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Homeowners renting out their property on short-term basis as holiday homes are required to partner with a licensed operator, as per a new directive issued last month by the Dubai Department of Tourism and Marketing (DTCM). The move follows the Decree No. 41 of 2013 issued in December by His Highness Shaikh Mohammad Bin Rashid Al Maktoum, UAE Vice-President and Prime Minister and Ruler of Dubai, regulating Dubai's vacation rentals market.
Previously residential property owners could only lega1ly lease their homes on long-term basis, although some homeowners had been advertising their properties as holiday homes and leasing them on short-term basis. Those who leased their homes for a short duration faced a few challenges. One common problem was that short-term tenants were often denied access to the building's communal facilities by the developer or building owner.
The new law on holiday rental licensing is set to regulate this grey area in the residential property sector and create an opportunity for homeowners to legally generate income from short term leases.
The regulation is also a timely initiative as the city prepares for a tourist rush in 2020, says Robin Teh, Country Manager - UAE at Chesterton Middle East and North Africa. A regulated holiday rental market means that tourists will have more options and property investors benefit from higher returns on investment by letting out their properties for a shorter duration, says Teh.
Khalid Bin Touq, Executive Director of Licensing and Classification at the DTCM, says, ''Through regulating the use of properties as holiday accommodation, the objective is to broaden the range of options available to visitors, while ensuring that the high standards of quality for which Dubai is known for are maintained.
''Visitors booking their accommodation through licensed operators will have the assurance that their accommodation has been classified in line with global best practices, while owners of properties will benefit from the expertise and marketing capabilities of the operator.''
To apply for a holiday home operator licence, one has to have a minimum of 20 properties, says Bin Touq.
''The first stage is to apply for initial approval,'' he says. ''Upon receiving the initial approval, applicants will have a maximum of three months to satisfy the requirements for the final trade licence and consequently become a licensed holiday home operator.
''Successful applicants will receive notification to declare all units in their portfolio and carry out a self-assessment to classify these proposed units on the Holiday Homes Registration System. Following this, a DTCM consultant will complete the final stages of assessment, at which point the Holiday Homes Trade Licence will be granted.''
Bin Touq explains those who have less than 20 properties will have to partner with a licensed operator to be able to offer their property for short-term rental.
''They will be required to use the services of a licensed operator, with their property becoming part of the operator's portfolio,'' he says. ''This applies to both second homes and to homes which are empty due to the owner being abroad.''
There are no defined restrictions on the location of the property, although one of the factors the DTCM will assess during the licensing application is the property's proximity to key tourism infrastructure. This will be assessed on a case-by-case basis, says Bin Touq.
The implementation of the new regulation creates two new categories in the hotel classification framework: Holiday Home - Standard and Holiday Home - Deluxe. Bin Touq says there are key differences between standard and deluxe accommodations, including the size of the bed (a minimum of 200xl80cm for deluxe and 190xl35cm for standard).
A deluxe accommodation also needs to have a TV with remote control in the master bedroom, bathrooms with bathtubs, a dishwasher and a microwave, which are all not required in a standard holiday home.
The business model
Filippo Sona, Director - Head of Hotels at Colliers International, points out that single residential units and serviced apartments both operate based on the same business model wherein a fully furnished property is rented for a short period and the owner remains accountable for the property's management and maintenance and not the tenant.
Hence, knowing the costs involved in short-term rentals is essential, says Sona.
The property owner needs to think about the cost of running a holiday home rental business. At the end of a short term stay, the owner will be responsible for cleaning and repairing any minor damage to the property. Moreover, assets rented out for a short term will generally wear out quicker than residential units on a long-term lease.
''If we add up the costs of running such an operation, from licensing and cleaning to maintenance, I think in the end a simple standard yearly lease will be more economically viable,'' says Sona.
Nonetheless, he says short-term accommodations can ultimately stimulate market demand. ''Bringing this product in the market will stimulate repeat visitation and create induced demand from travellers, who prefer this type of accommodation,'' he says. ''At the same time, it may allow Dubai to become more affordable.''
If an investor purchases a property with the intention of staying in it regularly for short periods, then it can be furnished appropriately and can be leased when not occupied, says John Stevens, Managing Director of Asteco Property Management.
''However, if the owner has no plans of occupying the property, it is financially prudent to rent it out for a longer term.'' he says.
The real estate sector will see a positive boost from the new regulation since it offers residential property owners and investors a new medium to generate income through short- or medium-term rental. Laura Adams, Managing Director at Carlton Real Estate, points out that a large number of people tend to rent apartments rather than stay in hotels, as residential complexes in Dubai offer notable amenities.
''Having alternative holiday homes is a win-win situation for Dubai, wherein more accommodations are available for visitors and there are better returns for investors,'' Adams says.
Stevens adds, ''One clear benefit of this law would be from a security perspective. Currently, all hotel and hotel apartment guests are registered and accounted for. However, guests staying in unlicensed, short-term rental accommodation are obviously not registered, posing issues for both the landlord and the tourist, where neither is adequately protected.''
The bulk of demand for short-term rental is more likely to come from corporates and expats on temporary assignment, rather than families on holiday, says Barmen DeJong, Director of Development Consultancy and Research at Knight Frank.
''It is expected that these properties will command lower rental values per square metre compared to similar properties run by professional hotel or serviced apartment operators,'' says DeJong. ''Overall, we expect that the rate will be slightly higher compared to the recent past for similar short-term rentals as licensing and regulation involve overheads such as licensing fees and refurbishments, which will be passed on to the short-term tenant.''
Short-term rental has been a popular concept in many mature property markets, says Stevens.
''Considering how quickly Dubai's real estate market is maturing, it is now time to put these regulations in place,'' he says. ''Allowing this sector of the market to develop in a regulated and orderly fashion will undoubtedly broaden Dubai's appeal not only as a holiday destination, but also as an established and well-regulated real estate investment destination.''
Claire Elliott, Property Consultant at ERE Homes, says investors have complete peace of mind with long-term rentals because there is a steady income of between 4 per cent and 7 per cent annually.
However, there are different challenges that come with a long-term rental model.
''As rents are still on the increase in Dubai, investors who offer long-term rentals cannot benefit from rapid rent increases we are experiencing at the moment,'' says Elliott. ''When renewing contracts, they have to increase in accordance with the rental index guidelines, so may not be able to benefit from the increase very much, if at all.''
For short-term rentals, returns can range from 10-15 per cent on average, hence the property generates higher yields on investment.
''However, the overall risk is also greater as although high occupancy is expected during the peak seasons, there may be periods when the property remains vacant, especially during the summer months,'' says Elliott.
In order to maintain a high occupancy rate consistently, she says the property owner needs to hire a management company that has a good network and access with travel agents and corporate clients. A management firm typically charges a 10 per cent fee, she says.
''Long-term rental is for hassle-free, steady income oriented homeowners, whereas short-term lease is for risk takers, who prefer flexibility on their investment, but with a greater yield potential,'' says Elliott.
The pros and cons of the new law by Hannen DeJong
For owners and operators, the regulation provides a clear framework of what is allowed and what is not. Previously, owners offering their property on short- or mid-term basis operated in a legal grey area.
The new law gives short- and medium term tenants full access to communal areas without being questioned. Moreover, the shortage of hotel rooms may be alleviated by providing holidaymakers with affordable alternatives.
Serviced apartment operators will face more competition as a number of potential guests may trade down to a DTCM-licensed shor tterm rental apartment.
Short- and mid-term tenants may face higher charges as landlords are likely to offload the annual DTCM charges on them.
Source: Hina Navin, Special to Property Weekly