The Real Estate Regulatory Agency (Rera) needs to revisit and review its rental index to reflect current market reality, analysts said.
"The index values released by Rera for commercial property are based on the prices that prevailed last year. Since then, there has been a significant economic and market correction, especially in property values, and the index needs to reflect this new reality," said one analyst who did not wish to be named.
"It is difficult to balance market forces with the social implications of variable housing prices. Generally speaking, the free market is better at determining prices. The effectiveness of the decree really depends on the precision of Rera's rental index and their commitment to keeping it current in a fluctuating market," Louise Pitt, Director of Leasing, for Landmark Properties, told Emirates Business.
"We think rents will fall on an average 25 per cent over the next year, so this decree will not really affect recent contracts. In fact, it may even restrict the ability to negotiate lower prices in the falling market, especially for those tenants that rented at the peak of 2008."
According to Pitt, even though rents should be updated to reflect current market prices, doing so might have serious social repercussions for tenants with old contracts.
"A sudden rent-hike could potentially uproot many individuals and families, leaving them unable to find affordable housing."
On Monday, His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE, in his capacity as the Ruler of Dubai, issued Decree No.1 for 2009, governing rentals in Dubai.
The new decree, which applies to both residential and non-residential properties, prevents increases in rents during 2009 for tenants who are renewing rental contracts signed in 2008 – as long as the rent value in 2008 was equal to or less by a maximum of 25 per cent than the average rents in the index of Rera.
According to Andrew Chambers, Managing Director, Asteco Property Management, "eventually the market forces will determine the rental in Dubai. Market conditions will eventually supersede the rent cap in the market."
"Rents in 2009 will no longer be driven by demand and supply, but on existing market rates and conditions. For new properties especially, the landlords will have to follow the market conditions and market rates on a monthly basis before determining their rents."
Chambers said for discerning tenants, landlords will have to match up to the tenant's new prices as per market rates and those rates established by the rental index. "Landlords will have to sharpen their pencils on the rentals fixations."
He further projected leasing terms of rental contracts in Dubai to become more flexible as landlords will increasingly look to lock in on their tenants.
"This is something we have been seeing predominantly in the more mature markets."
Chambers called for the rental index to be developed further and reach a certain level of maturity.
"The decree will be a good step towards stabilising rentals in the market."
Minc Properties Chief Executive Officer Haroon Mahmood said: "There is downward pressure on rents due to the projected fall in population and more finished units coming into the market. However, it is unlikely that contracts signed in 2008 are likely to be below the average rents mentioned in the index. The current rents are marginally above the 2007 level and fairly above the 2006 levels." He believes the decree will not have a significant impact on the market, in terms of lowering rents.
"During the current market conditions, there is no need for such a regulation, but there is need for 'effective arbitration'. The rent committee will now step in and provide adjudication and not penalise tenants who have lost their jobs."
Regulations are less required in today's market situation, which is dynamic. They should allow said.
Dr Ahmed Saif Belhasa, Chairman of the UAE Contractors' Association, said the decree will play a big role in regulating the relation between the two parties to the rent contract. It will also facilitate the work for the rent committee, which used to look into many disputes landlord and tenant. The decree included clear and specific texts for the value of rent increases according to the year of the contract and the previous rent value.
Belhasa saw the decree as an important reference that would prevent injustice by one party against the other, and which will restore stability to the rent market and give Dubai transparency for its residential and non-residential rents.
He highlighted the intervention by Sheikh Mohammed in 2006 to fix the rent increase at five per cent and then at seven per cent in 2007 when he found exaggeration in rents in Dubai.
Belhasa stressed the significance of the decree in attracting investments and in the stability of the business sector, especially that the decree will work to rationalise the rent increase in a way as to be within the rate of inflation and which will prevent more inflation.
"The decree will help a great deal in market stability, not only in the real estate sector but also in all other sectors and will have a positive return on the emirate's economic activity."
Said Ali Hadad, Owner and Senior Lawyer of Al Haddad & Associates believes the decree will help stabilise the market and give breathing space to businesses and families. "Landlords, who were increasing rents need to br controlled. The decree will be the right tool to control them."
Financial analyst Ziyad Al Dabbas also echoed the same sentiments. He said the decree would have a positive effect on all sectors, especially that of local and foreign investment, since rent stability and retreat will bring inflation down and boost purchasing power, which will reflect on the economic activities as well as people's lives.
"This step should be followed to decrease rental values in line with low rents in other neighbouring countries. Logic imposes a retreat in rents equal to that in the value of real estate as the retreat in property value is supposed to reflect positively on rents," he added.
Economic expert Dr Ahmed Al Banna said: "The decree is fair for the two parties of the contract. It maintained the 2008 contracts, which were relatively high while pushing old contracts up where rents were mostly low despite the maintenance and other burdens shouldered by the landlord."
He said there would be no increase in 2008 contracts since they were already at a higher rate, but old and long-term contracts could be increased.
Last week, Rera launched its first official rental price index for commercial properties. "This index is for guidance, not regulation. This will enhance transparency in the market and help investors to have a solid idea of what rent should be in the near future based according to the official statistics," Rera Chief Executive Officer Marwan bin Ghalita had said.
According to Rera, the evaluation process for all types of properties is based on giving each property points for various attributes such as building facilities, nearby retail outlets, age and condition of building, etc. These points are used as the statistical basis to set a minimum and maximum average rent price.
Rera plans to release the index every six months but may make that quarterly if necessary.
However, for Michael Grant, Partner at Cluttons, the main concern is how the new regulations will be implemented. Questions are increasing on which properties fall under the 25 per cent below category and who will decide on this.
"The decree needs to be further detailed on who will adjudicate this decree and who is the deciding authority in case of disputes. Many landlords have already increased rents this year by five per cent, assuming that the same rent cap will remain as last year. In such a case will the tenants get a refund," said Grant.
Ala'a Nagawa, Head of Marketing for Leo Sterling said many real estate agents were hoping to see the rent dropping by 15 to 20 per cent. "While we have been waiting to hear about the rent cap since a long time, we were hoping it would make rentals go down by 15 to 20 per cent rather than freeze rents as right now there is a lot of pressure on rentals in some areas.
"Last year there was a huge inflation in rents for contracts signed in 2008. After the crisis, we have noted that many companies have been affected in Dubai as they were giving accommodation to their staff. Increased rentals have been affecting less cash in hand for tenants and increased costs to companies," said Nagawa.
He cited high rents as the main reason for many people leaving Dubai. "Even senior executives today are staying in other emirates and working in Dubai. Job insecurity and job losses are seeing many [tenants] defaulting rental payments. Only the ones who paid one cheque and have their rental already secured are the ones waiting around Dubai to find another job."
Nagawa said if rents in Dubai decrease it will become attractive for companies and help in increasing the disposable income of many people.
Meanwhile, Chambers said flexible rental terms to monthly or bi-monthly payments will help establish a definite cash flow in place for the landlords.
"There was still enough demand left in the market from a rental perspective and it would be fairly easy for a tenant in an existing rental contract who is exiting the country to find another tenant for his unit. There is enough demand prevailing for re-let and tenants will not be unnecessarily put under any stress to find other tenants," Chambers said.
Meanwhile, Grant said rents for large villas in areas such as Discovery Gardens have been reducing, with rents in the Burj Dubai remaining stable.
According to Grant, a four-bedroom villa in Jumeirah Islands or Meadows was around Dh450,000 in December and has now dropped to Dh350,000. A one-bedroom apartment in Discovery Gardens has come down from Dh110,000 in December last year to Dh70,000 to Dh80,000 this month. "These rents were inflated and they need to come down," Grant said.
Real estate consultant CB Richard Ellis said earlier rents for commercial property in Dubai are showing the first signs of levelling off and posted no growth in the fourth quarter.
Still, rents increased by 50 per cent during 2008 for industrial buildings, 29 per cent for offices and 18 per cent for retail industry. But rental yields were unchanged in fourth quarter at 11 per cent for industrial sector, 7.75 per cent for offices and eight per cent for retail industry, it said.