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Negotiating a lower rent

Some owners would rather keep flats empty than get locked into low rents

Cost of relocating
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When renewing ensure you give the appropriate three-monthnotice period of your intention to renew. This will give plenty of timefor you and your landlord to open up the lines of communication torenegotiate your rental amount
01 Gulf News

Dubai : American expatriate Jan Miller hasn't had a pay raise in two years and decided to ask his landlord for a lower rental rate before his contract expired.

A tenant who rents a one-bedroom apartment in Downtown Burj Khalifa, Miller hoped to reduce the Dh84,000 annual rent as a way to justify not moving to a cheaper neighbourhood.

"When you're paying Dh7,000 a month and there are plenty of other apartments out there in Dubai that can be had for half that a month, I believed the landlord would agree to cut a little from my monthly rent," he told Gulf News.

With rents dropping by more than 50 per cent in corners of Dubai in the last year, Miller thought he had the upper hand in what's been described as a renters' market.

High demand

The landlord, he said, declined to give a reduction, noting that demand for Downtown residences was high enough that decreasing rents were not necessary to retain tenants.

"I'm not sure what I'm going to do now," Miller said. "I may look at renting a villa in Sharjah that I can get for anywhere from Dh40,000 and up, save money and have my own backyard."

Sankha R., an Indian expatriate, lived in Bur Dubai for four years and decided to leave his one-bedroom flat in Al Hamriya when he realised that his next rent increase would push the price beyond Dh60,000.

"There are so many new apartment buildings coming onto the market with rental rates as low as Dh40,000 for new one-beds (apartments), I would be crazy to pay Dh20,000 more a year. That is money in the bank."

He asked his landlord in writing for a rent decrease but was told that company policy does not allow standard rent increases to be circumvented.

The cases are not isolated even as thousands of new residential units come online in Dubai, ramping up pressure on existing residential building owners to lessen rental rates.

Getting official numbers on how many people have left flat accommodations for cheaper digs isn't possible given those types of statistics aren't calculated in Dubai.

Officials with the Land Department couldn't be reached for comment.

But academics and property consultant firms suggest that some landlords are hesitant to virtually give away new and existing accommodations at lower prices for fear of committing themselves to lesser rental revenues over the long-term because they will become locked in to five per cent annual rent controls.

Professor Ajit Karnik, a top economist in Dubai who teaches at Middlesex University Dubai, told Gulf News that some landlords are willing to lose revenues now for better yields down the road.

"Many individuals and rental agencies who invested in apartments and apartment buildings now find that rents bring in less than the installments they have to pay on the loans taken to buy the apartment," Karnik said. "The important question is whether landlords will be willing to lower rents even further. My view is that reducing rentals even more by 15 per cent or 20 per cent now rather than keeping the apartment vacant possibly does not make economic sense."

Karnik proffered one example in which the current rental on "a two-bed apartment is Dh80,000 per year (down from around Dh95,000 at the peak of the boom). A further reduction of say 20 per cent (down to Dh64,000) could possibly bring in a tenant but will lock the landlord in if rentals rise in the next one year.

"The landlord will be willing to lose Dh64,000 for one year in the hope of recovery and being able to get back to Dh95,000 per year. I have computed the discounted cash flows under the two situations and found that it is economically more sensible to keep the apartment vacant for a year."

That said, landlords who are holding back on awarding decreases may not be able to hold out indefinitely if rents continue to slide.

"The cash flows example that I have constructed… assumes that an apartment is kept vacant for only one more year. But if that time period is in danger of lengthening even more, then I expect a substantial softening of rents. Right now landlords are hoping to ride out the bad times and avoiding getting locked into low-rent contracts. But one year later, this could change for the worse. That would be bad for Dubai and then recovery from that setback would be even more difficult and prolonged," Karnik said.

He said the same formula also applies "for rentals of office space."

Reluctance to lower rents may not always be about money, he suggested, noting that another "reason for not lowering rentals could well be to preserve the "exclusivity" of certain neighbourhoods. Lowering rentals substantially would bring clients from income groups which might not ‘fit in.'".

Whatever the case, Karnik said that acquiring a less-expensive flat "certainly seems to be one of the most important drivers. It is also true that expectations of tenants have gone up — tenants seem to believe that this is the best time for a bargain, especially when landlords are in a vulnerable position."

Jesse Downs, Director of Research & Advisory, Landmark Advisory in Dubai, said rent negotiations can depend on whether tenants are new arrivals or are already under contract.

Cost of relocating

"Generally, landlords are more willing to negotiate rents with new and existing tenants than ever before," Downs told Gulf News. "However, landlords are usually unwilling to bring rents down to market levels for existing tenants. This is because the landlord and the tenant realise there is a cost to relocating. Often the rent agreed is marginally higher than market levels."

Downs said "landlords may be unwilling to bring rents down due to their financial obligations, but this is now unusual. Most stakeholders have accepted the current market reality and know that if they lose their tenant, void periods can impact their ability to meet financial obligations as well."

Lowering rent rates can also be more difficult in larger communities that have a single owner and a standardised formula.

"Sticky rents are relatively more common outside of investment zones because landlords often do not have the same financial obligations. Additionally, rents in these areas are less standardised than in master planned communities making it difficult to establish an accurate market rate. An excellent example is Jumeirah-Umm Suqueim," Downs said.

Refusal to lower rents for existing tenants is not a main driver of tenants uprooting themselves to move to cheaper buildings, she suggested.

Rather, people are looking for more quality for their dollar.

"Based on our experience, this is not the main driver of relocation. At this time, relocation is generally value driven and can lead to either upgrading or downgrading. The latter is generally a function of conservative spending patterns among a population that has been concerned with corporate downsising and redundancies. While the unit itself is important, those looking to upgrade are often more enticed by the location, quality of the community and amenities and facilities available," Downs said.

There is ample supply to find all levels of quality in a home. According to Landmark Advisory figures, "the average vacancy rate in Dubai is approximately 15-18 per cent, which accounts for commuter demand.

Based on the current supply projections, average vacancies will be in 2012 at 19-24 per cent.

The important trend to watch will [be] the reversal of the commuter trend [Dubai to Abu Dhabi]. This will slowly start with the handover of large projects like Marina Square in Abu Dhabi in 2011. We think this will gradually gain momentum in 2012 and pick up in 2013, which means vacancies could remain at 19-24 per cent in 2013," she said.

Better deals

With vacancy rates in Dubai to climb higher in coming years, Downs believes tenants will see even better deals in the market which will force landlords to be more competitive.

"Since rents will continue to decline and vacancies will rise in the short term, we do expect that landlords will increasingly cater to tenants' needs," Downs said.

In a Landmark Advisory fourth quarter report, latest figures showed that "average Dubai apartment rents fell by 5.5 per cent according to our unit-weighted index, 5.8 per cent weigh by area and 6.9 per cent weighted by unit type"

Statistics suggested that "villa and apartment rentals remained relatively stable with a marginal two per cent increase in the third quarter."

There are more new apartment rental units on the way as more handovers of newly completed units are planned in Dubai in the next two years, the report stated. "Dubai residential supply and demand dynamics remain non-conducive to market recovery in the short term," the study reported.

"As of Q4-10, Landmark Advisory estimates that 52,000 residential units will be completed between 2011 and 2013 with a total unit handover of just under 40,000 units in 2010."

Liz O'Connor, Director-Residential Sales and Leasing, for Better Homes, also believes landlords will be more flexible toward reasonable rental rates.

"It is difficult to know over what period of time rents may soften," O'Connor said.

"However, should they [rents] continue to do so we would expect property owners to be flexible on negotiations at the time of renewals. While there is more supply than demand, tenants continue to look for the best deals."

In fact, O'Connor said landlords are now actually giving tenants breaks to keep them, for a better immediate bottom line.

"Many landlords do negotiate when it comes to the renewals as they do not want the tenant to move out, particularly those with mortgages who require the cash flow. Some property owners are asking for one-year tenancy contracts as they are concerned that in the event rents do rise in a year's time that they may not be able to get a better rental yield on their property," O'Connor said.

Moving companies see spike in business

As the industry experiences a boom spawned by declining rental rates, the moving business couldn't be better.

Some movers who spoke with Gulf News say the majority of customers they are moving are doing so because they are relocating to less-expensive digs or are upgrading to better homes for the same rates as they were paying in older flats.

"We're busy because more people are changing apartments. Business is very good," said Rabia Ashoor, Partner of Ahmed Saleh Packing in Dubai.

"Before, people were moving out to Sharjah. Now people are moving back into Dubai because it is cheaper."

Ashoor said his firm is doing four moves a day, double that of last year.

"People are moving from Dh80,000 rent a year to Dh40,000 per year. More people are calling," Ashoor said.

He estimated that business has shot up by more than 70 per cent over last year.

Mohammad Waleed, Removal Consultant with Executive Cargo Packing, estimated that the entire moving sector is witnessing a 30 per cent spike in daily moves thanks to better rental rates.

"Probably 85 per cent of our customers are upgrading while 15 per cent are moving to smaller apartments," Waleed said. "We're doing two to three moves a day."

The average cost for a one-bedroom move is Dh1,600-Dh1,800 while a two-bedroom move is between Dh2,000-2,200, he said.

Derek Baldwin, Business Features Reporter

Saving money on contract renewals

Better Homes offers its Top-10 list to help tenants get the most out of renewing a contract or moving to a new home:

1.) Don't move: You'll save on the cost of removals, the hassle of finalising the lease, getting your security deposit refund, new DEWA, cooling and internet accounts.

2.) Before you begin the process, speak to a reputable agency that offers multiple listings and particularly to a specialist in your area of choice with price and quality market comparisons.

3.) Choose a property that is close to both work and school, and one with amenities and services close by; driving less means a reduced commute and less petrol expense.

4.) Keep the décor on a rented property cost-effective since the property isn't owned and a long-term investment is better saved for a purchased property.

5.) Wait two months before the renewal period in order to research the market and get the latest property rates in the chosen area.

6.) Assuming the property agency has a strong relationship with your landlord, let your agent speak to the landlord to affect the best deal possible, since some agencies brief landlords on current market rates.

7.) Check to see if your company already has a relationship with your landlord as this may be an advantage when negotiating or re-negotiating for a lower rent.

8.) Some lenders can give you a one-cheque option for better negotiations and a lower annual rent and the fee can be minimal.

9.) Educate yourself on the rental expectations of the community you are currently living in or want to move to; call around to different real estate agencies and ask their opinion on the average rental - also, use the Real Estate Regulatory Agency (Rera) rental index for guidelines.

10.) When renewing ensure you give the appropriate three-month notice period of your intention to renew. This will give plenty of time for you and your landlord to open up the lines of communication to renegotiate your rental amount.

Have your say

Do you know someone who moved to a different emirate because of cheaper rates? How has their experience been with negotiating lower rents? Tell us at readers@gulfnews.com

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Latest Comment

One of my friend and his family have moved from Muhaisnah (Dubai) to Shajah (National Paints) He saved from paying 42k yearly to 22k yearly for 2 b/r flat, yes saving 20K per annum !!! and offcouse there were no changes as he is 5 mins drive from his old place except for getting his SEWA / Etisalat connection done....3 Cheers for him...he did right !

TM

14 January 2011 12:02jump to comments
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