Commercial real estate is a large and important part of the UAE’s market, especially a large shopping and commercial hub like Dubai.
However, it is often bypassed although it is a good income source for investors.
In this article, we will explain why you should turn to the commercial real estate sector, what benefits it offers, what to buy, and what to expect from it.
Сontent:
- Reasons to invest in commercial real estate
- Limited offers
- High return on investment
- Rapid increase in capital cost
- Long-term and more flexible leasing terms
- Competence and qualifications of tenants
- Commercial real estate ownership: costs, VAT, lease terms, and best areas
- Purchase cost of completed commercial property and VAT
- Commercial real estate lease
- Best Areas to Buy or Rent Commercial Real Estate
- Conclusion
Reasons to invest in commercial real estate
Here are 5 key reasons why every investor should at least consider investing in these assets.
Limited offers
First of all, commercial real estate is a limited supply with high demand.
There is a wide offer of real estate under construction in Dubai (approx. off-plan real estate), dozens of large and thousands of small projects are launched into production every year. In recent years, the flow of money into this sector has been critical in the growth of the Emirate's real estate market.
Completed real estate does not lag and is in active competition with off-plan real estate. Annually, tens of thousands of new properties are brought to the market, often greatly surpassing the demand for all this real estate.
But it shall be noted that we are talking about residential and hotel real estate like studios, apartments, villas, penthouses, townhouses, and other types of such property.
By any quantitative indicators, commercial real estate, in its turn, lags far behind all of the above, even though the demand for it is not any less.
Many regional and international companies are interested in all types of office real estate, working residential real estate, warehouses, sorting rooms, and exhibition spaces.
Warehouses and sorting spaces have become especially popular in the last year and a half when various e-commerce companies have become market leaders amid the COVID-19 pandemic.
High demand with limited supply forces prices to grow, providing high returns for those who own and lease commercial real estate to businesses.
High return on investment
The return on investment index or ROI is the most important indicator by which an investor will assess the prospects of investing in a particular company or asset.
The commercial sector provides one of the highest ROIs in the market.
This market is stable with high incomes - higher than for those who rent out residential real estate.
Unfortunately, the cost of a particular object is subject to fluctuations but this does not affect performance in the long term.
Commercial property valuation is based on how much revenue the property generates. The more generated profits for a particular property, the higher its market value and demand.
Given this, the main thing in this market is scale. The larger the volume of the assets, the greater the revenue and ROI. This cycle of price appreciation is self-sustaining; investors are only required to remember to diversify the property they own.
Rapid increase in capital costs
As we have indicated, the higher the revenue generated by the property, the higher its value. This works well in a competitive market with limited supply - if your property has been able to establish itself, it will be “heard” by everyone who wants to rent such property.
This is the same self-sustaining cycle.
Property brings more revenue, the value and the cost of the property are higher, there is increased attention, it is rented more, and it brings in more revenue.
This distinguishes such a property from a residential property. In a market segment with a huge supply - often an oversupply - and that is heavily dependent on the seasonal influx of people (be they tourists, expats, or migrant workers), such rapid growth in property values is extremely difficult to achieve.
Generally, residential real estate is not subject to traditional market mechanisms for increased value.
The growth in capital costs can also depend on the competent use of the leasing instrument. In this case, the tenant gets the right to use your property at their own discretion but must fully cover the costs of its maintenance.
Long-term and more flexible leasing terms
Compared to residential real estate, lease contracts in the commercial real estate sector are concluded for a longer period.
Thus, for this obvious reason means that the business needs stable and long-term funds with which it generates profits. This, of course, differs from the demand generated by the temporary need to provide oneself with housing.
Lease contracts in the residential real estate sector are usually concluded for a year and less often for several months. Commercial real estate is usually rented for at least 3 years and usually for 5.
It is not uncommon for contracts to be concluded for 10 or even 25 years.
Long-term rentals reduce the vacancy rate which gives the property a certain reputation and ensures a steady stream of profits.
Competence and qualifications of tenants
Most of the commercial real estate tenants in the UAE are large legal entities, corporations, large brands, public organizations, clinics, educational institutions, or factories.
Before deciding to rent your property, a potential tenant is guaranteed to carry out a thorough study of your proposal, assessing all factors, risks, and profits.
If a tenant comes to you, they already know what they want and understand what they are ready for.
In turn, you as a landlord will be able to get a more than complete picture of who your tenant is; their licenses, economic data, track record, market reputation, and so on.
Real estate leasing is also in demand mainly from large companies and they have a strong interest in the proper maintenance of their leased property. You can rest assured that the other party will carefully comply with the terms of the real estate lease contract.
Commercial property ownership: costs, VAT, lease terms, and top locations
According to the law, commercial freehold real estate must be registered under the name of the company that owns and operates it.
Freehold real estate is a special form of real estate that constitutes the main sector of commercial property and for which there is great demand.
This is because it can be acquired in full, unconditional, and perpetual possession. You can dispose of it as you like as long as it does not violate the laws of the United Arab Emirates.
This distinguishes it from real estate acquired on a leasehold which is a temporary (10 to 99 years) purchase of rights to real estate and obliges the renter to account for the use of real estate to its real owner.
Freehold real estate is limited both in quantity and in the areas where it can be purchased. The vast majority of commercial freehold real estate is located in a variety of special economic zones in the UAE. We will talk about this a little later.
The most popular direction for large companies is purchasing real estate in the special economic zones of Dubai.
For example, an offshore company registered in the JAFZA or DMCC special economic zones has the right without any restrictions to buy any freehold property anywhere in Dubai where such property is represented.
The need to register a company under the name of the company that owns it provides many business benefits. The most important thing is the right of foreigners to own 100% of a business without intermediaries. Also, such companies enjoy great guarantees regarding investment security and confidentiality.
Purchase costs of completed commercial real estate and VAT - h3
The property value is made up of the following indicators:
- Immediate property value at which it is listed on the market - the price.
- Transaction funds fee and title to DLD (Dubai Land Department) at 4% of the price.
- 5% duty - VAT on real estate purchase.
- Fee for trustee registration in the amount of 1089 dollars + 5% VAT. As a result - 1143 dollars.
- Duty paid to the real estate agency which helped you purchased the property.
When renting real estate, the tenant must pay VAT but only if the owner of the real estate has a registered TRN (Tax Registration Number) and is properly registered with the regulatory authorities - DLD and RERA.
Such a lessor is required to provide a VAT invoice in the name of the lessee.
The buyer of commercial real estate will have to pay VAT of 5% of the amount that is obtained by calculating the net value of the real estate (note: appraised value of the real estate minus depreciation and maintenance costs).
You can get a VAT refund if the company that bought or rented property is registered with the local regulatory authorities and issued a TRN.
Commercial real estate for rent
This is a short but important point.
Since we have already indicated that if you decide to start working with commercial real estate then you are most likely to work in Dubai - there is one more key point to be noted.
Commercial leases must be carried out by registering a contract on the Ejari online platform, a government program governing all commercial lease contracts in the Emirate of Dubai.
Signing up for Ejari costs only $ 46 including VAT. This registration must be carried out by the tenant who has a paper on hand certifying that the person in question represents the name of the company.
Signing up on Ejari can be quite time-consuming and not intuitive for those who come across this process for the first time, therefore. many real estate agencies provide legal services that allow you to get through this stage as quickly as possible.
The best areas to buy or rent commercial real estate
Individual entrepreneurs, small legal entities, and large companies can register a business either on the “mainland” or in special economic zones.
The word “mainland” is used not in a geographical sense but to describe the entire territory where the laws of the UAE and individual emirates operate. Special economic zones have slightly different legislation and a certain degree of autonomy.
Foreigners can own a business 100% and without intermediaries, however, they can only conduct relations with companies outside the United Arab Emirates in the special economic zone.
Since 2018, the mainland also allows 100% business ownership, however, the list of industries and commerce where such a business can operate will be significantly limited.
This can be avoided by registering a business with a representative office of UAE citizens who will own 51% of the company's shares but it is quite obvious why this may be unprofitable.
That is why 95% of new legal entities are registered in the territory of economic zones.
Among these areas, the most popular destination is the DMCC located in the Jumeirah Lake Towers (JLT). Most of the new office space, shops, and retail spaces are opening there.
DMCC guarantees zero tax disputes on both personal and corporate income and is perfectly integrated with the online environment.
In addition, JLT is only partly a commercial zone. It is also a large residential area with an excellent supply of expensive and affordable properties.
There are two other major commercial hubs nearby - Dubai Media City and Dubai Internet City.
However, buying a property in Dubai South would be the best choice for a business interested in buying a profitable and quality warehouse and sorting space, such as an e-commerce business.
In 2021, this is also beneficial because this area will become a venue for the world exhibition Expo 2020. Al Maktoum International Airport is located nearby.
Conclusion
The commercial real estate market is a little more complex than the residential market, it requires more activity and a willingness to take risks but in general, it is undeservedly deprived of attention.
This market offers excellent profits, many amenities for investors, stable income, and growth prospects.
Many large, trustworthy companies are represented in this segment and the state closely monitors the legislature to provide the best guarantees for start-up entrepreneurs, large companies, and investors.
Of course, this market requires you to be willing to play big. It is with commercial real estate that the need to use the services of consulting companies, trustees, brokers, and real estate agencies comes to the fore more than ever.
This can create an unnecessarily long list of intermediaries in certain business matters. But on the other hand, it will allow you to confidently enter the market and gain a foothold in it.
And as you can imagine, if you can pass the initial stage, the market itself will do most of the work for you.