Should You Invest in a Dubai Holiday Home in 2021?

Villas on Palm Jumeirah

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In today’s post, we’re going to lay out the facts to answer the question that’s currently on every real estate investor’s mind: does it make sense to invest in a Dubai holiday home in 2021?

Recap: A holiday home is a short-term rental property. Renters (or guests) typically use sites like Airbnb to book these units on a per night basis much like booking a hotel room. 

Contrary to what many people may think, demand for short-term rentals in Dubai has increased over the last year. This may come as a surprise considering the havoc created by the pandemic. After all, with movement restrictions between countries and cities, and with WFH (working from home) in full swing, the hospitality industry has taken a beating at the hands of covid. Therefore, it would make sense for the holiday home market to be in shambles too, right? 

Not quite. 

As rational as we think we may be, humans (and investors) are prone to irrational thinking. One of the main reasons for us making irrational decisions is that we’re not intuitive statisticians (or generally good with numbers). We base much of our decisions, including investment decisions purely on personal biases or come to some conclusion based on some correlation that has nothing to do with the underlying causation. But enough of that behavioural finance jibber jabber, you’re here to learn about the holiday home market and whether it makes sense to invest. So here we go.

Holiday Homes vs Hotels vs Long-Term Leases in Dubai

We know that economies and industries are intertwined. A negative event in one sector often has cascading effects on others. As direct as the relationship between the hospitality and short-term holiday home market may seem, they are far more distinct than they are direct substitutes. A challenge for hotels isn’t necessarily a challenge (or as big of a challenge) for holiday homes.

Here’s what we mean. Over the last year, customer preferences and attitudes have shifted. With the pandemic amplifying the importance of properly sanitized areas, social distancing, and the need for bigger living areas, it is no wonder that many people are now opting to rent out short-term homes rather than staying in hotel rooms. With short-term homes, guests can minimize interactions with people (such as hotel staff), stay in a larger space at competitive prices, and get access to amenities such as stovetops, full-sized fridges, and even private pools. 

Moreover, tenants or guests may want to avoid long-term leases for entirely different reasons. Given that most countries are experiencing the second wave of covid, potential tenants looking to move homes or move into their first Dubai home may feel uncomfortable meeting potential landlords, agents, and other personnel for viewings. For them, it may make sense to find holiday homes and hunker down for a month or two. In fact, according to airdxb, a holiday home operator in Dubai, the average length of stay in Dubai by short-term guests increased in 2020 compared to 2019. 

Current Facts About the Holiday Home Market in Dubai

For most of 2020 the holiday home market managed approximately 90% of the occupancy levels of 2019 –  not as drastic of a change as some of us would have imagined. By mid-2020, nightly rates were on par with 2019 rates. In fact, from September until now, nightly rates have increased by 124% compared to mid-2020. With occupancy rates back and higher nightly rates, investors in the short-term holiday home market have realized healthy returns. 

Compared to long-term leases, short-term rentals can generate between 40%-60% higher net returns. Of course, with a higher return potential, the risk is also higher (i.e., vacancy risk). However, investors can mitigate these risks by making smart investment decisions in popular areas with limited prospects of additional supply, easy access to business hubs, and close proximity to leisure spots.

Positive Future Indicators For the Holiday Home Market in Dubai

With all that said and done, what does the future hold? Well according to a recent report, holiday homes in Dubai account for 2% of the total number of households – the highest proportion of all key global hub cities. With Expo this year, the city expects to see higher occupancy numbers by welcoming 17 million visitors and has plans to target 25 million annual visitors by 2025 – all strong indicators of potential demand for the short-term rental market.

Additionally, with diplomatic relations improving between Qatar and all other GCC states, real estate investors looking to enter the short-term rental market will benefit the most. With the World Cup just over a year away, the city of Dubai can expect to welcome well over a million visitors that have traveled to Qatar for the world’s most anticipated sporting tournament. After all, the flight time between the two countries is less than 50 minutes!

The Top Locations to Invest in Holiday Homes in Dubai

If you’re going to dabble into the short-term rental market, your safest bet is to target assets in popular areas like Palm Jumeirah, Dubai Marina, JBR, and Downtown Dubai. 

One of the main reasons is that additional supply in most of these areas is expected to be very limited. With limited supply, investors can seek comfort in knowing that their asset price is likely to hold its value with strong potential for future capital appreciation. 

In terms of rental income, rates for holiday homes in Palm Jumeirah, more specifically in the Palm Villas have increased by 10 percent year on year. If we compare that to another popular area like Dubai Marina, we’ve found that rates on average are down by 10 percent from last year, but are still outperforming long-term leases in the area which are down by 18%. Therefore, with the right asset, investors looking at these popular areas have potential to earn higher returns if they consider the short-term rental market.

Your Options to Invest in Dubai Holiday Homes

What are your options then? If you’re looking to invest in a property that generates rental income, should you then consider a popular area where you can convert your property into a holiday home? Or should you target newer developments of town and play the long-game until the city’s suburbs sprawl further and these areas become prized locations?  

This may seem like a shameless plug, but at SmartCrowd, we’re firm believers in helping people diversify their investment options appropriately. We think that asking yourself to invest in one asset vs another is a typical syndrome of short-term thinking. The better question is to ask yourself how you can maximize your returns by diversifying and investing in both types of properties – one in an upcoming sprawling neighbourhood and the other in a densely populated and popular prime location.

Fortunately, with SmartCrowd investing in both holiday homes and long-term leases is possible. No longer are you confined to choosing one option over another. Backed with rigorous analysis and independently evaluated reports, we give all members access to institutional level data to make informed decisions from anywhere in the world. So go ahead, view our latest investment options here and see how you too can own a holiday home in the most prime areas in Dubai.

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