Dubai homeowners looking to turn their property into a lucrative investment opportunity can opt to turn their property into a short or long term rental, but which option guarantees better returns? That depends on a variety of factors, industry insiders told Arabian Business.
The emirate’s real estate sector is currently experiencing a record year in almost all segments of the market, largely driven by the influx of high net-worth individuals and rental increases prompting residents to buy property instead of renting.
“Investors navigating the real estate landscape are confronted with a crucial decision – selecting a strategy that aligns with their individual risk appetite and financial objectives,” Sean McCauley, CEO of Devmark, told Arabian Business.
Short-term rentals can yield higher returns
The allure of higher returns associated with short-term rentals can be tempting for investors, but there are several factors that must be considered that could potentially impact ROI.
“Short-term rentals introduce a distinctive element of uncertainty,” said McCauley, due to highly variable occupancy and nightly rates which are contingent upon the fluctuating levels of demand in the market.
But the most important factor that can determine the demand of your short-term let is location, said Head of Research at Savills Middle East, Swapnil Pillai.
“Properties in prime areas like Downtown, Palm Jumeirah, and other key locations often offer better ROI compared to long-term rentals. However, even secondary locations such as JVC and Uptown Motor City are gaining popularity for short-term rentals, showcasing potential for good returns,” said Head of Holiday Homes at Allsopp & Allsopp, Sheena Arilla.
Apartments or studios are ideal for solo travellers or couples looking for a convenient cost-effective holiday home while villas and townhouses offer a more suitable option for larger groups or families seeking a more spacious and private experience. The most in-demand short-term rentals are generally located in city centres, coastal areas or entertainment districts.
“Waterfront neighbourhoods like Dubai Marina and JBR are very well situated to short-term rentals thanks to their amazing views, great amenities and proximity to the beach,” explained Louise Harding, Managing Director at Betterhomes.
“Downtown Dubai and Business Bay are very popular with residents and visitors alike thanks to their proximity to businesses, transportation links and amenities like the Burj Khalifa and Dubai Mall.”
There are currently more than 26,000 apartments for short-term rentals in Dubai, according to data from Beyond Pricing, with one to two bedroom premium properties being the most popular, with a remarkable 30 percent ROI compared to long-term rentals.
However, to ensure your investment property makes for a successful holiday home, it needs to have stylish furnishings and excellent amenities including Wi-Fi, swimming pool and gym.
“Short-term rentals offer more flexibility in terms of the property being available for personal use, but also create more potential points of friction given the consistent transactional element of the short-term market, a higher risk of void periods and the fact that there are many more moving parts as the properties are almost always offered furnished, including soft furnishing,” said Harding.
These properties often have higher operational costs due to regular cleaning, restocking amenities, and providing additional services, and demand more active marketing and management efforts to ensure a steady stream of guests.
Since the legalisation of short-term rentals in Dubai, both supply and demand have increased, said Arilla.
“Booking through units like these provides guests with flexibility, comfort, and competitive rates compared to hotels. Looking ahead, it’s anticipated that the demand and supply for short-term rentals will continue to grow in the next few years, aligning with Dubai’s development plans,” she added.
Long-term provides steady income
Traditional long-term rentals are a suitable choice for property owners who have a lower risk appetite and are looking for a more stable stream of incomes from their investment, experts said. But there are downsides, the biggest one being that a higher ROI is not always guaranteed.
“Long-term rental agreements offer greater visibility into the possible income that may be generated from letting a property in Dubai. This offers landlords a greater visibility into their income for the year,” said Pillai, adding that the expenses associated with this rental agreement type are also limited to the maintenance fees for the property, which are far less labour and capital intensive than short-term lets.
However, unlike short-term rentals, prices can’t be adjusted based on market demand if a long-term tenancy contract is already underway.
“The question of returns ultimately comes down to your priorities. If you are someone who seeks comfort and convenience, without the hassle of frequent maintenance or search for tenants, long-term is the best option. It ensures a consistent output on investment with sustained returns,” said Cherif Sleiman, Chief Revenue Officer, Property Finder.
Investors more suited to this rental model should consider buying their investment properties in residential neighbourhoods (areas with good schools, healthcare facilities and family-friendly amenities) and take into account the property’s proximity to business hubs so professionals can have a more convenient commute. Factors like green spaces, play areas, parking facilities and security features are also important to consider, said Harding.
Stability vs. flexibility: Assessing ROI is complex
Although longer-term rental prices continue to be at a premium, BetterHomes’ Harding advises landlords to make decisions between the two options based on personal circumstances, what they are looking to achieve and how often they want to be involved rather than just the financials.
“Once all the factors are considered, the ROI between them can end up being very marginal,” she added.
However, those looking for quicker returns, not affected by the rental freeze and are willing to keep up with frequent tenant changes and evolving market conditions may want to consider short-term rentals, said Sleiman, especially since recent data shows “spikes in gains over short-term stays.”
Investors can use Property Finder’s Data Guru tool to consider all their options holistically and learn more about historical transactions, pricing insights and community trends.
“Ultimately, the choice between short-term and traditional rentals is a nuanced decision that hinges on an investor’s tolerance for risk and their specific financial goals. Whether prioritising the potential for attractive returns or seeking the stability of a traditional rental model, investors must carefully assess their own preferences and objectives to formulate a strategy that aligns with their unique circumstances in the ever-evolving landscape of real estate investment,” said McCauley.
Arilla of Allsopp & Allsopp believes that the potential for a high ROI hinges on the property itself.
“Not all units can achieve a significant ROI. It heavily depends on factors like location, the quality of the building, how well the property is furnished, and having the right pricing strategy,” she said.
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