A view of Discovery Gardens. There has been ‘minimal’ upward movement in the rental market since the second quarter of last year, but only after the market saw sharp increases earlier. Image Credit: Atiq-Ur-Rehman/ Gulf News Archives

Dubai: Multiple factors are combining to arrest the pace of rental growth in Dubai, both within the freehold zones and in the traditional residential neighbourhoods of the city.

“This is driven in part by an increase in new supply as well as a general reluctance on half of [the] residents’ [part] to pay more,” said Matthew Green, Head of Research and Consultancy at CBRE Middle East.

A third reason is that most landlords have already raised their hikes to be in line - or even above - the rental index overseen by the Dubai Land Department. If the rental on a property is broadly in sync with what is there for that particular neighbourhood as shown on the index, landlords have little room left to ask for more.

It is also the barometers tenants have used to decide whether they should contest the hike demand at the Land Department-sponsored rent dispute court or just up and move on to new premises in the city. For those who decide to shift, there is still quite a lot of spaces to choose from, and where the asking rents are a few percentage points lower than what their previous landlords were demanding.

“The rental index is an important tool, helping to bring [about] increased transparency to the market for both landlords and tenants,” said Green. “However, there are still ways to improve the index system, including having more granularity in terms of different buildings, rather than having just a single average rent spread across an area, where there might be varying quality buildings.”

There could even be a fourth reason as Dubai’s landlords take stock of a softening property market and might not want to push their luck too far by making unreasonable demands. This is the case for those landlords who still have mortgage payments to clear on their assets.

Based on market feedback, there has been ‘minimal’ upward movement recorded since the second quarter of last year, but only after the market saw sharp increases for the better part of two years prior to that. During the run-up, it was felt the hikes landlords were imposing during lease renewals risked upsetting the balance of the wider property market, much like what had happened in the three years leading up to 2009.

According to Green, there are, however, still instances of “many” tenants being asked to pay more than the market average on renewals. “Many older contracts [are] still below current market rates and thus susceptible to a potential increase from landlords under the regulation,” Green said.

But, overall, “This year’s rate hikes should be more restrained - residential tenants can look forward to the emergence of more favourable conditions although change is likely to gradual,” Green said.

As was to be expected, some of the emerging residential locations did see rental increases above the market norm. In its first quarter update on Dubai’s property market, Asteco said these included homes at Jumeirah Village and Sports City and “where vacancy levels are low”. The strong tenant movement witnessed over the last two years, especially for the affordable segments of the market, levelled off in the first quarter of 2015 as most tenants chose to renew their rental contracts rather than relocate, the Asteco report says.

Secondary locations such as Sports City, in addition, attracted good levels of demand from middle income residents due to the master community becoming better established.

Going forward, Dubai World Central (DWC) should be the one to watch for, including as a residential leasing hotspot. “Emerging locations such as DWC do yet have an established residential base and it will take some time before there is critical mass in the area,” said Green. “However, there a number of new residential and staff accommodation developments under way in close proximity locations, such as Dubai Industrial City.”