New dynamics are in play for Dubai's rental marketplace. Landlords and tenants will have some major adjustments to do. Image Credit: Shutterstock

The update to the Dubai RERA Rental Index has been one of the most significant announcements to come out of the property market recently. Tenants are now facing unavoidable rent increases.

The other key announcement was that eviction notices are now transferrable between owners. Whereas a tenant could potentially increase their eviction period (when the landlord sold the unit) by asking for a fresh eviction notice from the new owner, they are now locked into a 12-month notice.

These announcements have caused some strong reactions from tenants and there will be some friction coming out of this in the short-term. But I think this can help the rental market find a new equilibrium.

Final nail for ‘Covid’ prices

One of the big issues with the Rental Index was that it still reflected ‘Covid’ prices for a lot of areas. At the onset of the pandemic, landlords went into panic mode and started lowering prices to keep attracting tenants. As we stepped out of the pandemic and prices started to rise for new rentals across Dubai, those existing tenants found themselves locked into lower prices because the Rental Index wasn’t reflecting the true market value.

While tenants are understandably upset at the prospect of seeing steep hikes – and some of them are already starting to see it – the reality is that their new rent will be more indicative of the property’s actual value in the market today. The Rental Index update is, in effect, the end of ‘Covid’ prices.

Changing supply-demand graph

It needs to be said that some tenants have fallen into a sense of complacency due to the previous Rental Index. After all, why pay 15-20 per cent more for a new rental (which doesn’t even factor in moving costs and broker fees), when you can renew your existing contract at a lower price regulated by the Rental Index?

Contract renewals have grown at a faster pace in than new rentals over the past 18 months.

The knock-on effect of that is an increasingly constricted supply of units, especially in the prime sector. What’s starting to happen now is, landlords are asking for rents in line with the updated index, and if tenants are unwilling or unable to match that price, they are being asked to vacate at the end of the term.

Some landlords are already serving eviction notices as well with the intent to sell, and buyers will be secure in the knowledge that tenants cannot extend that term further. As a result, stock is starting to free up for mid-range properties.

We currently have around 20 vacant villa units in Dubai Hills Estate, which is unprecedented. It allows our rental team to present a greater range of options to interested tenants and raises the level of activity in the community.

How does the price graph change?

Does this increased vacancy mean that we could start to see downward pressure on prices a few months down the line? I think it’s certainly possible, though it all comes down to the rental appetite for new tenants.

When someone is renting in an area like Dubai Hills Estate, they’re not just interested in a home or a particular type of unit – it’s the community and the lifestyle that they’re really paying for. Someone who has the means to enjoy the Dubai Hills lifestyle would be willing to pay a higher price for it.

If we end up in a situation where the current vacant units in the community are still vacant months later, that might cause a re-evaluation in pricing. But that doesn’t seem likely in the near term.

Is there a price correction coming in the larger rental market? I think that price increases at the top end of the market won’t be quite as steep as they have been, but there won’t be any softening of prices. And at the lower and mid-range, I expect prices to shoot up a bit as more tenants branch out to find more affordable options.

Forward planning

When we look at rent increases above a certain price point, the issue is not going to be one of affordability. Rather, it’s the timeline that will be the problem. If a tenant is paying Dh150,000 in rent, as an example, and the RERA Index allows for an increase of 20 per cent - that’s an extra Dh30,000 per year.

That might still be an affordable rent to pay over the course of the year, but not upfront. Tenants need time to generate that cashflow.

This has resulted in a push for more flexible payment terms with a larger number of cheques. Alternatively, tenants might be alright with paying the full amount of the old rental price in one cheque, with the additional increment spread out over a few months. While landlords do have the leverage now to command a higher rent on renewal, it’s essential that they work in tandem with tenants.

There’s little sense in evicting a tenant who cannot pay a 20 per cent premium upfront, only to end up with a vacant unit for the next 3 months as you try to find a higher paying tenant who will clear everything in one cheque.

The truth of the matter is that a lot of tenants will have some tricky decisions to make, whether that involves downsizing their current living arrangements, or jumping into the buying market to avoid any rent-related hassles.

We have already seen an expansion into communities located further out from the city centre, as well as a growth in apartment rentals. Both of these trends will, I believe, intensify over the coming months.

Ultimately, both sides of the equation need to work together. Tenants need to accept that increases are coming and plan accordingly, and landlords need to be flexible with how they approach the increases allowed by the updated RERA Index.

That is the most practical way forward and will help maintain a healthy market for everyone.