By Alexandra Dubsky
Dubai's new 7% rent cap should add stability to the market, according to the local real estate industry.
The 7% rent cap set at the beginning of the year in the Dubai has been welcomed by the real estate industry.
Omar Ayesh, President of Tameer Holding, said that the government’s decision was necessary with skyrocketing rental prices forcing an increasing number of residents and companies to relocate to neighbouring Gulf States.
The government’s main reason behind the rent cap was to reduce inflation rates by 6% or 7% from last year’s double-digit figures, with rents making up around 40% of the total inflation figure. “This was a long-term decision to stabilise the market. The expenses for companies based in Dubai have been doubling in the last two years and it was needed,” Ayesh said.
He dismissed the idea that investors would shy away from buying property now that the returns on rents have lowered. “Rents are still high, and investors make more than enough profits when renting out their properties,” he said. “Properties in Business Bay, for example, sell at US$1200 per sq ft, and they are rented out for US$250 per sq ft — a profit of more than 20%,” Ayesh added.
Saima Khan, managing director of Taktical Realty Group, agrees that the cut was desperately needed to keep the property market stable. “The authorities realised that, unless they introduced limitations, high rents would increasingly prompt residents to move to the neighbouring emirates,” she said.
Khan added that the Dubai property market would “definitely undergo a price correction”. “A correction is positive. It was predicted to happen this year, but I don’t see it happening until the end of 2008.”
According to a study by investment bank EFG Hermes, Dubai has a demand for between 40,000 to 50,000 residential units a year, with 69,000 units set to be delivered in 2007 and 139,000 units in 2008.
The study links Dubai’s property cycles to those of Singapore, which went through a boom between 1998 and 2000 with prices up 37%, and then a short period of stability before a sharp drop of 30%.