Landlords adopt non-renewable clause to get around the rent cap

Landlords in Dubai are incorporating a "non-renewable" clause in the yearly rental leases so they are not bound to adhere to the rent cap of the Dubai Government, realtors told Emirates Business.

"Rents are continuing to fall in Dubai as a number of developments have come on-stream this year. Landlords are leasing at lower rents, but are putting a 'non-renewable' clause," a real estate agent said on condition of anonymity.

"This practice, however, is mostly followed by single unit owners, who need to rent their units to meet their debt obligations," the agent added.

In January, the Dubai Government announced a rental price index, which it said was for reference rather than a guideline. The rent index was revised in April.

According to the Decree No1 of 2009, if the existing rent of a property is less than 25 per cent below the rental index value, there should be no increase in the rent payable upon renewal in 2009.

However, where rent is more than 25 per cent below the relevant rental index amount, the decree places a sliding scale on potential increases of between zero and 20 per cent, depending on how far below the index value the applicable rent is.

A senior official of the Dubai Rent Committee said a contract signed by both parties has to be honoured and if the tenant has willingly accepted the "non-renewable" clause of the contract then he has to comply with the terms.

However, agents confirmed that the property companies with leasing operations are not following this practice.

"These large property companies are building their rental portfolio and they don't want to lose their tenants during such a time," he added.

Bobby Sarkar, Vice-President, Equity Research, Al Mal Capital, told this newspaper that rents are likely to fall in as a follow-on effect of price fall.

"By 2010, we might see rental yields to be like three to four per cent, a true reflection of what the Dubai/Abu Dhabi market should be – in line with other emerging markets," he said.

Landmark Advisory has said residential rents will see further declines in Dubai during the third quarter despite there being signs of rent stabilisation.

Keep up with the latest business news from the region with the Emirates Business 24|7 daily newsletter. To subscribe to the newsletter, please click here.