At a time of low demand in residential and commercial real estate, developers and high-net-worth individuals (HNWI) have found the time is right to put their money in serviced apartments, which offer better yields and a steady income compared with other asset classes. Apart from the potentially lucrative returns, freehold serviced apartments have become popular among investors because owners can use the property for personal use each year.
Serviced apartments align with Dubai’s tourism goal of attracting 20 million tourists per year by 2020. The top markets include visitors from the GCC who often travel in large groups and for longer periods. Accordingly, a number of high-profile projects are under way, including brands such as The Address, Vida, Viceroy by SKAI, Jumeirah Living by Select Group, Alef Residences serviced by the W Hotels and Kempinski Residences Business Bay.
Andrew Cleator, Luxury Sales Director of Luxhabitat, a real estate brokerage firm, says Dubai’s freehold serviced apartments segment is growing at a healthy pace with more developers adopting the concept. “The segment has grown quite large with many players, more so in prime residential areas than the perimeter affordable home districts,” he says.
Cleator, whose firm sells off-plan properties such as Armani Residences, The Alef Residences, The Kempinski, Viceroy and Anantara Residence, has observed two main categories to emerge: developers that build their own brands such as Emaar’s The Address and Vida, and developers that franchise or partner with brands such as Paramount, Jumeirah, Kempinski and Bvlgari.
Besides the steady inflow of tourists, Dubai has a large transient population that demands fully furnished residential options without the burden of a long-term tenancy or expensive hotel bills. ”Dubai is dominated by an expat population of which many people are here on a short to mid-term basis,” says Marko Vucinic, acting head of hotels and hospitality group for Middle East and North Africa (Mena) at JLL. “A serviced apartment allows new arrivals to the city to find a place to stay prior to having completed any administrative formalities, such as visa arrangements, which would be required to find a residence in the city.”
Additionally, he says there is a convenience factor to serviced apartments: furnishing, housekeeping, room service and other amenities such as TV, internet, water and electricity costs.
Hamptons International says serviced residences are the preferred investment choice by its customers because of their appealing returns. The Dubai-based real estate company is the exclusive sales and marketing agent for The Address Residences Jumeirah Resort and Spa, which offers freehold homes in the last available land plot for development on Jumeirah Beach Walk.
Ranju Kapoor, general manager of Hamptons International, says serviced residences are increasingly gaining in popularity for UAE residents and international investors. “[According to] our study, serviced residences can bring good returns of up to eight per cent. The study further revealed that the attractive returns partnered with hassle-free ownership, effortless management and Dubai’s status as a global hub for tourism and leisure are driving the demand for serviced residences.”
Growth potential
Industry players acknowledge there is tremendous growth potential for serviced apartments in the luxury and mid-market sectors in Dubai. In the mid-market sector, Dubai is actively targeting families as part of its Vision 2020 strategy. “Serviced apartments are particularly popular with large families from the GCC and multigenerational families where up to three generations of family travel for a holiday,” says Kabir Mulchandani, group CEO of SKAI, which in March opened the Viceroy Palm Jumeirah Dubai with 221 private residences operated by Viceroy Hotel Group. “At the upper end of the segment, there is also demand for those who want to combine living in a luxury residence with the services of a five-star hotel.”
Mulchandani reveals an excellent response from investors since the project launch in 2013. “There are two ways to invest in the Viceroy Palm Jumeirah Dubai: purchasing a residential unit or a hotel room,” he says, adding that SKAI was one of the first developers in Dubai to allow investors to buy a hotel room. “The hotel rooms are put into a pool and leased back in exchange for 40 per cent of the room revenue.” Mulchandani claims the company has secured Dh2.4 billion in sales of residential units and hotel rooms within a few months of the launch. “Resales, particularly on the residential side, have been active since 2013. Residential resales are currently trading at around Dh3,200 per square foot depending on the unit type.”
Filippo Sona, director and head of hotels in Mena at Colliers, agrees that sales and rental pool options make it attractive for developers to build serviced apartments. “Developers also prefer an affiliation with an international hotel operator as it helps create an identity for the development and achieve a premium on the sales price. The key investment attributes from the developer’s point of view, says Sona, include raising equity, earning fees and income on the rental pool and adding an element of prestige to the property.”
Additionally, developers are generating income by selling the units off-plan, helping improve the financial structure of the project. “Serviced apartments in the purely operating model [non-sales] are highly complementary with the hotel components, as they target a different type of guests, mainly mid-term and long-term contract, and enable developers to differentiate their overall product offering,” says Vucinic.
From an investment perspective, they also offers benefits such as lower operating costs and longer average length of stay, including annual contracts. Serviced apartments thus typically have more stable occupancy with less fluctuation. “Serviced apartments are known to be less impacted by seasonality,” says Vucinic.
According to JLL, there were nearly 25,000 serviced units from 207 establishments in Dubai last year, accounting for nearly 25 per cent of the hospitality supply.
Dubai’s Department of Tourism and Commerce Marketing (DTCM) has three categories for hotel apartments: standard, superior and deluxe. The standard category consists of unbranded establishments, while the superior and deluxe categories typically consist of either local, regional or international brands. “The majority of unbranded serviced apartments are found in the more established areas in the city, such as Bur Dubai and Deira where there are over 8,500 hotel apartments associated to unbranded establishments compared with just over 2,700 hotel apartments that are part of chains or groups,” says Vucinic.
Some developers that have ventured into the segment tell PW there is a strong demand in the HNWI segment for fully serviced and managed, high-end primary and secondary residences. “Market response has been particularly strong across the various product offerings with the larger units in the project having generated as much interest as the smaller ones,” says Mustafa Pooya, chief commercial officer of Select Group, which recently launched the 508-unit Jumeirah Living Marina Gate and signed a management agreement with Jumeirah Group.
“Dubai Marina attracts a diverse resident community and Jumeirah Living Marina Gate is no different,” says Pooya. “We’ve had strong interest from HNWIs in the GCC, Europe and Southeast Asia. There has been increased demand from European investors who are seeking investment opportunities abroad in light of the tightening tax regime at home.”
Who are the investors?
Since 2010, with ever-increasing tourist numbers, Dubai has been experiencing growing demand for branded serviced residences. The segment has also caught the fancy of overseas investors looking for a turnkey investment solution.
Vucinic says buying a branded service residence usually entails a higher investment return compared with typical residential apartments. Sona of Colliers agrees: “The confidence associated with buying into a global brand is a key factor for investors, as purchasing a unit within the development not only creates an impression of exclusivity, but also augments the assurance on the delivery of the unit and its management structure.”
Key areas in Dubai that are seen as primary investment areas are the Palm Jumeirah and Downtown Dubai, followed by Dubai Marina, Jumeirah Lakes Towers and Barsha Heights.
Current trends
There is an increasing trend of developers offering a guaranteed return to buyers. Industry observers say developers in Dubai for a while have been focusing on both high-end luxury branded developments as well as their home-grown counterparts. “In general, luxury branded developments provide a significantly higher return for developers,” says Cleator. “A tie-up with an international brand certainly has its advantages, but of course as a result drives up the overall costs resulting in higher selling prices, which reduce the market audience.”
On the other hand, he says local brands are certainly cheaper to develop and manage, which naturally results in lower selling prices. “As the real estate market continues to mature, so do the investors,” says Pooya. “As a result, the brands that focus on delivering excellence will fare better than the rest.”
