Navigating A Difficult Market With Short-Term Rentals

It is important for property owners to differentiate and remain flexible in a tough real estate market

It has been five years since the introduction of Decree Number 41 (2013) which regulated the leasing of vacation homes in the Emirate of Dubai. Since then, the industry has grown to a size in excess of 10,000 licensed and active units – approximately 2 percent of the total housing stock.

Since 2016, both sales and annual rental prices in Dubai have declined around 25 to 30 percent, according to Data Finder, real estate insights and data platform under the Property Finder Group. Many experts anticipate a significant further decline based on the extensive supply pipeline that has been created from a flurry of off-plan launches.

With all this uncertainty, property owners are finding themselves in a difficult position during negotiations and are having to offer notable price reductions to rent their property on an annual basis, as well as facing the realization that if they wanted to sell, they would need to do so at a loss.

As Dubai’s largest short-term rental management company, partnered with real estate agency Edwards & Towers, we are seeing those short-term rentals provide a solution to this problem. Through harnessing differentiation, flexibility, and technology, we work with our clients to make their assets as resilient as possible in the current market conditions.

How Short-term Rentals Add Value

Specifically, short term rentals in Dubai can add value in a difficult market in the following ways:

Higher rental yield: Since the industry began five years ago, there has been a clear premium on the returns from short-term rentals above annual rentals in Dubai, but our data shows that this spread is growing as the wider market softens. Depending on the unit type, owners can now expect a 20 to 30 percent increase in net yield with short-term over annual rentals.

Flexibility to benefit when the market rises: Renting a property on an annual basis in the current market means that this low price will be fixed for quite some time (depending on the tenant). With Expo 2020 coming next year, it is likely that some areas will see increased occupier demand and it would be wise to stay flexible rather than being locked into a low rent when the market turns.

Sell as vacant at any time: Vacant properties appeal to both end-users and investors, while rented properties can only be bought by investors. A short-term property is ‘vacant on transfer’ because of the flexible nature of the agreement, hence why approximately 20 percent of our short-term units are simultaneously for sale at any one time. This gives the seller a stronger negotiating position because they are earning a regular income so are less likely to accept a very low offer. There is also a higher chance of the right offer coming because the property will appeal to end-users as well as investors (who tend to want a better deal).

Demonstrate higher historic returns: A potential buyer can be shown the higher returns achieved by the unit available for short-term rental, which makes the property more attractive for sale. We have many units in our portfolio that have been sold several times and kept in our system because the various investors prefer to maximize yield rather than use the property themselves.

Staging: If the property is for sale and short-term at the same time, the property will be furnished and therefore the buyer can get a better idea of what the property will be like to live in. Studies from the Real Estate Staging Association (RESA) found that staged homes spend 72 percent less time on the market than empty homes.

Using new technologies as a point of differentiation: The ‘sharing economy’ is revolutionizing how people travel and enjoy cities, moving away from traditional hotel stays to the more authentic experience of an apartment or villa. This has been highlighted by the rise of technology giants such as Airbnb. Furthermore, we employ other technological initiatives such as online payments, smart locks, and our mobile app to enhance the experience for our guests, increase the booking retention rate and support our growth strategy.

To conclude, it is important for property owners to differentiate and remain flexible in a difficult real estate market. Short-term rentals can assist this in many ways so landlords are in the best possible position to benefit when the market enters the next growth phase of the cycle.