Small homes fetch best yields in Dubai
The city of Dubai attracts property investors from around the world as residential rental yields in some areas are higher than other global investment destinations such as Manhattan, London and Singapore.
On closer analysis, it is found that affordable freehold communities offer the best gross yields in town - International City at 9.16 per cent and Discovery Gardens at 8.85 per cent. Other communities that offer mid-tier housing such as International Media Production Zone, Barsha Heights, Jumeirah Village Circle and Dubailand also offer gross yields close to eight per cent and above, according to statistics from property consultancy Cavendish Maxwell.
"Discovery Gardens and International City fall under the category of affordable housing and, therefore, are in high demand for tenants, which leads to high yields for investors. Compare this to Dubai Marina where demand is high and offers a healthy yield, but due to lower ticket size of investment vs lesser differential ratios in rents across Dubai, the yield percentage for Discovery Gardens and International City becomes higher," explains Mansi Saxena, marketing director, SPF Realty.
Usually, prime areas have the lowest yields and non-prime areas tend to have higher yields. For instance, Downtown Dubai offers a gross rental yield of 5.62 per cent and Business Bay of 5.85 per cent.
"Distance from a central business district, limited amenities and high vacancy are some factors in non-prime areas that lead investors to assign higher risk and, therefore, higher yields to these areas," observes Manika Dhama, senior consultant at Cavendish Maxwell.
"Affordable housing is a segment that is under-serviced in Dubai and will continue to deliver good yields," says Sanjay Chimnani, managing director, Raine & Horne Dubai.
Villas vs apartments
Villas offer lower yields since they are usually end-use products and internal maintenance, if unoccupied, could be high. Villa communities such as Jumeirah Islands offer gross yield of 3.67 per cent, Palm Jumeirah 4.68 per cent, Jumeirah Golf Estates 4.87 per cent and Mohammed Bin Rashid City 5.10 per cent, according to Cavendish Maxwell data.
"Villas usually attract investors who are looking to invest and retain the property for the long term, use it for rental earning or most likely move in at a later stage. However, the net return on apartments in Dubai is around seven per cent to 10 per cent, which is always higher than that of villas, which ranges from about five per cent to eight per cent at the maximum," informs SPF Realty's Saxena.
Properties in Dubai can be counted on to fetch better gross rental returns than capital appreciation. With price declines continuing across the Dubai residential market over the past 18 months, there is limited capital appreciation opportunity at present.
"Capital appreciation depends on the area of investment. Typically, off-plan offers higher capital appreciation. As an area develops in terms of infrastructure, amenities, things to do, etc., the perceived price goes up, resulting in higher capital appreciation," adds Saxena.
So, what should investors chasing yields watch out for when zeroing in on a property?
What to watch out for?
"Yields can be impacted by operating costs related to the property. For instance, in some buildings, chiller charges are borne by the landlord and not the tenant. Therefore, the emphasis should always be on net yield," says Dhama.
She adds: "For residential properties, factors such as proximity to central and secondary business districts, building quality as well as occupancy should be taken into consideration. Also, different unit types in the same location operate at different yields and hence a study of underlying factors impacting rents in the area as well as differentiation between unit types is needed."
Investors should also consider liveability from a tenant point of view. Access to schools, public transport, supermarkets, etc., make a house easier to rent and, therefore, will likely give a high yield.
"The average price per sq ft vs average rent in the area or similar area should be looked at as that is directly linked to the yield. Other things that matter are size of the apartment - for example, one-bedroom and studio apartments typically give better yields," adds Saxena.
"Completed communities will always offer a better yield than ones that are still under construction or/and where amenities are still not available," concludes Chimnani.