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With Dubai's realty market witnessing a deceleration in the growth of housing prices and sales due to stricter property laws and mortgage caps, some industry observers say developers should look to bring back attractive schemes such as rent-to-own options to revive sales.
"From a developer's point of view, offering a lease-to-own scheme will surely open up an additional pool of potential buyers," says Simon Gray, Managing Director at Chesterton Middle East and North Africa (Mena). "It is an option worth considering as the market starts to further consolidate. These schemes will inspire confidence in buyers and reduce the risk element when buying into the UAE market."
Gray argues such schemes will benefit investors and sellers in the current scenario, where property prices are more stable after seeing exponential growth over the past year.
Although Dubai's property market has been on a high, house prices witnessed a sharp deceleration in the past couple of quarters. According to Knight Frank, the annual growth in prime property prices in Dubai almost halved in the second quarter compared to the previous quarter. Prime property prices grew by just 6.3 per cent in the year to June, down from 11.7 per cent in theast quarter.
Current statistics indicate the market may be stabilising, which means there is no significant upside in the market," says Robin Teh, Country Manager — UAE at Chesterton Mena. "In such scenarios, developers can use the rent-to-own op tion to protect themselves from any downside in the market. It may restrict large upside gains, but it will reduce associated risks significantly."
Since the secondary market is slowing down and speculative interest is drying up, Teh says it's time to bring back the scheme to attract more end users into the market. This as industry experts note that exponential growth in the UAE real estate market has made it more difficult for the majority of end users to buy property.
Their agony is exacerbated by mortgage regulations that require a 50 per cent down payment. And while cooling measures adopted by the government have stabilised the market, these have also made it almost impossible for most expats to buy their own homes.
"The solution to this is a rent-to-own option, which gives you the flexibility to terminate the contract towards the end of the tenure if the decision has not been made to purchase the house without any penalty," says Teh.
The rent-to-own scheme became popular as a way to boost sales in 2000 and in 2009. In early 2000, Dubai was in the initial stages of establishing its property market and rent-to-own options were used by developers to lure buyers and increase property sales.
But soon after the market started to accelerate from around 2002, when property regulations were relaxed to allow foreigners to own property on a long-term lease basis, developers started to pull back from offering rent-to-own schemes.
"Although it wasn't clear when exactly the scheme was stopped, [we know] it was stopped because the market picked up and developers did not need to use such an incentive to try and get parties interested in ' selling their property," says Victoria Garrett, Associate Partner at Knight Frank.
The Dubai property boom that started in the middle of the previous decade peaked in 2008 before crashing, resulting in many cancelled or abandoned projects. Sales were down again and developers started to bring back the scheme to revive real estate activity and stimulate buyer interest.
"The scheme was employed by some developers to try and bring back purchase confidence in the market after the crash in 2008, by effectively giving a try-before-you-buy option to people," says Garrett.
Initially, rent-to-own schemes were offered in Downtown Dubai, Dubai Marina and some Aldar developments in Abu Dhabi.
"They were not just limited in the high-end areas, but also in areas such as Dubai-land as well as more prominent locations such as Su-lafa Tower in Dubai Marina," says Garrett.
Aldar Properties had offered this scheme for its units in the Raha Beach development in Abu Dhabi, although it was only this year when the Abu Dhabi Government announced a freehold law that allows non-GCC nationals to own property in the capital. Tenants would pay rent for two years, with 100 per cent of the first year's rent and 90 per cent of the second year's rent converted into an equity for the purchase of the unit.
The tenant was under no obligation to purchase and also had the option to transfer the equity to another tenant.
Abu Dhabi developer Sorouh Real Estate also launched Sun Tower on Reem island with a rent-to-buy option and Emaar launched a similar scheme in November 2008 for some of its developments in Downtown Dubai.
However, developers say they are shying away from the lease-to-own scheme because it had created problems in the past.
Not the right time
"I believe it's not economically viable," says Ah-mad Khalaf Al Marri, General Manager of Union Properties. "The scheme requires a lot of financial commitment and the risk is higher for developers with the interference of bank, as lease terms are spread over a long period of time."
"So it's not really beneficial to a developer as people used to exit the country when they go through financial difficulties."
But the current market dynamics is very different from what it was during the lean period that followed market crash in 2008. The remarkable resurgence of the property market in the past couple of years has increased real estate demand and developers are saying the timing is not right to reintroduce such schemes.
"From a developer's point of view, I don't think this is the right time to reintroduce such a scheme as it will not benefit the Dubai property market," says Al Marri. "Given a healthy path of market growth and substantial demand and supply, it's not a tight market anymore."
Union Properties also launched a rent-to-own scheme for phase one of its Green Community project in 2008. It claimed about 98 per cent of tenants availed of the option to buy their units. The developer also offered the scheme for select properties such as Uptown MotorCity, Green Community MotorCity and Control Tower at Motor City, and Index Tower and Limestone House at Dubai International Financial Centre.
But the recent market upturn no longer gives developers an incentive to continue with the scheme. Many developers have therefore stopped offering rent-to-own schemes and started focusing on traditional sales.
"It's time to make the most of the current positive climate in the real estate market," says Al Marri, adding the company might consider reintroducing such a scheme when a crisis emerges.
Although the growth of house prices has started to decelerate, demand remains very strong and investors continue to be bullish. According to the Dubai Land Department, GCC nationals alone already invested more than Dh19 billion in Dubai's property market during the first half of the year.
"In the current climate, rent-to-own is not something that will be attractive to developers who have customers willing to buy without having to test try out the property," says Garrett.
From a developer's point of view, Garrett explains rent-to-own schemes only work if there are vacant units • and a developer wants to generate an income stream with the hope of eventually selling the property.
Industry observers say the market will eventually chart its own course. While rent-to-own does not fit the current market scenario, things might change in the future.
"I have heard speculation of the scheme possibly coming back in the near future," says Garrett. "If the market sees an oversupply of available property or takes a turn in consumer confidence, there is potential that it could return." ^
How it works
In a typical rent-to-own scheme, the tenant agrees to a fixed rent for the first two years with a potential increase in the third year and an option to buy the property at a predetermined price. A portion of the rent goes toward the down payment. This gives the tenant an opportunity to live in the property before actually buying it. The developer usually charges a higher rent than the market rate to cover the option price or the deposit required to activate the option.
Click on Time to bring back to know more about rent-to-own in UAE
Source: Syed Ameen Kader, Special to Property Weekly