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Thu 1 Feb 2007 12:00 AM

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Dubai's rent cap could curb inflation

The Dubai government recently cut the existing annual “rent cap” of 15% to 7%.

 

In an effort to control runaway residential property rental costs, the Dubai government has more than cut in half the existing annual “rent cap” of 15% and reduced it to 7%. The new annual cap came into effect from the beginning of this year.

 

With residential property rental rates having risen, on average, by an estimated 65% over the past two years, concerns have mounted in both business and government circles to the mid and long-term impact this is having on overall consumer price inflation.

 

There is hope that the new 7% cap – which applies to all renewing rental agreements in 2007 (rents which were raised in 2006 can not be raised again this year) – will result in a drop in the inflation rate.

 

Nasser Saidi, chief economist at the Dubai International Financial Centre (DIFC), predicts that the rental cap will reduce the current inflation rate by up to 7% (note: this does not mean that the inflation rate will drop by seven percentage points).

 

The current high inflation rate – which many peg unofficially at being in the high teens – has effectively neutralized property mortgage interest rates (presently between 5% to 8%).

 

Essentially, individuals have been able to take out mortgages on properties which they have been able to rent out at significantly higher annual returns while capital values have soared. This very attractive “total return” of capital appreciation and rental yield has drawn an increasing number of experimental buyer/investors into the property market to the extent that properties are being purchased “off-plan” for periods up to three years ahead.

 

The explosive growth of the residential property market has prompted wide-based fears of an imminent market crash and the significant economic and social impact such an event would cause.

 

As such, some people in the property investment field believe that Dubai’s latest rental cap is an attempt by the government to “cool down” the property market and make ownership of properties purely for renting out purposes less attractive.

 

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