As you may or may not know, there is an ongoing lag between falling property prices and rent rates in Dubai.
This begs the question: freehold or leasehold, which property type is cheaper to rent?
When it comes to leasehold areas, it is generally cheaper to rent apartments as well as villas as they cater to the affordable market segment, while freehold caters to the affluent.
Quick Numbers on Freehold and Leasehold
One of the latest property reports reveals that a comparison between these two market segments indicates apartments are about 50% cheaper while villas are just over 30% cheaper, compared to the same in freehold areas.
The report also claimed villas generally saw a higher rental growth rate (20%) relative to apartments over the past five years. However, rental real estate in Dubai has been on the decline in the last year or so. While the market adapted to keeping up with this increase in demand, a host of new villa projects sprouted, thanks to private and government sector developers.
Villa market dynamics have shifted in the last year, owing to a fall in rents and prices, though apartment rental prices have stood comparatively strong.
Understanding the 6-month Lag
The same report also mentioned property prices will remain dormant for now.
The correlation between sales prices and rent is strong as it is: +0.8. Since sales prices have hit a plateau and fallen from their peak level, the same seems to be the case for rent, with a lag of about six months.
An analysis was done on the income distribution of the working population which uncovered some interesting facts: 84% preferred to rent, quite higher than developed nations such as Hong Kong (48%) and London (50%), it should be noted.
Part of the reason lies in the fact that freehold ownership is relatively a new concept; it is rather obvious that income distribution levels should be elevated so that it leads to a broader home ownership base. As highlighted by the report, 38% of the working class can rent individual units while 17% and 13% can afford to rent one and two-bedroom apartments in freehold localities.
The report went on to say that a certain rental gap exists between prime location-apartments and secondary locations which stands at 69%, while villa communities account for 77%. The highest discount was observed among two-bedroom apartments, while the smallest gap was present in the studio segment.
Villas generally have not performed at their best in the past year, even though they have outpaced apartments in the prime and secondary market over a 5-year span.
It was concluded that the least impressive among property for rent in Dubai were prime villa communities, followed closely by regular villa communities. Prime properties haven’t been performing at their best, in contrast to the rest of Dubai, and there remains a strong demand in the affordable market segment: leasehold.
It is best to leave the math up to a Dubai real estate agency who has an established track record in the property market.