Buying property as an investment is popular in the UAE, with the country offering healthy returns to buy-to-let investors. However, the Covid-19 pandemic has had an impact on the market, with subdued demand and oversupply weighing on sales and rental prices.
As a result, landlords have had to contend with lower rents and weaker yields. However, some communities in the UAE have managed to buck the trend.
Indian expat Rajesh Soni, 48, makes a net rental yield of 6 per cent on his three-bedroom townhouse in Nakheel’s Al Furjan community in Dubai.
He has rented the property for Dh125,000 annually for the past two years, and pays a yearly service fee of Dh3,000, which he says is “one of the lowest in Dubai”. The townhouse’s current price is approximately Dh2 million despite purchasing it at the height of the market boom in 2008 for Dh3.3m.
Mr Soni, who is in the real estate business, also owns other investment properties in Remraam and Skycourts Towers in Dubailand. However, he says the service fees are higher.
"One third of my apartment rent goes towards paying my service fees. I pay approximately Dh2,000 as service fee every month for each apartment and only Dh250 for the Al Furjan townhouse," he tells The National.
Dubai still offers investors one of the most attractive rental yields in the world, according to a study by real estate consultancy Savills in 2020. Gross residential yields for investors across prime properties in the emirate remained the fourth-highest globally at 4.6 per cent, exceeded only by Los Angeles, Moscow and Cape Town, the study said.
“There is a huge opportunity to enter the market while sales prices are attractive, and we are currently seeing that rents are on the rise slightly,” Lewis Allsopp, chief executive of real estate broker Allsopp & Allsopp, says.
“The cost of entry into the Dubai property market is the lowest it has been for years and we’re predicting that there will be an uptick in sales and rental prices over the next few years.”
However, property markets move in cycles and investors should consider the potential risk of their asset losing value, Haider Tuaima, head of real estate research at consultancy ValuStrat, says.
Property values may increase due to robust market growth, stabilise or even decline through certain stages of the cycle, he says, adding that investors must recognise at which phase the market is and then secure the sale in the right location at the right price.
“In a declining market, yields are negatively impacted and if rental income is the only source of cash flow, the risk of not being able to make mortgage payments will be heightened," Mr Tuaima says.
"Risks can also become severe when property investment is intended for a short term. Since the UAE’s property cycle is on the cusp of a trough, property values rarely decline for long-term investments made at this stage.”
So if now is a good time to invest, where are the areas that experts believe landlords are likely to achieve the best rental yields in Abu Dhabi and Dubai?
Developer Aldar’s project Al Ghadeer, located on the border of Dubai and Abu Dhabi, offers the highest net rental yield of 8 per cent in the UAE’s capital city, according to Crompton Partners, a real estate company in the emirate.
Rent for a studio apartment in Al Ghadeer starts from Dh22,000 and can go up to Dh43,000 for a two-bedroom apartment, the broker says. The community saw sales prices drop by around 8 per cent in 2020.
Al Reef, located on the city's outskirts, offers the second-highest net rental yield of 7.5 per cent.
You can rent a one-bedroom apartment from Dh48,000 in Al Reef and a three-bedroom apartment for Dh90,000, while villa rents range from Dh80,000 to Dh165,000, according to Crompton Partners.
With the pandemic spurring more residents to upsize and move to larger properties, Al Reef gained in popularity last year and saw a 4 per cent increase in sales prices, according to the property company.
Al Reem Island ranks third in terms of net rental yields in Abu Dhabi, averaging 6.8 per cent. The proliferation of towers on the island, however, weighed on sales prices and rents, with the former declining by 8 per cent in 2020, says Crompton Partners.
A one-bedroom apartment on Al Reem Island can be rented from Dh50,000 to Dh70,000, while a premium four-bedroom apartment will fetch a yearly rent of about Dh240,000, the broker adds.
Al Raha Beach and Yas Island round out the top five rental hotspots in Abu Dhabi with net rental yields of 6.2 per cent and 6 per cent, respectively.
Al Raha Beach, an Aldar beachfront development, registered a 6 per cent decrease in overall sales prices last year, while apartment prices on Yas Island dropped 6 per cent and villa prices increased 12 per cent, Crompton Partners says.
Landlords can lease out a one-bedroom apartment from Dh65,000 or a premium four-bedroom apartment for Dh260,000 in Al Raha Beach. Meanwhile, a four-bedroom townhouse in the community costs from Dh190,000 to Dh310,000 to rent.
On Yas Island, rent for a one-bedroom apartment starts at Dh70,000, while a three-bedroom apartment can yield rent of about Dh190,000, the broker adds. A two-bedroom villa in the community can be rented for Dh160,000 and rent for a five-bedroom villa ranges from Dh240,000 to Dh300,000.
Buying property to let has never offered better value, with interest rates at all-time lows, according to Ben Crompton, managing partner at Crompton Partners. The low interest rate environment means that investors can borrow cheaper money and invest it for a good return, he adds.
“The counterpoint, however, is the current low rent environment. Service charges don’t come down with lower rents, so as rents drop, they make up a bigger percentage of that income and depress net yields,” Mr Crompton says, adding that smaller villas with lower service charges are a better option for investors.
Discovery Gardens offers investors the highest gross rental yield in Dubai, with apartments in the Nakheel community averaging returns of more than 8 per cent, according to real estate website Property Finder.
The median rental transaction price for a one-bedroom apartment in this community is Dh38,000, while the median sales transaction price is Dh417,000. Rent in Discovery Gardens has declined by 5 per cent over the past six months, Property Finder data show.
At International City, another Nakheel community, apartments fetch an average gross rental yield of 8 per cent. The median rental transaction price for a one-bedroom apartment here is Dh25,000, while the median sales transaction price is Dh300,000. Rent in this community has increased by 6 per cent over the past six months, according to Property Finder.
Apartments in Dubai Marina rank third, fetching a gross yield of more than 6 per cent. The median rental transaction price for a one-bedroom apartment is Dh60,000, while the median sales transaction price is Dh830,000. Rents in Dubai Marina have remained stable over the past six months, Property Finder says.
“Net yield will need to be calculated by each individual based on service fees and maintenance contracts,” Lynnette Abad, director of research and data at Property Finder, says.
Meanwhile, for villa/townhouse communities, Damac Hills offers a gross yield of more than 6 per cent, while properties in Nshama’s Town Square provide investors with a gross yield of more than 5 per cent, according to Property Finder.
“If there was ever a time to invest in property in Dubai, now is the time,” Ms Abad says. “There is still opportunity to purchase properties at affordable prices and rent with decent returns compared to other mature markets in the world. This window will not last long, as prices have already started to rise in popular prime areas.”
Although short-term returns on property investments are unlikely to be significant, there is an opportunity to gain from a buy-to-let property if it is a long-term investment, according to Mr Allsopp.
“Property sales prices are on the rise and rents will follow and, as a result, capital gains and higher yields will be expected in the next couple of years,” he argues.
Mr Allsopp tips Downtown Dubai, which has an average net rental yield of between 4 to 5 per cent, Jumeirah Beach Residence and Palm Jumeirah as key areas to purchase a buy-to-let property because they are popular tourist areas.
Buy-to-let investors are also considering short-term leases for their properties. By renting out on a short-term basis to tourists, corporate clients or residents not keen on long-term commitments, property owners can expect to make up to 20 to 30 per cent more from their property, according to Mr Allsopp.
The upcoming Expo 2020 Dubai is also likely to maximise returns for property investors, with millions of visitors likely to attend.
“With letting a property out short term, a landlord has flexibility and more control over the property they own. They can use the property for personal use or gain access to it quickly if they would like to sell in the future,” Mr Allsopp adds.