The owner on his own cannot lease it.

“This is where the higher costs come in.”