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14 April 2024

Rent cap to help tenants over supply hump

By Nitin Nambiar and Adrian Murphy



Supply bottlenecks will be bridged by the new rent cap law, developers and analysts have said.

On Friday, Dubai lowered its rent cap by two percentage points – to five per cent from the existing seven per cent – effective from January 1, 2008. With a view to curbing rising rents and their impact on the country’s inflation, the government had first intervened with a 15 per cent rent cap in 2006. That was followed in 2007 by a reduction to seven per cent.

Supply shortages, which have seen annual rates of return on property in Dubai appreciate to double digits in the past few years, are unlikely to change much despite the new rent cap, analysts told Emirates Business.

A recent report released by EFG-Hermes showed that even though Dubai is among the most expensive cities globally, with an average rent of $98 (Dh360) per square foot, it is still much less expensive when compared to other cities like Moscow ($180.1) and London ($180.8). Given the high GDP growth and demand for commercial space, Dubai still remains economically competitive with other “global” destinations.

According to the EFG-Hermes data, Dubai’s commercial property rents have seen a 19 per cent rise over the last 12 months. “The annual rate of return on property in Dubai currently ranges between seven and 15 per cent, depending on the type of asset and other factors,” said Thierry Loué, managing director of global real estate investment and advisory firm Jones Lang La Salle.

“The rate of return depends to a great extent on the type of property under consideration, the price of land, construction costs and the quality of tenants. There are usually grades for different commercial tenants. Depending on these factors, the rate of return currently ranges anywhere between seven and 15 per cent,” said Andrew Chambers, managing director of Asteco, a real estate development and consultancy firm.

“The current rate of return in some cases, such as Technopark and other industrial areas, can even be in the range of 20 per cent. I don’t see the rate of return changing because of the new rent cap. The rent cap was brought down from 15 per cent to seven per cent in 2007, but the rate of return on Dubai property still continues to be prolific,” he said.

The new rent cap also does not change the buying-to-use versus buying-to-rent equation for investors, according to Chambers.

“I don’t see any change in investor perspective between buying-to-use and buying-to-rent. You’re looking at a three to 10-year horizon when you buy for investment. So a two percentage point drop in the rent cap is unlikely to change investor sentiment on that front,” he said. 

The rate of return on property in Dubai is mostly supply driven and to a much lesser extent on the rent cap, said Martin Seward, spokesperson for RICS, the biggest non-profit body of property professionals worldwide and an independent chartered quantities surveyor.

“At the moment there is a significant scarcity in supply. In this scenario, there is a huge premium charged by the owner or the developer at the first instance of a property going out in the rental market… and that premium has to be paid because of the lack of adequate supply. The rent cap only comes into the equation at the time of contract renewal. But, a lot of property may already be overvalued before the rent cap becomes applicable,” Seward said.

“Also, if a tenant decides to vacate the property, the new leaseholder has to pay a rent much higher than the cap. Owing to such factors, the short-term rate of return in some cases have been in excess of 20 per cent, but I’m not sure if that is sustainable in the medium term of five to 15 years,” Seward said.

EFG-Hermes said in its report that it expects around 64,000 units to be delivered in 2008 and 68,000 units in 2009. “We estimate that Dubai’s population will rise to almost two million in 2010 from the current level of 1.6 million people, implying a compounded annual growth rate of nine per cent. We now estimate resident demand of 40,000 to 45,000 units per annum [based on expected natural population increases as well as expected immigration], with international [non-resident] demand of 13,000 units in 2007,” the report said.

Better Homes, one of the largest real estate firms in the Middle East that was set up in 1986 and has thousands of properties for rent, believes that the rent cap is a good move for tenants as a short-term measure.

“The problem now is that demand exceeds supply. But in the next 12 to 24 months, the natural cycle of the real estate market will balance itself out,” said a Better Homes spokesperson.

“If you really want to address the issue of inflation, you must look at issues of capacity and supply.

“The UAE has already opened up its market for foreign players in the construction sector, the materials sector… but you still need to open up a few bottlenecks in supply if you have to address inflation in the long term,” said Ali Al Shihabi, founder and Chief Executive of Rasmala Investments, an investment bank with sizeable assets in Dubai’s real estate.

“Of course, a rent cap has its short-term benefits. But you need to further accelerate the supply side for a more sustainable solution.”

Rent increases - disputes

The Dubai Rent Committee has dealt with more than 8,000 cases between tenants and landlords in 2007. Its offices in Deira are some of the busiest in the city with officers dealing with an average of 20 to 30 cases per day. This may seem like a high number but there are also thousands of tenants’ complaints that go unreported, as some are worried about costs and the timescale involved.

Although the rent committee reportedly favours the tenant, its head, Saeed Mohammed Al Kindi, said this is not always the case.
“A majority of cases involve tenants complaining about rent increases but a landlord sometimes has a problem with the tenant,” he said. “Overall the ratio is 50-50 between who is successful and who is not.”