Comment: Dubai's condo market comes of age
With the historic success of residential unit sales in designated freehold areas of the UAE, it was perhaps inevitable that developers would think of selling hotel units on a similar basis.
Originally a US concept, it is something that had not been tried before in the Gulf, due to the historical restrictions on foreign property ownership that existed prior to Emaar’s launch of freehold property back in 2002, but which then became not only possible, but a logical response to the large proportion of unit purchasers who buy solely for investment purposes.
In the original US jargon, hotel apartments that are for sale freehold — the most common unit of this type — are known as ‘condo apartments.’ Hotel rooms and suites for sale are called ‘condo suites’, while hotels containing such units are known as ‘condo hotels.’
Sometimes referred to as a ‘sale and leaseback’ model, the concept works like this. In its simplest form, a developer builds a hotel or hotel apartment building and sells each and every key freehold to individual buyers.
The multiple owners then hand over their units to a hotel operator, who manages them in the customary way. The profits from the units are then split between the operator and the individual owners, who also have the right to occupy their units for say, two to four weeks per year, typically free of charge.
The reality is usually more complex, with many developers selling furnished condo units on three bases: buy to occupy; buy to let (on the annual residential market); and buy for investment, whereby the unit is added to a hotel rooms inventory.
When you take into account that the original developer typically retains ownership of the public areas of the property and that the individual unit buyers will form an owners’ association to interface with both the developer and the operator, you can imagine the difficulty of keeping all these parties with their conflicting interests happy.
It is for this reason — together with the fledgling status of the UAE’s ‘strata titling’ laws — that certain major hotel operators refuse to even contemplate managing this kind of property here.
CAN-DO CONDO
Regardless of such challenges, the condo hotel model has multiple advantages. The original developer can pre-sell all the accommodation units off-plan and enjoy significant cash inflow benefits (subject of course to the restrictions of legislation such as the 2007 Dubai Escrow Law, which requires developers to establish an escrow account for each project and restricts them from utilizing purchasers’ funds for purposes other than the project).
While enjoying the benefits of selling the letting units, the developer can also earn an often significant percentage of the on-going profits from their hotel-style letting on behalf of the individual unit owners.
The developer can also earn the full profits from any on-going hotel-style operations such as F&B, meeting rooms and with smaller management fees from employing a hotel management company.
Thanks to such incentives, there are now 29 existing condo apartment buildings with 7764 keys in Dubai alone, all of which are fully sold out and operational. A further 16 future projects are now selling, with 7248 additional units.
Among the top developers behind such ventures are Emaar, Damac and The First Group. Condo hotel operators include Golden Tulip, Mövenpick, Rezidor, Wyndham and apartment specialists, Bridgestreet in the mid-market, while at the upper upscale end are Angsana, Anantara, Fairmont, Kempinski and Viceroy.
Asking prices for new projects range from about US$5000 up to $10,000 per square metre, with many second-hand properties achieving even more impressive rates — perhaps unsurprising when you think that the freehold zones in Dubai include Downtown (Burj Khalifa), The Palm Jumeirah and Dubai Marina, among other areas.
The upcoming Viceroy Dubai Palm Jumeirah is promising unit buyers a first year return of 12.2% on a hotel room costing US $447,343, assuming 80% year-round occupancy and an average rate of US$469. Sound good? Buy now, because they’re selling like hot cakes.
About the Author:
Guy Wilkinson is a director of Viability, a hospitality and property consulting firm in Dubai. For more information, email: guy@viability.ae