Restaurant rent in Dubai: the percentage test

The unit is beautiful: a corner site with a terrace, heavy footfall and a landlord eager to sign. The rent is high, but the owner reasons that a great location will bring great trade. A year later, the venue is busy and still losing money. The rent, the service charges and the cost of a fit-out that will stay with the building when the lease ends take more of every sale than the business can carry, however full the terrace is on a cool evening.

Restaurant rent in Dubai is often the single largest fixed cost a venue takes on, and the one hardest to change once signed. The question to ask is not whether the rent is reasonable for the location, but whether it is reasonable for the sales this particular venue can realistically make there. A simple test, rent as a percentage of sales, answers it before the lease is signed rather than after.

This guide covers the percentage test, how to estimate realistic sales for a site, what to include in the rent, the fit-out you will not recover and how to read the result. It gives no market rent figures, because they change quickly and vary by location: test every offer against your own numbers. Every venue and figure in it is an example.

Rent is a fixed cost: it is paid whether the venue is full or empty. A venue with a high rent needs high sales every month just to cover it, and in a quiet month the rent takes a larger share of a smaller total. Many venues that fail are busy; they simply cannot carry their rent.

Because the lease runs for years, a rent that is too high is a problem for years. It is the decision most worth getting right before signing.

Rent as a percentage of sales is the rent, plus the other costs of occupying the premises, divided by the sales the venue makes over the same period. It shows how much of every sale goes to the landlord and the building.

A rule of thumb often quoted is that occupancy costs should be well under a tenth of sales, though prime locations and different business models vary. Your own figure, worked out honestly for the site in front of you, matters far more than any rule.

Count the full cost of occupying the premises, not just the headline rent: the base rent, service charges for shared areas, any marketing or promotion levy in a mall, any share of sales paid as turnover rent, cooling charges where the building bills them separately and any other fees the lease requires.

The headline rent is often the smaller part of the true cost in a mall or a large development. Ask for every charge in writing before comparing sites.

Service charges cover the building's shared costs: security, cleaning, maintenance, common areas and sometimes air conditioning in shared spaces. In malls and developments they can be substantial, and they may rise over the life of the lease.

Ask how the service charge is calculated, what it has been in recent years and how it can change. A low rent with a high and rising service charge can cost more than a higher rent with none.

Some leases, especially in malls, include percentage rent, often called turnover rent: a share of the venue's sales paid to the landlord, either instead of a fixed rent or on top of a base rent once sales pass a set level.

Turnover rent shares the risk: the landlord earns more when the venue does well and less when it does not. Model it at several levels of sales, because a turnover rent that looks modest at average sales can become large in a strong year.

The percentage test is only as good as the sales estimate. Build it from covers, not from hope: how many seats the site will have, how many covers each service can realistically serve, how many days a week the venue will trade and how much each guest is likely to spend.

Be cautious. Most new venues take time to build their trade, and a sales estimate based on a full room every night will make almost any rent look affordable.

Estimate covers service by service: weekday lunch, weekday dinner, weekend lunch and weekend dinner, plus any breakfast or late service. Each depends on the site's footfall at that time, the offices and homes nearby and the competition.

Visit the site at each of those times before estimating. A street that is busy at lunch may be empty in the evening; a mall that is crowded at the weekend may be quiet on a weekday afternoon.

Dubai's seasons change trade sharply. The cooler months bring visitors and outdoor dining; the hottest months bring fewer residents, fewer visitors and empty terraces. Ramadan changes the pattern for a month.

Estimate sales month by month, including the summer, and work out the percentage for the quiet months as well as the busy ones. A rent that is affordable in January may take a crushing share of sales in August.

A terrace can transform a site's trade in the cooler months and contribute little in the hottest ones. If the sales estimate relies on the terrace, check how many months a year it can realistically be used, and whether the rent charges for it all year.

Treat terrace covers as seasonal in the estimate, and test the rent without them for the summer months.

Site selection and the rent go together. A site with high footfall may justify a high rent if that footfall becomes covers; a site with modest footfall but a loyal neighbourhood may support a venue better at a lower rent.

Choose the site for the trade it will bring your concept, then test the rent against that trade. A site chosen for its prestige, and then forced to justify its rent, is a common expansion mistake.

The fit-out is often the largest opening cost after the deposit and advance rent, and in many leases it stays with the premises when the lease ends. Money spent on the kitchen extraction, the floors, the walls and the fixed furniture is money the venue will not get back.

Treat the fit-out as a cost spread over the length of the lease, a process accountants call amortisation. A large fit-out on a short lease adds a heavy monthly cost to the rent, even though it is paid at the start.

Landlords sometimes offer a rent-free period for the fit-out, or for the first months of trading. It helps cash flow at the most difficult time, but it does not change the rent the venue will pay for the rest of the lease.

Include the rent-free period in the sums, but test the percentage on the full rent. A site that only works while it is rent-free does not work.

Rent in Dubai is often paid in advance, by a small number of cheques covering the year. The percentage test measures whether the rent is affordable; the cash flow shows whether the venue can pay it when the cheques fall due.

Work out both. A rent that passes the percentage test can still strain the business if a large cheque falls due before the venue has earned the money to cover it.

Leases often include rent increases over their term, or a review at renewal. A rent that passes the test today may fail it in three years if sales do not grow as fast as the rent.

Read the lease's increase and renewal terms, and model the percentage over the whole term. A lease with clear, limited increases is easier to plan around than one open to large rises at renewal.

The rent drives the break even point: the covers the venue needs each month to cover all its costs. A higher rent raises the number of covers needed, and when that number approaches the most the site can serve, the venue has little room for a bad month.

Work out the break even point with the proposed rent, and compare it with the realistic covers. Our guide to break even point: the covers you need by Tuesday covers how.

If occupancy costs come to a comfortable share of realistic sales, and the break even point sits well below the covers the site can serve, the rent is probably sound. If occupancy costs take a large share, or the break even point is close to the site's limit, the rent is a risk however good the location.

Read the result for the quiet months too. The test that matters is the one the venue must pass in August, not just in January.

If the test fails, there are a few options: negotiate a lower rent, longer rent-free periods or a turnover structure that shares the risk; choose a smaller unit; change the concept to one that sells more from the same space; or walk away.

Walking away is often the right answer. Another site will come along, and a rent that fails the test before signing will only be harder to live with after.

The percentage test is a useful tool in negotiation. A landlord who sees a clear, realistic sales estimate and the share of it the rent would take may agree to better terms, especially in a building with empty units.

Bring the numbers to the conversation: the covers, the spend per head, the sales and the rent as a share of them. A tenant who understands their own business is a better tenant, and landlords know it.

Rent is one part of restaurant costs in Dubai, alongside staff, food and drink, utilities, licences and delivery commission. A rent that passes the test still has to leave room for everything else.

Our guide to restaurant costs in Dubai: what to budget sets out the other costs, and the rent test is most useful as part of a full budget.

After signing, work out rent as a percentage of sales every month. If it rises because sales are falling, the venue needs more trade or a conversation with the landlord. If it was always high, every other cost must be tighter to compensate.

Our guide to why restaurants fail, in the numbers covers how a rising rent share is one of the clearest early warnings.

The lease decides more than the rent: the length, any break clauses, who pays for repairs, what happens to the fit-out at the end, the permitted use and the conditions for assigning or ending the lease. Each can matter as much as the rent itself.

Have the lease reviewed by a lawyer before signing. A slightly higher rent with a break clause can be safer than a lower one locked in for many years.

Signing a lease in Dubai usually means paying a security deposit and rent in advance before the venue has served a single guest. With the fit-out, the licences and the opening stock, the cash needed before opening can be far more than the first year's rent suggests.

Count the deposit and the advance rent in the opening budget, not in the rent test. They do not change the percentage, but they decide whether the business can afford to open on that site at all.

In Dubai, tenancy contracts are registered through Ejari, the official registration system, and the registered lease is usually among the documents needed for the trade licence. A lease that cannot be registered, or one whose permitted use does not match the licence application, can delay the opening.

Check that the lease can be registered and that its permitted use matches the activity on the venue's trade licence. Our guide to restaurant licence Dubai: what you apply for covers the licensing steps that follow.

In many Dubai buildings, cooling is supplied centrally, through a district cooling system, and billed separately from the rent, sometimes with a fixed capacity charge as well as a charge for what is used. Electricity and water are billed on top. For a restaurant, with its kitchen heat and long hours, these can be large monthly costs.

Ask for the cooling arrangement in writing: who supplies it, how it is charged and what similar units have paid. A unit with a low rent and an expensive cooling contract may cost more to occupy than its neighbour.

The test is most useful when comparing sites. Take two invented units. Site A has occupancy costs of AED 720,000 a year and realistic sales of AED 7.2 million: 10 per cent. Site B has occupancy costs of AED 450,000 a year, but realistic sales of only AED 3.75 million: 12 per cent.

The cheaper rent is the more expensive site. Site B takes a larger share of every sale, even though its rent is lower, because it cannot bring the same trade. Compare sites by the percentage, not by the rent.

Work out the percentage for every year of the lease, not just the first. Add the rent increases the lease allows, a cautious growth in sales and the fit-out spread over the term, and see how the figure moves.

A lease that starts at a comfortable share of sales but rises faster than sales can grow becomes harder every year. A lease whose share falls as the venue's trade builds becomes easier. The first year rarely tells the whole story.

Before signing, ask the landlord for the full picture: every charge on top of the rent, how the service charge has changed in recent years, how cooling is supplied and billed, what the rent-free period covers, what happens to the fit-out at the end, how increases and renewals work and how the previous tenant traded, if they will say.

Ask for the answers in writing. A landlord who will not explain the charges before signing is unlikely to be more open after.

Before signing, ask someone who has not fallen in love with the site to check the sums: an accountant, an adviser who knows restaurant leases or an operator who has run a venue nearby. They will question the sales estimate, the charges and the length of the lease in ways the owner, already picturing the opening night, may not.

A second opinion costs little beside a lease that runs for years. If it confirms the test, the owner signs with more confidence; if it does not, it has saved the business.

An invented brasserie is offered a mall unit with a base rent, a service charge, a marketing levy and turnover rent above a set level of sales. The owner builds a cautious sales estimate from covers by service and by month, including a quiet summer, and adds every charge to the rent. In the busy months, occupancy costs take an acceptable share of sales; in the summer months, they take far too much.

The fit-out, spread over the lease term, adds a heavy monthly cost on top. The owner negotiates a lower base rent in the summer months, a longer rent-free period and a smaller fit-out by keeping some of the previous tenant's kitchen. The revised figures pass the test in every month, and the owner signs.

servearound does not hold rent, leases or costs, so the percentage test itself is worked out in your own sheet. What it holds, once a venue is trading, is the sales side of the sum, on the venue's own clock.

Payment analytics show what was collected by day and by hour, reservation analytics show covers by day and hour and by shift, the dashboard shows revenue, covers and spend per cover against the previous period, and table analytics show revenue per seat for every table, so the rent can be tested each month against real sales rather than the estimate. See Analytics.

Occupancy costs divided by realistic sales, showing how much of every sale goes to the premises.

Base rent, service charges, marketing levies, turnover rent, separate cooling charges and other lease fees.

A rule of thumb is well under a tenth, though locations and models vary. Your own figures matter most.

From covers by service and by month, cautiously, including the summer.

Model it at several levels of sales, because it grows with a strong year.

Yes, spread over the lease term, because you will usually not recover it.

Negotiate, choose a smaller unit, change the concept or walk away.

Yes, every month, against real sales.

Restaurant rent in Dubai should be tested against the sales the venue can realistically make, not against the location's reputation. Rent as a percentage of sales, counting service charges, levies, turnover rent and separate cooling, shows how much of every sale goes to the premises, and the fit-out you will not recover adds a monthly cost spread over the lease.

Estimate sales from covers by service and by month, including the summer, check the break even point against the site's limit, and use the test in negotiation and in site selection. Read it as part of restaurant costs in Dubai, walk away from a rent that fails, and keep checking the figure every month after signing.