How is ROI for Dubai real estate calculated?

One of the main goals of any investment is to make a profit, short-term or long-term. You can benefit from investing in stocks, startups or acquiring liquid real estate. In the latter case, it is important to make sure that the project is potentially profitable and the property will popular among tenants.

The sales of property in Dubai in 2022 has reached the highest levels. Thus, in the first quarter, the emirate sold 76.6% more apartments, 56.1% more villas and 124.2% more properties under construction than a year ago. Property buyers consider their new homes as a profitable investment: the property can be easily rented out or resold at a higher price.

To find out why and how to calculate the ROI for a future asset, which areas of the emirate are the most profitable and how to successfully resell the property, check out this post.

Table of contents

• Return on investment (ROI) for real estate in Dubai
• Rental yields
  • One Percent Rule
• Return on investment when reselling the property in Dubai
• ROIs for commercial real estate

Return on investment (ROI) for real estate in Dubai

A home or office, regardless of size, purpose, value or prestige, can be an asset. The owner can rent out the property, resell it at a higher price to get a profit as well as use the new home to secure funds from volatility.

The return on investment is calculated according to a certain formula. Thanks to this formula, you can find out how much profit your investment will bring you. Usually this indicator is expressed as a percentage of the value of the asset. With this data, the investor can decide whether it is worth investing in the property or not.

The ROI formula looks as follows:

A (Income from investments at the end of the period) – B (Amount of initial investment)

B (Amount of initial investment)

The result obtained must be multiplied by 100 to obtain the result as a percentage.

For example, suppose the total investment is AED 250,000 ($68,000) and the income is AED 300,000 ($81,000). In this case the ROI is 20%.

Property investment as any other type of investment can be profitable or not. Those who are interested in a return on investment and receiving profit take into account how soon they can reach the break-even point and start making money. These data are calculated in a slightly different way. If we are talking about renting out the property, the formula will be as follows:

A1 (Annual Rent) – B1 (Property Ownership Costs)

×100

C1 Property value

Let’s say you bought an apartment worth AED 400,000 ($108,900). The rent per month is AED 7,500 ($2,000), that is, AED 90,000 ($24,500) per year. The amount of related expenses is about AED 36,000 (2,000) per year.

The cost of a property is made up of:

• its price;
• a state duty;
• expenses for expert appraisal of the property and a fee for its implementation;
• payment for legal and notary services;
• a mortgage deposit and fees (if the purchase was made using credit funds);
• repair expenses, etc.

The list of expenses includes:

• a monthly mortgage payment (if any);
• repair and maintenance of the house;
• land rent and maintenance costs of the building and grounds;
• insurance;
• rental agency commissions (if paid by the owner);
• utility bills paid by the landlord;
• a municipal tax;
• losses during periods when the property is not rented out, etc.

Applying the formula, you will see that the benefit from this property will be 13.5% per annum. Real profit (after reaching the payback threshold) you will start to receive less than eight years after the purchase.

In fact, it is difficult to achieve such a result. For example, the return on investment for real estate in Dubai – the most popular emirate in the UAE among tenants – is about 5-8%. However, this indicator can be improved – it is only important to know what to pay attention to.

Rental yields

Buying a buy-to-let home is a profitable investment solution. In Dubai, this option is extremely popular  – in the city, which is the country’s biggest tourist and business hub, the rental housing market is huge and works as a separate business sector.

According to the Dubai Land Department (DLD) , in the first quarter of 2022, the emirate registered 160,530 rental agreements. Of these, 51.9% were new, and 48.1 were renewed. This is 4% more than the total volume of contracts compared to the fourth quarter of 2021. The share of one-year contracts in the first quarter amounted to 79.95%, and contracts for a different period of time – 20.05%. One-bedroom apartments were the most popular type of rental property, followed by two-bedroom apartments. The most sought-after villas and townhouses were three-bedroom options, while four-bedroom houses with were rented less actively.

The areas with the highest number of apartments rented in the first three months of the year were Dubai Marina, Downtown Dubai, Business Bay, Jumeirah Village Circle and Jumeirah Lake Towers. Dubai Hills Estate, Jumeirah, The Springs, Al Barsha and Arabian Ranches were the most popular destinations for villa rentals.

The average cost of housing and the ROI for property in these areas are as follows:

The average cost of housing and economic efficiency of these areas are as follows:

The most profitable neighborhoods as of May 2022 are:

You should keep in mind that the rental yields for long-term and short-term rentals may differ. For example, a long-term contract in the emirate can bring the owner about 5-8% per annum. A short-term lease of a popular option in a sought-after location can reach a yield of 11-13% per year, which means that in this case it is possible to make up for the acquisition costs in eight to ten years, while in case of a long-term lease, it will be possible to come to break-even in 14-20 years.

If the project you are interested in is under construction, and it is impossible to calculate the ROI directly, you should look for similar housing in the same area and make enquiries about it. Data on the popularity of this property, its ROI will give a rough picture of how a potential asset that is still being built will behave.

According to AX CAPITAL experts, today it is almost impossible to successfully rent out housing for a short-term lease if the location is far from the key points of the city and infrastructure. The reason is that most of tourists who come to Dubai are primarily interested in sights and beach holidays. In addition, it is worth considering the transport accessibility of the project and the neighborhood.

One Percent Rule

The one percent rule is a general rule of thumb for those who invest in a buy-to-let property. This formula helps to narrow down the list of options and make a choice faster.

The rule is that when considering options, you consider 1% of the value of the future purchase as a monthly rent. This algorithm cannot be applied to all properties, but very often, it allows you to figure out the main goal – the benefit.

It is argued that this method of analysis does not take into account such inputs as the quality and condition of housing, so the result will not be objective. That is, the one percent rule should probably only be used to quickly select from a large number of investment options, but it should not be used as the only option to consider.

Return on investment when reselling property in Dubai

Another opportunity to capitalize on residential and commercial units is resale. There are no restrictions on this issue: you can resell both finished property and off-plan housing. In the second case, it is not necessary to wait for the completion of the project: according to the individual conditions of each developer, the property can be resold when the previous owner has paid a certain amount. For example, for some developers this threshold can range from 20% to 40% of the cost. When buying an buy-to-resell option under construction, the investor always wins – the ROI this property increases every day, and with a successful choice of the neighborhood, it will continue to grow even after the construction is completed.

The liquidity of a particular unit will depend on a number of factors: for example, location, condition of the building, infrastructure development, proximity to key facilities, a beautiful view from the window, layout, size, etc.

AX CAPITAL agency experts note that the speed and ease of resale also depends on the owner’s appetites. If the seller is satisfied with the average market price, the process will take one to two months. When reselling property at a higher price than the market one, the process will take longer, at a lower price it will be possible to conclude a deal as quickly as possible. In addition, if the object itself is in demand and interesting, its liquidity will grow. For example, one of the few studio apartments in a building that houses a three-bedroom prime apartment has the potential to have higher liquidity.

For buy-to-resell property, the ROI can also be calculated. The simplified formula would be:

A2 (Net profit on sale) – B2 (Total investment: Estimated sale price + costs)

×100

B2

Let’s say you are going to buy a house for AED 400,000 ($109,000). Over time, you expect to receive AED 500,000 ($136,000) from resale. You plan to invest AED 50,000 ($13,500) in repairs. So your estimated cost will total AED 450,000 ($122,500). The return on investment will be 11.1%.

ROIs for commercial real estate

In order to generate income, you can also purchase commercial property. This step should be assessed as the ROI in this case will directly depend on who you rent out this space to.

The average price of commercial premises in Dubai today is AED 800,000 ($218,000). In the first four months of 2022, the number of transaction remained high in this sector, reaching AED 506 million ($137.7 million) in April, which means a 128.2% year-on-year growth rate. The total number of contracts reached 228.

In the first quarter 2022, the number of concluded contracts for the sale of commercial premises amounted to 749, with 308 sales registered in March. This three-month total increased by 48.3% comparing with the previous year. The total value of the acquisitions reached AED 1.1 billion ($299.5 million). The results of the first months of 2022 have already exceeded the result of the previous one by 48.32% in terms of the number of transactions and by 87.62% in terms of the value. This is a sign that the city has fully recovered from the pandemic and is actively developing the business sector.

ROI for commercial premises is calculated in the same way as for residential properties. The only difference is that when renting out, the rental rate can be progressive. For example, an office or a retail outlet can be rented out with the condition of an annual increase in payment by 5%. It looks like this:

• the first year – AED 150,000 ($41,000);
• the second year – AED 157,500 ($43,000);
• the third year – AED 165,375 ($45,000), etc.

This will allow you to gradually increase profits and protect yourself from possible volatility. However, this is more of a precaution – the dirham exchange rate against the dollar has not changed since 1997.

AX CAPITAL, a real estate agency in Dubai, will help you to find a property with a high ROI. Our experts will answer any questions and provide professional support at all stages of the transaction.