In the current market environment, a rent freeze may not help tenants or landlords too much. Image Credit: File photo

Home rents - and prices of freehold properties - are subject to demand and supply and other market conditions - and that's why it should be left to the market forces to decide. That is unless things get out of hand due to drastic changes that affects the tenants and regulators must step in.

That’s the way real estate market functions where the market has achieved high degree of maturity. In those countries, rent laws are formulated to protect tenants rather than the landlords. Usually, the tenants outnumber landlords, and who are perceived to be well off on their own. Therefore, rent laws in the developed markets are seen as tenant-friendly.

The real estate market in the UAE, especially in Dubai, has reached a certain level of maturity and, therefore, the regulations should reflect that. Dubai introduced a rent cap around 2005-06 when rents had started to jump exorbitantly due to high demand. Those days, Dubai’s economy was growing at around 14-16 percent per annum – thousands of jobs were created every month due to an unprecedented boom fuelled by the real estate and construction sectors.

OPN MICRO 200820 Rizwan Sajan-DANUBE
Rizwan Sajan of Danube Group: "So, if the tenant is free to leave to an apartment of his choice and of his budget, can the draft rent law help the landlord?"

Different times

The influx of people far outnumbered the supply of new homes. As a result, rents had started to climb 20-40 percent per annum, forcing middle-income families to seek refuge towards cheaper neighbourhoods in Sharjah and Ajman. It was a time when investors had started to build apartments and villas for freehold in Dubai, but the deliveries were yet to materialise on a large scale.

The rent cap, therefore, was an important market intervention needed to protect tenants at that time. However, the market has changed quite a lot since, shifting from a sellers’ market to a buyers’ market. The market then started to soften from 2016, as supplies gradually caught up with demand. By 2018-19, the market had started to signs of oversupply, resulting in price and rent correction. Both rents and prices continued to remain under pressure at the beginning of 2020 – when most landlords started to reduce rents to retain tenants.

Softening rental yields The outbreak of the pandemic worsened the situation, due to loss in income, business and job loss. Following the relaxation of the lockdown, many families had to relocate to their countries leaving homes vacant. This forced landlords to re-think their strategies. From a 6-8 per cent rental return, it came down to 4-5 per cent – still high compared to most real estate markets in the world.

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Can it deliver?

Although prices are stabilising due to an influx of foreign investors returning to the market since January, rents are yet to stabilise. In this context, a rent freeze law could come only to protect the interests of the landlords. However, the question is, can a law help stabilise rents? Let’s look at the possible scenarios.

If a tenant sees that the rent demanded by the landlord as ‘high’ compared to declining rents, can the law force the tenant to continue to stay in the same premises, beyond the tenancy contract? The answer is a ‘No’. The tenant can move to an apartment of his choice, if he finds a cheaper one. And there is no shortage of these in the market.

So, if the tenant is free to leave to an apartment of his choice and of his budget, can the draft rent law help the landlord? No. It will just encourage the tenant to shift to another apartment of his choice and budget.

Contrary to many reports, rent of a one-bedroom apartment comes as cheap as Dh20,000 in certain neighbourhoods in Sharjah and Dh35,000 in Dubai. It might go down further – due to the abundance in supply.

Most landlord might not realise it, but rental income in Dubai is still higher than most developed markets. Rents of a Dh1 million two-bedroom apartment is around Dh50,000 to Dh60,000 – fetching a 5-6 per cent return on investment – still better than most markets.

While landlords are used to increasing rents when the demand was high, they need to adjust their mindset to the low-demand scenario and the new norm. We are a lower part of the real estate market cycle. Until demand picks up, we need to accept the current market reality.

From a landlords' it has become a tenants’ market. This is the reality. Let’s face it.