Dubai rents continue their northward spiral

As we have all heard and in many cases experienced, rents are going up everywhere. This seems to be due to the fact that there are not enough properties available for the huge demand from the growing population of Dubai.

The completion of freehold properties in The Springs, The Meadows and Dubai Marina has made more properties available, (approximately a further 14,000 units), but the influx of people to Dubai has been far greater, therefore creating the shortage.

A couple of years ago, it was the general consensus that rents would come down once the freehold developments hit the market.

However, until more freehold developments are handed over, there will remain a shortage and rents will continue to go up. For instance, two years ago, it was possible to rent a three-bedroom villa in Jumeirah for about Dh80,000. Now, you cannot find anything below Dh120,000. The same is true for apartments in Bur Dubai.

Are these increases legal? Apparently the law prohibits landlords from increasing the rent during the first two years in Dubai and the first three years in Sharjah. Thereafter, increases of between 20-25 per cent only are allowed. However, this has not stopped some greedy landlords from increasing the rents by as much as 50 per cent after the first year.

There is a Rental Committee to whom you can complain to, but it is unable to intervene in most cases as the landlords have the right to take back any properties for their own personal or family use.

Within the next couple of years as more and more properties are handed over, the rents will stabilise and may even start to decrease as there will be an over-supply of properties, especially with the completion of the many towers along Dubai Marina and Jumeirah Lakes.

Currently, with not enough properties available for renting, agents are finding their revenues decreasing, especially as they do not receive any further commission on renewal of the tenancy. This is a strange situation as it means that for agents to survive, they must continue to find new tenants for their properties.

The commission they receive is only 5 per cent of the annual rent and with properties now being scarce, most agents have to share this with other agents. It is no wonder that most rental agencies are now involved in the selling of freehold properties as well.

It is a completely different scenario in the UK where an agency receives a commission termed annual management fee which is about 10 to 15 per cent of the annual rent each year for as long as the tenant remains within the property. For this fee, they find the tenant, collect the monthly rental payment and inspect the property twice a year. This gives them a guaranteed income irrespective of how many new tenants they find properties for. This fee is paid for by the landlord, which is only fair as he is profiting directly from the rental income.

So what does an agency earn from renting out a property? The average rent for a property in the south east of England is about £12,000 per year. So the agency receives between £1,200-£1,800 per year, and every year as long as the landlord stays with them. That's a reasonable annual income for a real estate company per property.

This is a far cry from the scenario here where the landlords pay nothing, they get all or half the rent up front and the tenant is totally at their mercy thereafter.

And what does the agent get? Probably just 2.5 per cent of the annual rent, (as he has more than likely had to share the 5 per cent commission), and only for the first year. With current rents averaging about Dh120,000, this works out to just Dh3,000 at 2.5 per cent.

Out of this, the sales agent gets Dh1,500, leaving Dh1,500 for the company from which it has to pay office expenses, advertising and other associated overheads. So who wants to start a Residential Leasing Company today in Dubai?

If things continue the way they are, in the not too distant future, there will be far fewer rental agents, and properties will become harder to rent due to over supply.

This means that landlords will either have to rent the properties themselves or start paying the agents a reasonable fee for their services. This fee will become payable each year. This is a natural market progression and given enough time, it will happen.

The writer is managing director of Best Value Property Consultants.