Cashing in on the rental boom

In a world where two to three per cent rental returns are standard, the prospect of 17-20 per cent rental returns seem incredible to most property investors.

However, this is a reality for many of those that purchased properties in Dubai as recently as two years ago. Current rental yields are not quite as unusual, but still exceptionally high by global standards, hovering between five and 15 per cent, and averaging at about 8 per cent, depending on the type and location of the property.

The harbingers of doom have voiced concern over the UAE’s maturing (some have said hyperinflated) market. Add to this mix rumours of property oversupply and a resultant fall in rents and property values and you get a dark picture.

But talk to active and experienced members of the leasing community, and you get a very different story. Louise Heatley, Managing Director and Owner of Exclusive Property Management Services, said: “Things are looking good for investors. And news will continue to be good for those that currently own and rent out property in the UAE. Interest in the rental of Dubai property of all types and standards is unprecedented.

‘Supply is an issue. But my feeling is that even when the large number of scheduled residential units are delivered this and next year, there will still be a real shortfall. This shortfall in turn will protect the non-occupant investor and keep the rents stable and growing well into the future.”

Rental yields to level off

All are in agreement that rental yields have to, and will, level-off slightly in the 2008-2009 period, and that the irrational rises in rents experienced in 2005-2006 are not likey to happen again (rents rose up to 30 per cent in 2005). This, however, should not disuade new investors from buying either completed or off-plan properties.

For people investing in properties now, the advice is that if you are looking for a stronger rent-to-investment ratio, look at buying an apartment and not a villa. Villa prices are soaring, mostly driven by an end-user clientele, so return on investment is not as good, averaging four to five per cent maximum at this time. Dubai apartments can confidently yield anywhere between eight and 12 per cent, depending on the location, but only if properly managed and rented by an experienced agent.

In relation to mortgages and insurance, it is worth noting that mortgages are not affected in any way by the leasing out your property. Insurance is a different story. You are legally obliged to contribute to your building insurance via the developer of your property, the fees for which are generally included in your annual maintenance charges.

Home insurance for individual units or villas is very much at the discretion of the owner. Though strongly recommended, is not a legal obligation. Home protection is as much to protect the landlord as the tenant in case of damage or personal injury. “We always advise our landlords to ensure that this is in place, no matter whether you plan to rent the propoerty on a short or long term basis,” said Heatley.

When discussing the future of the rental market in Dubai, she continued: “The short term rental market is a very lucritive one in this popular sunshine destination. The Dubai Government, however, is planning to lock down on this pracice, one which many developers also strongly dislike.

‘Minimum rental terms are expected to be set at six months, and plans are to legislate against unregulated short term lettings in the near future, forcing landlords to set up their short term rental business under a more company like structure, pending the developers agreement to rent the properties out under these terms. More details are expected on this legislation in 2008.”

Renting a property – what you need to know

What is a tenancy contract?
• A signed agreement between individual/company and the landlord for a one-year period
• This includes the tenant’s and landlords’ details, their responsibilities and agreed rental amounts
• Although this is usually for a one-year period (period of contract can vary depending on landlord/tenants requirements) it is renewable with the consent of both parties
• All payments to be exchanged prior to the landlord signing the contract

What documentation do you need?
Tenant
• A passport and UAE residence visa copy is required
• If the tenant’s visa is currently under process by an employer – a company letter confirming sponsorship for the employee (must include company stamp)
• If it is a company renting the property a copy of Trade License is required

Landlord

• A copy of the first page of Sales Agreement as proof of ownership
• A copy of passport
• Newly completed properties a copy of completion certificate to confirm handover

Payment
• Annual rent is paid in advance in Dubai, but this is not always the case in other emirates. The majority of owners request the payment in one or two cheques. If two cheques are accepted the first cheque will be dated from the commencement of the Tenancy Contract and second cheque post-dated six months later. UAE cheques cannot be cancelled and therefore this is security for the landlord/owner
• Refundable security deposit is payable to the landlord. This is usually a percentage of the annual rent, and will be more for unfurnished properties. The deposit is held until end of the Tenancy when vacating the premises. Any damage to the property (other than fair wear and tear) is deducted from the deposit
• Agent’s commission is five per cent of annual rent, paid by the tenant at the time of signing the Tenancy

Contract
• To connect electricity and water supply, a refundable deposit is held with the water and electricity authority (Dubai Electricity and Water Authority, or DEWA, in Dubai, for instance) until the final bill has been cleared at the end of the Tenancy. (Security deposit for villas is Dhs2,000 and Dhs1,000 for apartments)

Maintenance
• The annual maintenance charges set by the developer for the upkeep of the communal areas and facilities are the responsibility of the owner
• The maintenance charges are usually reflected in the total annual rent the landlord is requesting
• Owners may request maintenance fees to be paid by tenant and this will be reflected in the Tenancy Contract and agreed prior to signing

Government Taxes
• A municipality charge is applicable to all residents.
• For tenants, It is five per cent of annual rent charge and is payable over a 12 month period.
• This charge is included in the monthly water and electricity bill and is payable by the tenant