Risks and rewards of building bigger apartments

Studio and one-bedroom units crowd projects as these are considered fast moving

Most Dubai developers have a large number of studio and one-bedroom units in their housing developments because these are fast moving compared with other types of properties. This strategy is simple: follow where the demand is strong. But over the years this has also created a potentially lucrative gap in the market for two- and three-bedroom apartments, which are the main requirements of families.

Attractive price point

While smaller units are the norm, Alan James Gammon, general manager of Samana Developers, says it is no longer unusual for many developers to create a more mixed product offering. “Studios are popular with investors looking at the rental market and one- and two-bedroom properties are more popular with end users,” says Gammon.

In terms of prices, there is higher demand seen in the range of Dh400,000 to Dh1.6 million, generally considered the affordable segment. “Every developer does its own analysis of the market and has its specialisation too, and accordingly undertakes a project catering to that specific audience,” says Rajiv Ghanekar, senior real estate broker at Keller Williams Real Estate Dubai. “There is some demand for larger units, spacious layouts, modern designs and projects in premium locations. Hence, you will find projects in Downtown Dubai or Palm Jumeirah being targeted towards a small niche market.”

In many projects, a full-floor configuration consists of 60-70 percent studio and one-bedroom units, 15-20 percent two-bedroom units and the 10 percent three-bedroom units, according to Sayndippta A Ghosh, director of residential at JLL.

A few developments with bigger configurations targeting end users are located in areas such as Dubailand, Meydan, Dubai Creek or golf course developments where the average size of units is larger than in prime locations like Downtown Dubai, Dubai Marina and Jumeirah Lakes Towers, adds Ghosh. “Developers of these projects are aware that they are slow burners and the absorption rate is comparatively slower and hence build in the cost and internal rate of return.”

Zorro Ghurra, client representative at Gulf Sotheby’s International Realty, points out that developers who see the value in building bigger-size units like to be competitive based on the location/price of the land. “Whereas some others take an alternate route to create a truly custom project, which has its own appeal, demand as well as price point,” says Ghurra. “And even though it is a risk, historically, it has paid off well for most developers.”

In terms of yields, smaller units generate higher incomes of 6-8 percent net per annum depending on the location and initial purchase price, says Ghosh. “For larger units of two bedrooms and above, the yield is always comparatively lower and can range from 4-6 percent per annum,” he adds. “Also, as per local law, any unit above a contract price of Dh1 million entitles the owner to a UAE residence visa, which can be [the price of] a one-bedroom unit and above in today’s market.”

Support from families

Demographics also play a role. “The predominantly transient expat population in Dubai drives higher rental demand for studios and one-bedroom apartments compared to larger three-plus bedrooms,” adds A Ghosh.

But Sunil Gomes, CEO of Gemini Property Developers, believes that demand for two- to three-bedders will continue, driven by the needs of extended families, high-net-worth investors and a portion of the tourist market that prefers luxury residential properties to hotels. “Despite the industry recording a relative lull in the market for two- to three-bedders in percentile terms, we expect that families with two or more growing children will continue to support these properties,” says Gomes.

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