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Caps off to rent watchdog in inflation battle
January is traditionally a month when spending belts are tightened. Eid and Christmas presents, shopping festivals and New Years Eve celebrations all take their toll on wallets across the world. So it was with great cheer that the government of Dubai announced the news that every tenant in the city wanted to hear. It would lower the rent cap by 2% from 7% to 5% from New Years Day.
The decision marked the third move by the government to help curb soaring rents and inflation following the introduction of the city's first rent cap at 15% in 2006, a year in which rents reached a 19-year high, and again last year when it was reduced to 7%. The latest decision places Dubai at the top of the list for lowest rent caps, ahead of Abu Dhabi at 7% and Ras Al Khaimah and Fujairah at 15%. Sharjah basis its rent cap on the market price in the third year of tenancy renewal with the first two years at 0%.
The all-time high in 2006 hasn't been the only worrying figure associated with Dubai rents. In the years 2004-5, rent in Dubai increased anywhere between 40-1000% and according to EFG-Hermes data, it is not just residential properties that are suffering. This year commercial rents have seen a 19% rise.
It's easy to see why there is a problem. The city was the first emirate to open its doors to foreign investment in 2002 and is actively encouraging a rapid rate of international investment. But in not having the properties already available, the city has in turn triggered a shortage of available accommodation and the emergence of a hugely competitive and rising rental market.
EFG-Hermes recently reported that residential property prices would only begin to fall in 2009, a year later than expected due to a delay of delivery in properties. The delays have resulted in a continued residential shortage and could see prices rising 10-20% this year and 5-10% next, according to the investment bank. All of this in a city which is expected to increase in population from the current level of 1.6 million people to two million in 2010.
While it may not be the most expensive city to live in with an average rent of US$98 per square foot (London soars in at US$180.8 and Moscow US$180.1), it is still a city which relies on foreign investment for its continued growth. It is not good news to hear that along with traffic congestion, increased cost of living and the falling value of the dollar, rent is one of the top four main concerns of people living in the city and of those considering relocation.
The initial reaction from landlords, tenants and businesses has been mixed. While tenants already living in the city can only agree this is a positive move, there is also underlying concern that landlords may have overvalued their property before the cap was introduced and that many will ignore the cap entirely, forcing a lengthy intervention from the Rent Committee.
Some real estate firms have also noted concern with regards to the glaring disparity of rents being charged to different tenants in the same property development, or even building.
While there is little doubt that these issues are some cause for concern, tenants can also be safe in the knowledge that the rising rent problem is being tackled. From an investors point of view this can only be a positive move for the city as it continues to attract further foreign investment.
As the figures note, demand currently far exceeds supply. But with an expected 64,000 units being delivered in 2008 and a further 68,000 in 2009 the problem is expected by many to even itself out naturally. While the rent cap only offers a short term solution, it is both beneficial for current tenants and also for those considering a move in a city which, like its transport system, is slowly recognising its difficulties and doing its best to offer solutions.
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Posted by rachiel, Dubai on 6 January 2008 at 20:13 UAE time
This is indeed a very positive news for the tenants, especially since most of the income we generate goes to the landlord directly!
I commend the government for recognising the people's cries about the rent however, I think this 'good news' will just fall on deaf ears and a very, very long battle between the tenant and the landlord.
As a tenant, you would rather pay up the rent than have your landlord at your back ALL the time!
I hope the government can at least form a separate group that could at least go through the rents each flat was given for the past year and see if the rule was indeed implemented.
Posted by Art Garfunkel, Doha, Qatar on 6 January 2008 at 15:50 UAE time
The region has taken a sad turn away from free-market capitalism as governments impose rent caps and price controls, all in order to curb inflation. It always amazes me when expats complain about rents and high prices even when it is much cheaper to live here than it is in London or Moscow, as the writer accurately mentions.
The problem the GCC has is not high rents; it is imbalances in the markets. What needs to happen is for rents to rise so high that it becomes almost impossible for people (and companies) to afford it. What will happen after that is a period were the economy cools down (inefficiencies are resolved) and prices start to fall, and then crash. This cycle of creative destruction is a necessary evil, and it helps clean up a frothy system.
Of course, it is a tough pill to swallow, so the benevolent government comes in to help buoy the party, but the crash has to come. Not even the rich GCC states can stop the pain in store for the region.
So the answer here is to welcome it. Let prices spiral out of control, get a new handle on the economy, and let the good times end. If the market forces are ignored for too long, the devastation we will all feel in the future will be amplified. So I say no to the rent cap. No to price controls. Let the market work its magic.
Posted by Graham Dunn, Duabi, UAE on 6 January 2008 at 09:27 UAE time
I think that a rental cap is good idea in principle but often difficult to enforce. This is also a highly emotive issue. My Landlord has increased his rent by 40% in two years. He cares about the rent cap and threatens to evict us if we don't pay. Is it possible to retroactively enforce the rent cap? The contractual documents are there for proof of the amounts paid. Also,trying to get the landlord to undertake any maintenance is hopeless.