Analysts say switching rent into equity could be popular and low risk entry onto property ladder
The growth in rent-to-buy property schemes, where tenants can convert the rent they have paid into equity towards the purchase of their unit, has proven to be a popular way for buyers to get onto the UAE property ladder, analysts have said.
Aldar Properties, Abu Dhabi’s largest developer, this week launched a rent-to-own programme for units at its Raha Beach development.
Under the scheme, tenants pay a set amount of rent for two years, with 100 percent of the first year's rent and 90 percent of the second year's rent then converted into equity for the purchase of the unit.
The tenant is under no obligation to purchase and also has the option to transfer the equity to another tenant if they decide not to buy after the two year period.
Such schemes are becoming more common in the UAE and analysts say they have proved popular as they offer tenants a way to get onto the property ladder at a time when the market is still not very certain.
“This idea has proved popular already and it can be even more successful if developers are clear and transparent with the terms and conditions,” said Priyesh Patel, a real estate agent at Aston Pearl Real Estate in Dubai.
Fellow Abu Dhabi Sorouh Real Estate launched the first rent-to-buy scheme in the UAE capital earlier this year for its apartments in Sun Tower on Reem Island and Emaar Properties launched a similar scheme in November 2008 for its developments in Downtown Dubai.
“No one can pin point where the market is going to be in two years, therefore there is an element of risk of prices falling or rising... [But] for those who want to enter the property market it could be the perfect solution,” added Patel.
Matthew Green, head of research and consultancy at real estate firm CB Richard Ellis in Dubai also welcomed the growth in such schemes but offered a cautionary note that tenants must make sure the rental rates and end sales prices offered by developers are realistic.
“In principle I think the scheme is a good idea, and could help to encourage and enable further investment for end-users looking to join the property ladder. However, this is on the presumption that the rental rates and the final sales price that are offered by the developer are actually in line with reality,” said Green.
“Evidently the developer will look to make a premium by offering such an incentive scheme and this is likely to be achieved by setting initial rental rates that are above market norms in order to ensure a profit should the tenant not decide to purchase,” he added.
The UAE market, especially Dubai, was one of the markets worst hit by the global financial crisis and the credit crunch, with a large number of projects put on hold and prices dropping by up to 60 percent from their peak in 2008.
The latest Global House Price Index from real estate agents Knight Frank reported Dubai prices fell 4.7 percent in the last year. While it was still the ninth worst performing market out of the 50 countries surveyed, prices have only fallen 0.1 percent in the first six months of the year.
Developers have looked to schemes such as rent-to-buy to try and inspire confidence in buyers and reduce the risk element in buying into the UAE market.
According to Patel, buyers should only avail of the scheme direct from developers, rather than from individual landlords.
“The idea of rent-to-own has been in Europe and UK for many years now but is only being offered by developers which should be the only way it’s done. There have been cases of real estate brokers trying the scheme but I don’t believe it’s safe as the property is owned by an individual and not the developer,” he said.
According to Tom Bunker, an investment sales consultant at Dubai-based real estate agency Better Homes, the scheme would only suit developers, as opposed to private landlords.
“This scheme is not practical for the average private seller who wants cash now for their unit and not in two to three years,” said Bunker.
“People need to be very careful about the prices they buy into for these units from the developer. In many cases the developers, in an attempt to protect their asset values set their prices above the market rate. So someone interested in this scheme can get into the market relatively easily, but may be buying a property that is above market value,” he warned.