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Fri 21 Nov 2014 01:34 PM

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Why Dubai should consider removing the rent cap

Property prices in Dubai seem to be fairly stable, and it may be time to rethink the need for the rent cap.

Why Dubai should consider removing the rent cap

“Rent control, along with laws protecting tenants against eviction, involves partial expropriation of property rights. It limits the owner’s rights to use and to profit from the use of his property.”

So runs the foreword to a paper by economists Milton Friedman and George Stigler, written just under 70 years ago. The market they were referring to — the post-war US — may be far removed from 21st century Dubai, but the complaint about the imposition of a rent cap is the same. In a free market, supply and demand should determine the cost of rent, and keeping prices artificially low serves no-one.

Dubai’s cap — which limited rent rises to 7 percent every year — was introduced in 2007, in a bid to protect tenants as the housing market shot out of control. Since then, it has been adjusted a couple of times to reflect the state of what has been an exceptionally volatile market. Now, for the first time for a decade, property prices in Dubai seem to be fairly stable, and it may be time to rethink the need for the rent cap.

Most tenants would argue that this would mean immediate rent hikes, and in some cases this would be true, at least in the short term. But if a landlord can achieve higher rents from someone else who is prepared to pay more, then it is hard to see what is wrong with that. If they are unable to find someone to fill their property, then that is their problem.

There is perhaps a lesson to be learnt from nearby Abu Dhabi, which removed its own rent cap last November. Admittedly, the UAE capital has a far less volatile property market than its neighbour, but the most recent data, from MPM Properties, suggests that more than half of all rent increases in the most recent quarter were between 0 and 5 percent.

Landlords tend to get a bad name. They are easy to characterise as “greedy” and “unscrupulous”. But when you take emotion out of the equation, all most landlords are trying to do is obtain a better return on their investment. They do not ‘owe’ tenants lower rents, in much the same way that tenants did not think twice about their landlords when the bottom fell out of the rental market four years ago.

The fear for the tenant is that they will be priced out of the market, and it is a valid one. However, this is hardly the fault of landlords and is symptomatic of a wider problem — the lack of affordable housing, especially for the mid-income segment. Developers have steered clear from this segment in the past, mainly because it’s more profitable for them to sell luxury housing.

Ironically, the rent cap itself may be playing a part in the dearth of affordable property. It puts off potential investors who are rightly concerned that the returns on their investment are being kept artificially low. With fewer investors in the market that, in turn, discourages developers from building more houses.

The flipside to the removal of rent control should be a regulation to ban the practice of paying for a year’s lease upfront, in one cheque. This practice has its roots in the days when companies’ used to pay for their employees’ housing but soon spread to cover the entire market. It’s unfair and puts undue pressure on the tenant.

While renters should be allowed to pay by one cheque if they wish (presumably at a discount), quarterly or — preferably — monthly payments should be mandated.

There is little doubt that any move to abolish the cap would cause short-term difficulties for some tenants in Dubai, but the long-term benefits in the form of more investment in the market should prevail.

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M Junaid Khan 5 years ago

I think the author has conveniently forgotten that without legal check in place, the suppliers always end up exploiting the buyers in the market. They can easily join hands, as it is a common practice around big metropolitans, and lift up the overall prices in the market. The government has to safeguard not the interest of the people with big pockets but also the general population of the country. Putting the blame on tenants for demanding lower rates when the market crashed is their right but what caused the crash was the greed of the landlords who wanted to become super rich over night at the expense of their tenants and to an extent they get into suicidal mode. The rent cap never results in dearth of affordable property either. In fact the ever rising returns attract developers to go for high end property to cash on high margins instead of volume market of affordable housing. Due to limit on words, I can't go into full detail but I totally disagree with author.

who2 5 years ago

there is a rent cap?
Not judging by comments in abundance here.

Of more benefit would be a greed cap. But that wouldnt fly as we all know!

Douglas 5 years ago

If I'm not mistaken this article poorly conveys the current rent cap. The 7% rule is gone and landlords can raise the rent by up to 20%, so why not be a little more honest? And let's face it. With such poor maintenance of services and traffic issues from living in so called 'gated communities' (which are no safer than those that aren't), and the innumerable taxes attached to living in Dubai - I think the price asked by most landlords does not reflect the property (and maintenance) we live in.

LordLands 5 years ago

Raise the average salary, and then raise the rents all you want. The government wants quality investors, the investors want quality tenants, and the tenants need quality salaries. This chain in a rudimentary state will only cause volatility, and that is an investor's worst nightmare. If you need different types of people to run a healthy economy, provide enough options for all the people.

Kaif Hannan 5 years ago

Couldn't agree more Ed!
Many issues regarding Dubai property need to be properly discussed and debated, with all stakeholders having a say, and it shouldn't be just a case of RERA imposing the rules.
Landlords hands are tied by various developers rules which make absolutely no commercial sense to investors. For example one major property developer doesn't allow it's properties do be given out on short term rental. Problem is there's no agreed definition of what is short term rental. Even someone wanting to lease for say 6 months is counted as short term. Landlords are being forced to let out their properties for a year or more with the lease rules clearly skewed in favour of tenants. This is ridiculous!

Bridge 5 years ago

Absolutely .. I'll conceived.. Simply because your theory has been tried and fantastically failed. This is Dubai not London or NYC; the level of sophistication in market dynamics is equal to that of a blank canvas. Hello, earth calling... Come oooooooon!

Musa 5 years ago

The writer doesn't seem to be informed of regulations! The rental index is now key to regulate rents across dubai but unfortunately is used in a way opposite to its intent. In its current form it shows rents as per current demand rather than average rent in an area per type of property e.g my rent in mirdif has gone up 15% in line with the index for my area and my type of property and on my renewal I am expecting another increase until I am paying what seems to be 'demand' rates only set by brokers!!

Dubai 5 years ago

Very inconsiderate and badly written article, as it can be evidenced with any research. Somebody should recommend Ed to visit the Dubai Statistics authority website, or just do a basic simple research in google about how the rents hiked in the recent years, especially after EXPO bid. I believe this argument is just to prepare the community to the change and strengthen the real estate agents.

H.K. 5 years ago

Where is your reference that "Dubai Cap's" is @ 7% ?

1. As per rent law for Dubai (21 Dec 2013), It is ranging up to 20%! based on % difference with an over-inflated average price, independent of Size of the Apartment / Villa, Its Services / View, being a Desert / construction site.. Not to mention PDC / DEWA / Municipality Excessively high pricing.. Many families are spending above 50-60% of their income on Housing and its services.

2. Have you visited AD rental dispute center recently? All people I know are just renewing in that center - due to unrealistic increases requested by their Landlords - referring to "market price"!

3. I might not be a reality market expert, but is there a place where you can check the "REAL" Demand and the "REAL" Ask other than individually cornered Cases? Each Tenant is always slapped by this "MARKET" Price where no-one really knows from where it came.

Wish to find a "Rental Decrease Calc" or at least to be neutral such as "Fair Rental Calc"..

Matt Williams 5 years ago

''There is little doubt that any move to abolish the cap would cause short-term difficulties for some tenants in Dubai, but the long-term benefits in the form of more investment in the market should prevail.''

No it would just lead to huge increases that would spin for the long term, what needs to be done ref attracting future investment is a compete overhaul of existing laws which add not only more transparency but a clear route to arbitration should issue arise. Many steer clear of first time investment or added investment for just these reasons, I am one of them after getting my fingers burnt when I purchased off plan, lost a huge amount of money and had to wait 5 years for delivery.

Laws are in place for good reason as this market is swimming with sharks who have no idea of the word 'moderation'. If you give them a zero cap market then you had better build another Sharjah.