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Property investment in Dubai: Why smaller units can mean bigger returns

Property investment in Dubai: Why smaller units can mean bigger returns

Automatically going for the largest apartments you can afford is best avoided, says Michael Burke

Investors can be forgiven for thinking that the larger the property, the larger the return. In theory, at least, it stands to reason that the more space you have available for rent the more income it is likely to generate.

In the majority of cases, however, this is not the reality. While larger properties often command higher rents, they also often come with higher service charges and a more significant initial outlay. All of which combines to hamper your ROI.

If you’re looking for a higher yield you should be aiming for smaller, lower cost properties like these three developments below.

1. Discovery Gardens

Discovery Gardens consists of multi-sized apartments near the Jumeirah Lakes Towers area of Dubai.

Investors stand to see the best returns here: those investing in studios. Discovery Gardens offers two types, with one slightly larger than the other. The studios differ by around 50-100 sqft, ranging between 500 – 600 sqft in size.

At today’s new prices, you can get a studio apartment in Discovery Gardens, fit it out, furnish it, pay your agency fees and transfer fees, and pay to connect your utilities for all under $100,000. You can also achieve a gross rent of 11-12 per cent, with net rent in excess of 8 per cent. Nakheel’s service fees are higher than the industry average and the owner’s association have been trying for years to bring them in line with the rest of the Dubai market, but even after learning to live with this, the net rental yield on a bad day is still 8 per cent plus.

How to get the most from your investment

Rent in Dubai is not cheap and many expat workers in the emirate are looking to make their money go as far as possible. This greatly increases the demand for smaller, less expensive apartments in developments like this.

2. Jumeirah Lake Towers and Dubai Marina

With JLT and Dubai Marina, property sizes and prices (along with potential ROI) vary greatly between developers.

There is also varying quality between developments. So, while you may find a larger apartment within your budget, it’s possible this may come at the expense of quality and could therefore attract less attention on the rental market.

That’s why the first step when investing here is to find the right building rather than developer when discussing JLT, as some developers and buildings vary in quality and price point, and also in terms of perception. You need to find a developer that will align with your aims and your budget, finding the right balance between budget and yield. Some developers here offer 320 sqft studios within your budget, others 550 sqft. The same is true of one-bed apartments. It is possible to find them in sizes ranging from 600 sqft up to 1,000 sqft.

If you look at JLT and if we take the case of studios apartments for a moment, you can pick up some of the cheaper units for Dhs500,000-550,000 and some of the nicer buildings for Dhs625,000-675,000. With the service fees lower in JLT than in Dubai Marina and Discovery Gardens, you are hitting 7-7.5 per cent return on the studios and 7 per cent on one-bedroom apartments, in today’s market. And that is after budgeting a further 5-8 per cent drop in rental prices in 2019.

How to get the most from your investment

The key here is to opt for quality over quantity. Less square footage but to a higher spec may be a better proposition than the reverse.

If more square footage is your only priority, you may pay out less initially but you are likely to have problems renting out the apartments to clientele who are looking at spec. In a location such as this, compact, reasonably-priced, yet high-quality apartments will always be in demand.

3. Jumeirah Village Circle

If you’ve really set your mind on investing in something a little larger, instead opt for a three-bedroom townhouse in Jumeirah Village Circle, or a three-bedroom plus maid’s room, which is what I normally prefer.

Situated in the heart of Dubai, Jumeirah Village Circle offers large-scale living without the high purchase prices usually associated with larger apartments in JLT, Dubai Marina or The Springs.

The reason for this is you are covering multiple demand points. People in larger villas or townhouses who want to downsize due to budget constraints, people in larger units downsizing as they want to save, and people in smaller units with a growing family. Like a three-bedroom semi-detached house in Europe, the three-bedroom plus maid’s room townhouse covers and delivers to the same demand spectrum, and in terms of housing units has been, up until 2019, the most under delivered.

Too many developers, large and small went for 4/5/6/7-bedroom houses, fully detached. Only Emaar with Mira and Al Reem in the later stages of Arabian Ranches started to see the demand for value for money-built units.

Now in the current market the three-bedroom townhouse, with or without a maid’s room, is available for anything between Dhs1.7 – 2.1m. While this price gap might seem huge, it is a reflection off the market. The quality of build, size, and location all play a part here.

The reason we like JVC and the three-bedroom plus maid’s townhouse, is that the average rents are in the region of Dhs110,000-130,000, and as a landlord or investor you can protect your yield by offering tenants payment in six cheques. Plus, these units, even in today’s depressed market, are delivering a 6 per cent yield, and due to the need for cash flow many developers are often forced to take a deal for around Dhs1.9m on something they would normally want Dhs2.1 – 2.2m for.

Furthermore, the units are likely to see rents rise to Dhs140,000-160,000 as the area matures over the next 24-36 months and the market improves. But this will not be until atleast 2021, in my estimate.

How to get the most from your investment

In terms of yield, on average properties in the Jumeirah Village Circle development offer between 15–20 per cent more space than those in The Springs and are around 15–20 per cent cheaper to purchase.

Even those looking for a larger living space in Dubai still seek out value for money. This quest for cheaper living in the heart of the city will drive more and more renters to developments like JVC, increasing demand and keeping rental yields healthy.

Careful consideration

When it comes to investing in the Dubai property market, automatically going for the largest apartments you can afford is best avoided. Also, take caution with 50-80 per cent on completion payment plans, as if you don’t have the cash today to pay for what you are trying to buy, who says you will have it in the future? Especially in a year when the world is in chaos.

With recent changes to foreign ownership rules and the introduction of the long-term visa set to attract yet more expats to the UAE, the demand for value-priced property is only set to increase.

In short: Don’t hold out for a bigger place. Invest in what makes sense, common sense, and if you are looking to take advantage of the value that has started to come into the market, it will be here for the rest of 2019. We can see it now in the above three very specific sectors and unit types.

Michael Burke is the managing partner of Arabian Escapes


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