Can high rents push more Dubai residents to turn end-user property buyers?
A lot of Dubai property market’s upcoming demand hinges on where rents are headed
Research indicates that there has been a widening gap between new and existing rental lease contracts in Dubai.
This in most instances translates into a widening chasm between units that are rented and those that are empty and/or those that have a ‘vacancy notice’ attached to them. In the context of getting tenants converted to buyers, an/or stimulating new development in mid-market areas, the regulation of rent stabilization has largely achieved its purpose.
But as ‘rent control’ laws are making somewhat of a comeback throughout the world, it appears fairly certain that further regulations will be in the offing, providing relief to existing tenants. Whilst this is against the grain of laissez-faire economics, it stands to reason the playbook adopted by landlords as a way to drive rents higher has to be neutralized for there to be rental relief.
Hard time selling older units
This is part of the reason why private sector developments that are occupied have a hard time reselling their units. And often why units and/or buildings start falling into disrepair in extreme situations.
In Dubai, the gap in sale prices between rented and empty units has been as high as 50 per cent depending on the community and the view. Curiously, after the first boom-bust rally that culminated in 2008, it was the other way round.
Rental units commanded a premium. This was of course because there were a greater percentage of investors, rent control mechanisms were not as rigorous as they are now, and prices were generally headed lower. A phenomena that we saw repeat itself after the second market peak in 2014.
Over longer market cycles, the issue of regulation has always been a funambulistsic one.
- Too onerous and the incentive to repair and refurbish goes away.
- Too lax and rents run away as does the ability for people to live in the city.
From a markets perspective, landlords have managed to ride the rally in the current cycle, but as we know, the bulk of the activity has occurred in the luxury space, with the mid-market sector taking off in 2023.
Even here, a cursory analysis shows the price disconnect between new and existing properties in areas like Arjan and JVC (where the gap is close to 100 per cent and more in certain cases). One solution would be to let market forces let themselves play out, as indeed most forecasters are predicting an inevitable slowdown, and even a decline.
However, in the case of the mid-market segment, the math of purchasing a property stretches finances in an environment of high interest rates. And as rent rises imply moving into smaller units or further out in the city, tenants have been left with a Faustian bargain.
Spate of new mid-market projects
This has also meant that there has been a rise in new developments in the mid-market segment backed on the bet of rising rents, which not only increases the supply pipeline but also introduces a speculative element into the market place that was bound to be met by opposition.
As tenants continue to get priced out of existing dwellings, the relooking at rent stabilization mechanisms implies some sort of relief, allowing for the supply pipeline to catch up as well as put a lid on the amount of rent increases that have transpired and caused a dislocation in the marketplace.
In the final analysis, the dynamics of the property market are already dictating investor preference for new units. Whilst this is natural, there should be a space for the ready market to flourish in an environment that preserves the value of the asset as well as allowing for tenants to not be forced into situations that lead to a churn in their dwellings.
Dubai’s success has always been keeping at the center the heartbeat of the small investor, and its regulatory impulse has always been guided by that maxim.
Long may it continue.