The 5 per cent limit on property rent increases in Abu Dhabi was removed on November 10, as per a resolution issued by the Abu Dhabi Executive Council. The new rule means that landlords in the emirate are given a free rein to increase rents.
Residents in the capital fear that landlords will take advantage of the new rule to charge exorbitant rental rates, leaving tenants at the mercy of realtors when they renew their contracts. The absence of a rental cap may force many tenants to move to less ideal locations, smaller homes or even consider moving to a different emirate.
Property Weekly investigates how deregulating the rental market would affect Abu Dhabi’s real estate landscape and, should Dubai follow suit, how it will influence the current upsurge in the emirate’s property market.
Mat Green, Head of Research and Consultancy — UAE at CBRE Middle East, says the rule has allowed landlords in the capital to increase rents, but, given that supply levels are increasing rapidly, the impact should not be that significant for much of the market in the short term.
Market values
Without the rent cap, rents will now be dependent on the level of supply and demand, location and quality of property.
"Abu Dhabi has mandated that employees for certain government companies have to rent in Abu Dhabi, so it is clear there is a push to drive demand in the capital and dissuade commuting from Dubai," says Georgina Chan, Senior Associate — Property Practice at Hadef and Partners. "Also, the Abu Dhabi market is reasonably well supplied. However, Dubai has far more new and high-specification properties built in the past eight years, whereas Abu Dhabi hasn’t achieved the same number of new property completions."
"The removal of the cap could potentially have a null effect, if tenants accept to lower their expectations on location and quality of property. However, we foresee the removal of the cap affecting good-quality properties, which will see higher demand and, therefore, higher rents in Abu Dhabi."
Old tenants
The new law primarily targets tenants who have been in the same property for a number of years and, in some cases, pay between 30-40 per cent below the market rate, says Khawar Khan, Research Manager at Knight Frank. In such a scenario, landlords will be in a position to achieve fair rent.
"However, in some parts of Abu Dhabi, there is a concentration of public-sector workers who have large allowances available on a ‘use it or lose it’ basis, which has helped keep rents artificially high. Thus, given current price levels, the removal of the cap is unlikely to hit those areas particularly hard. Moreover, in areas such as the Corniche, Sadiyaat Island and Al Reef, where supply is plentiful, the new legislation should be similarly ineffective."
Ideally, there should be an open market without any cap, where property rent is determined by supply and demand, says Sona Agarwal, an investment analyst at a leading oil and gas firm in the capital and an Abu Dhabi resident.
"In the current Abu Dhabi scenario, if adequate supply is assured, then the removal of the rent cap may not have a major impact on the rent," says Agarwal. "Had this been implemented 3 to 4 years ago [when the supply was limited], it would have been an unfair move for the tenants. Having said that, I sincerely hope the removal of this cap is used in a fair manner in the current market conditions."
There is no indication that Dubai will follow Abu Dhabi’s lead, particularly given that rents in Dubai are already rising rapidly, with an average growth of 23 per cent in the past year, says Green.
Different markets
Abu Dhabi is also fundamentally different and has not experienced the kind of rental price increases seen in Dubai in the past two years, explains Abdul Kadir Faizal, CEO of ERE Homes.
"I believe Abu Dhabi will have a rental index as Dubai did, which will be reviewed every year as per market conditions," says Faizal. "However, if the new rule is implemented in Dubai, we will see the same changes that we saw in 2008, when tenants with a tight budget relocated to the suburbs or other emirates such as Sharjah."
The rent cap was introduced in Dubai and Abu Dhabi in an attempt to moderate rent inflation and promote market stability and confidence, explains Michael Lunjevich, Partner, Hadef Partners.
"This was a necessary move in the last boom, when supply was short and demand was high," says Lunjevich. "However, over time more completed properties have come online, but it is still questionable whether the level of supply is sufficient, and, more importantly, whether this supply is adequately disbursed. In mature markets, one usually sees a wide disbursement of stock where individuals might hold one or two properties and would therefore be flexible to market pressures.
"In Dubai, the market is slightly different because investors tend to have big holdings of ten units or more. Furthermore, these are cash-rich investors who can leave properties empty and demand higher rents. The new loan-to-value ratios introduced by the Central Bank might serve to strengthen the hold of cash-rich investors over owner-occupiers and small investors," he says.
Consequently, Dubai might release the rent cap altogether, but not any time soon.
Growth phase
Dubai’s property market is in the midst of a major growth phase and the rent cap is an important piece of regulation that limits volatility and controls rental movement, says Green.
"Without it, we could expect to see rapidly rising rates, raising the overall cost of living and ultimately making the emirate a less competitive environment," he says.
"While supply-and-demand fundamentals do apply in the local market, sentiment appears to be the key driver. With the World Expo 2020 awarded to Dubai, there is a new wave of confidence sweeping the market, and for tenants that means more bullish landlords."
Green adds that the rental cap system allows for rental growth, but only in certain cases where rents are 25 per cent below the current market rates. Moreover, the maximum increase for a Dubai property leased before the enforcement of the decree is based on the following matrix:
a. There should not be any rent increase if the rent for the real estate unit is up to 25 per cent below the average rent of similar units.
b. If the rent is 26-35 per cent less than the average rent of a similar unit, the maximum rent increase shall be 5 per cent.
c. If the rent is 36-45 per cent less than the average rent of a similar unit, the maximum rent increase shall be 10 per cent.
d. If the rent value is 46-55 per cent less than the average rent of a similar unit, the maximum rent increase shall be 15 per cent.
e. If the rent is less than 55 per cent of the average rent of a similar unit, the maximum rent increase shall be 20 per cent.
Consistency
Rent controls are common measures to control housing costs in expensive cities such as New York, San Francisco, Los Angeles and London, which all have some form of rent control, says Robin Teh Country Manager — UAE of Chesterton Middle East and North Africa.
"Rent caps in Dubai have brought a sense of consistency to the market and reduced inflationary pressures on the economy," he says. "Rent caps are essential for the overall benefit of the economy as housing is a crucial component of the total expenditure and any excessive and rampant increases might disturb the overall budget of residents, which will impact consumer spending and confidence adversely."
Dubai should continue with the rent cap as this is good for the long-term health of the market, and would prevent rents from being increased disproportionately, says Kalpesh Sampat, Director of SPF Realty.
"Cap regulations are essential because salaried employees who are trying to make ends meet would find it very difficult to look for affordable accommodation in a market with exorbitant rent increments, pushing them to find accommodation in other emirates," he says.
"If a regulation change becomes essential, a compromised solution could be adopted where caps or slabs may be adjusted and realigned from the current 5 per cent increase, as this protects the interest of both landlords and tenants."
In any evolving and maturing property market, it is imperative that changes of laws, rules and fees are done gradually and systematically, and not overnight or instantly. Sampat believes that if there is a need to remove the rent cap regulation, it could be done gradually over a period of one to two years, rather than one to two months.
In Dubai, there are regulations in place that prevent landlords from hiking rents, primarily to stop the market from becoming unaffordable.
"These regulations apply to existing tenants, not new ones," Khan points out. "In the event current regulations are lifted, popular locations that have little new supply such as Downtown Dubai could see significant rent inflation. In turn, that would cause a spillover into other micro-markets such as Jumeirah Lakes Towers, which currently has good availability.
"However, even here the general shift in demand and the fall in vacancy rates would push rents up eventually, albeit not reaching the levels in areas where landlords command premiums."
If Dubai removes the rental cap, Khan believes it is unlikely the wider Dubai market will see significant rental increases.
"After all, rents are dictated by market forces, i.e. demand and supply. But tenants who have been in the same property for many years and haven’t felt the full effect of the double-digit rental growth of recent times would eventually have to come to terms with paying market rates," says Khan.
"That in turn may stimulate greater buying activity from long-term inhabitants as they look to shield themselves from incurring large rental increases every year."
Teh believes all areas would be affected if rent caps are removed. "At the moment, many units across various communities are under-rented since their leases have not yet expired," he says. "We believe these units will be brought up to the market rate if the rent caps are removed. We foresee the highest rent increases in premium areas such as Downtown Dubai, Dubai International Financial Centre, Jumeirah Beach Residence and Palm Jumeirah.
"We expect 30-50 per cent rent increases in old leases, and long-time tenants would find it very difficult to cope with such rental increases as it would severely affect their budgets."
Dubai attracts people from different countries to work and live here, and it is important to make residents feel secure, says Marisa Ortolan, a freelance investor.
"If the rent cap is removed, people will no longer feel secure about the cost of living in the future," she says. "As a landlord, I must not look at the short-term benefits alone. Setting the rent market free will enable greedy landlords to raise rents without any control.
"We have learned from previous experiences that what goes up unrealistically, will go down unrealistically."
Inhibiting factor
Ortolan says companies that are relocating staff to Dubai would be interested to know about the emirate’s rent cap. When rents are deregulated, these companies would be unable to calculate the mid- to long-term cost of living of their staff, and this may affect their interest in Dubai, while encouraging them to consider moving to other countries instead.
"I don’t think Dubai should follow Abu Dhabi in removing the rent cap," Ortolan says. "If the rent cap no longer reflects the actual market rates, they could revise the rent cap as this will prevent the market from going crazy.
"I am a landlord and I believe rents should be actualised, but with a regulation, as this enables medium- to long-term market growth."
Tenants’ concern
Barry Lee Cummings, Managing Director of Maximum Net Gain, says he is worried Dubai might follow Abu Dhabi’s lead.
"Already, as tenants, we seem to be at the mercy of landlords," says Cummings, a tenant in Jumeirah Village Triangle. "I know it’s a measure to cool the buying market, but has no one noticed the familiar pattern being followed? Remember 2008 when massive upward trends couldn’t be sustained? The words ‘bubble’ and ‘burst’ come to mind."
The removal of the rent cap has led many Abu Dhabi residents to look for places far from the capital’s business centres. The same could happen in Dubai if the emirate will also remove the rent cap, even affecting a more substantial number of people because of Dubai’s larger population, says Khaled Abou Hichme, an Account Manager at Landmark PR and Events.
"I personally feel that there should be a cap to make sure rents don’t go skyrocketing," says Abou Hichme, who resides in Dubai Silicon Oasis.
Steve Gregory, Managing Partner at Holborn Assets, has mixed views on the issue. "Naturally, landlords want to gain more than a 5 per cent increase in rent, but some have resorted to breaking the rules almost with impunity, to the detriment of the tenants, who often do not know how to protect their rights or cannot afford to do so.
"Governments have a right to change rules as they see fit, and most do it sensibly for good reasons. However, where tenants face increasing rents, no increase in salaries and difficulty in finding schools and other infrastructure they expect, they will move out.
"Thus, the removal of the cap might trigger a reduction in rents before long, as people find alternatives such as sharing, sending their families home or going home themselves. I suspect we are some way before that could happen, though."
