What is Best? One Year Rental Contract or Holiday Homes?

As Dubai rents increase, many landlords think whether to lease on 1-year contracts or as holiday homes. Dubai's 1-year rental contracts record 15-30% gains - should landlords cash in on that?

Some holiday homes / short-term rental companies are promoting the model by overpromising the yields to landlords as being 50% higher than for annual leases," said Firas Al Msaddi of fam Properties. "This is an absolute myth. Landlords only get to know the true state of yields after having invested much in set up costs and furniture. Do not trust the 50% profit promise”.

One-Year Tenancy Contract rents in Dubai are up 10-15 per cent on average across most residential locations in the last 12 months, with prime neighborhoods such as the Palm Jumeirah and Dubai Marina seeing increases closer to 25 per cent. And the common sentiment is that rents will spike further through the summer.

So, should Dubai’s landlords who have just received the handover of their units be thinking about offering these properties for annual rentals? Or should, like many landlords did in these last four years, offer these for short-term leases as holiday homes?

“When annual rents are rising by an average 15 per cent in freehold districts, landlords need to do a bit of rethink,” said an estate agent who has a sizeable portfolio of holiday homes. “Signing up a tenant on a one-year lease, they get a full-year advantage from the rise in Dubai rentals. Many landlords, especially those who have just taken possession of their units from developers, are veering towards annual contracts.”

Quite a difference

If so, this is a 180-degree change in sentiments on the part of landlords; between 2019 and up to March this year, holiday homes were considered as the obvious choice for landlords/property investors seeking rental income. There was the run up to the Expo and the year-end demand gains that holiday homes experienced. Except during the peak of the COVID-19 phase, holiday home rentals were on the high or holding steady. And during the whole of the six-month Expo phase, demand for Dubai’s holiday homes was its peak.

All this while for the better part of the last five years, annual rentals in Dubai were recording steady declines, and quite sharply so in some neighborhoods.

Decision time

Another 30,000 new homes will be complete in Dubai this year, and some market-watchers say, even more. Many will be occupied by end-users but a sizeable number will still make it into the rental market. So, should it be for 1-year or short-term?

Holiday homes / short-term rent does not necessarily get you much more than annual rents - but there are advantages of placing your property on short-term rents. The landlord will not be tied to a long-term lease that you cannot exit unless you have a valid reason, and provide the tenant with an eviction notice of a month or more. Also, landlords do not have to comply with strict restrictions of the Dubai Rent Index on any rent increase. In the holiday home model, rents can increase depending on demand patterns.

Moreover, there is no risk of bounced cheques. Depending on the location and size of the property, you may benefit from a rental upside of around 5-20 per cent more after fees as compared to the annual rent.

RERA Rent Index

Ideally, on annual leases, landlords should link any demand to hike rates – for existing tenants - within a strictly defined range. Of late, however, there have been growing instances of tenants complaining that landlords are arbitrarily asking for more. The Rental Disputes Centre at Dubai Land Department is certainly hearing a lot more of such cases.

One thing is for sure – rents in Dubai are back on the rise, and by all measures, bound to grow higher. Even with all the new homes added to the existing supply, actual demand is growing too fast in too short a time.

And landlords will have only two questions on their mind – should they rent long- or short-term? If long-term, how much more should they ask for.