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Tue, 09 Feb 2010 | 17:39 GMT
Tue, Feb 09, 2010, 17:39 GMT
 

Serviced apartment rents drop 30%

 Emirates Business 24/7
 
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Emirates Business 24-7, 01 July 2009

Rents for serviced apartments in Dubai have dropped by 20 to 30 per cent since last August, according to real estate agents.

"The recent rent drops across Dubai have affected the serviced sector as well," Mohanad Alwadiya, Director of Harbor Real Estate, told Emirates Business. "A one-bedroom serviced apartment in The Address hotel at Downtown Burj Dubai cost around Dh150,000 per year to rent in August 2008. However currently it is priced at about Dh115,000.

"At Madisson Tower, a serviced apartment building at Tecom, a one-bedroom apartment was about Dh110,000 per annum but is about Dh75,000."

Agents said though rents for unfurnished apartments has dropped across Dubai, rents for furnished units remained higher than those for non-furnished ones.

"The drop in rents for serviced apartments is lower than the average drop in standard residential rates, which stands at about 45 per cent since last year," said Alwadiya. "The difference is mainly driven by the strong hospitality industry in Dubai and the attractive yields that operators continue to offer to investors. Many developers are converting their units into serviced apartments in response to the poor sales market.

"This trend is picking up but mostly among solid, reputable developers that have the capability to manage such assets. Tameer Holding is considering converting its Platinum Tower into a serviced apartment building."

Element Real Estate is looking to convert two planned apartment projects at Culture Village and Downtown Burj Dubai into residential serviced apartment buildings.

"The developer asked us for feasibility studies on the projects and we suggested converting them into serviced apartment buildings."

Nikki Doyle, Assistant Operations Manager for Short Term Rentals at Better Homes, said at the moment the residential rental market is very competitive.

"In most areas, clients are paying about 30 to 50 per cent more rent - based on monthly rates - for a serviced apartment than for a long-term unfurnished property," she said.

"For example, a one-bedroom apartment in Old Town might lease for Dh100,000 to Dh110,000 per annum. However, in the short-term market we would lease the same property for about Dh13,000 to Dh15,000 per month."

According to newspaper advertisements, a hotel in Bur Dubai is renting out rooms for Dh76,000 per year or Dh6,300 per month.

The furnished rooms come with LCD TV, high-speed internet and daily housekeeping services

Alwadiya said the average return on investment (RoI) for landlords from serviced units was about eight per cent per annum.

"We sold 31 serviced apartments at the Bonnington Hotel at Jumeirah Lake Towers in April and they were offered to the client with a 10 per cent guaranteed yield for five years from the operator and the developer. Having said that, luxury serviced apartment developments normally generate a seven to eight per cent annual yield.

"Furnished apartments command a higher premium, which ranges between eight and 15 per cent depending on the quality of the furniture. Also, the rent deposit amount is higher for furnished apartments - it is usually 10 per cent of the annual rent whereas with unfurnished apartments, it is usually five per cent."

David Schuin, Commercial Manager at Sherwoods Property Consultants, said the RoI varied from project to project and depend on the contract.

"Typically investors who wanted to get into the serviced unit business would enter into an agreement with the building operator to put their apartment into the rental pool," he said.

"The operator would then rent out the apartment either on a short or medium-term basis. The proceeds from the rents would be placed in a central pool to be shared by the various investors each year, minus the operator's management fee and the service fee for the development.

"The RoI for investors would therefore be linked to the operators' ability to fill the rooms on a regular basis. The higher the occupancy rate the higher is the RoI. The return from serviced apartments is generally expected to be higher than typical residential rental income as the rates for short-term rents are substantially higher than for conventional rents."

Meanwhile, agents said tenants remained cautious about Dubai's real estate sector despite signs of stabilisation and were increasingly seeking short-term contracts rather than signing lengthier tenancy agreements.

Doyle said: "Many tenants now see short-term rentals as a better solution because of break-lease issues and uncertainty in the market. Many are looking for as little commitment as possible.

"But most landlords, who have finance for a property, are looking for a more secure rental return and will still opt for long-term leasing as it provides a steadier flow of income. However, it is more difficult to lease furnished accommodation in long term."

Schuin said the facilities offered by serviced apartment operators varied among developments.

"These apartments are typically furnished and fitted to the standard set by the operator," he added. "Many services are offered including cleaning and laundry for bedding, and in many cases there will be room service, TV and wireless internet. The operator is normally responsible for maintaining the standard of the services and the apartment in line with the pact."

Louise Pitt, Director of Leasing at Landmark Properties, said the cost of maintenance of serviced apartments is usually included in the rental price.

"The rental can include cleaning, linen, maintenance, room service, internet connection, business centre, use of meeting rooms and concierge facilities, among other comforts," she said.

"People who are attracted to such units are those planning to stay longer than the average hotel occupant and are, therefore, looking for more space than just a hotel room. They need the space of an apartment but require the services and facilities a hotel would offer."

Schuin said the serviced apartment sector in Dubai was under pressure to reduce rates to achieve higher occupancy levels.

"Rates in Al Barsha have in some instances fallen by up to 25 per cent," he said.

Pitt said finance to purchase serviced apartments was available depending on the project, the developer and the buyer's criteria.

"There are no finance arrangements available if the lease tenor is below one year," she added. "Beyond one year finance is available only if the prospective tenant has been resident in the UAE for more than six months."

Schuin said financing was available for the serviced apartment sector depending on the arrangements between the developer and the banks.

"Finance is dependent on bank criteria, which will include the applicant's credit status," he said.

The agents said though the 'serviced' concept was more common in the residential sector, serviced offices are popular with some companies because of the flexibility they offer.

Schuin said: "The commercial equivalent of serviced apartments are business centres and serviced or managed offices. The serviced office industry is becoming more popular among corporates and small- to medium-sized enterprises as it provides the companies with flexibility in terms of space.

"Also if an office occupant is looking for tenancy periods of up to three years it makes financial sense as the company does not have to provide capital to fit out offices. In addition, the serviced office concept offers immediate space that has all the basic requirements such as phones, meeting rooms and internet connections."

Alwadiya said demand for serviced office units came mostly from the small business segment.

By Anjana Kumar

© Emirates Business 24/7 2009

 
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