Dubai considering three-year rent freeze on new contracts

Dubai: The Dubai Land Department is considering a proposal on a no-rental hike provision for three years after the signing of a lease agreement between landlord and tenant.

“The Dispute Resolution Committee is studying such a proposal, but no decision has been taken on the ‘if and when’ to roll it out,” a spokesperson said.

“Right now, all rental decisions are based on the Dubai Rent Index, and it will continue to be so until the three-year no-hike proposal is cleared.”

Sharjah currently has a three-year cut-off on new contracts when it comes to rental increases.

It isn’t clear whether the proposal only extends to residential properties, or would cover all manner of real estate categories, including retail premises. If it becomes all-inclusive, this would have a huge bearing for the retail sector, whereby retailers have complained vociferously about how mall operators set and hike rents, even when market conditions do not dictate them.

Will it work? 

But in the residential space, with rents in decline and expected to remain under pressure for some time, will a three-year no rise cap work?

“The Dubai Rent Index has been working well in the neighbourhoods that it covers,” said John Stevens, Managing Director at Asteco, the property services firm. “In fact, it would work even better if the Index was based on building by building rather than a neighbourhood, it would work even better.

“Because the Land Department has access to all rental transactions through “Ejari”, and it would be easy for it to base the index even on a per building basis.

“But in a rental market that will see more oversupply for the next few years, is there a need for a three-year rental hike cap? More so, as the Index has shown it is working well.”

Stevens reckons that while it is unlikely any neighbourhood in Dubai will see any form of rental increases this year, even in the Expo period of late 2020 and early 2021, only select locations in the emirate are likely feel an upward pull.

How the rent index works

As per the Index, a landlord can only seek increases within carefully set parameters.

If the current rent is up to 25 per cent below the average for a similar property in the same neighbourhood, the landlord cannot increase the rent.

But if the rent is 25-35 per cent lower than the average, he can see a 5 per cent increase, and 10 per cent if the gap is as wide as 36-45 per cent, and so on, as per a 2011 Decree issued by Dubai Government.

Strong message

Nasser Malalla Ganem, senior partner at the law firm of AM Associates, is another who doubts whether a rental hike cap and a Rent Index can coexist. “They are asymmetric even in the best of times,” he said.

“The only reason I see for a change to three years is because the government wants to send a strong message to assure residents about future costs.

“Because right now, apart from having the Index, a landlord cannot increase rents for the first two years. That’s the standard and it’s been working well. But it’s a fact that the rental market continuously needs tweaking to ensure inflation pressures do not proliferate.”

Could a three-year cap be the cure for retailer headache?

Retailers in Dubai have complained long and hard about rents and the often arbitrary ways they are hiked. The Dubai Land Department has been working on a blueprint to revive the brick-and-mortar sector, and a revised lease agreement has been one of the suggestions.

The challenges

So, will a three-year fixed rental work? “The challenge with retail and commercial lease agreements is that they are negotiated on a longer term basis,” said John Stevens of Asteco. “If the landlord wanted to encourage a tenant to move into their property and is willing to commit to the rentals in years one, two and three and the tenant agrees, then there should be no regulatory involvement required or imposed.

“A landlord may offer much-reduced rents in years one and two to convince the tenant to relocate to their property, while allowing them to fund the cost of fitting out. Mandating a fixed term with no increments would reduce the landlords flexibility in such a scenario.”

Even in situations where the lease is based on a base-rent plus a percentage of the turnover, “a fixed cap would affect landlords since the rental generated in the first year is likely to be significantly less than they will generate in the second and third years when the business becomes established. Therefore, the landlord is a partner, and benefits from their success.

“Implementing a situation where a cap is enforced by the Rental Disputes Committee in this manner would restrict landlords’ willingness, or ability, to offer such terms.”