Buying property in Dubai - A tenant's dilemma

Buying property in Dubai - A tenant's dilemmaImage Credit: Supplied

Although Dubai's housing prices are showing signs of cooling off, the rental market continues to soar faster than in most traditional financial cities in the world. According to a new report by Knight Frank, Dubai recorded the strongest growth globally, with prime rents rising by 6 per cent in the first quarter, ahead of cities such as London, Hong Kong, Tokyo and New York.

Prime rents in the emirate rose by more than 10 per cent in the past six months, while annual growth was at 16.4 per cent, second only to Nairobi, according to the consultancy's Prime Global Rental Index.

''It is of note that Dubai and Tokyo recorded the strongest rise in prime rents in the first quarter,'' says Victoria Garrett, Associate Partner at Knight Frank. ''The key reasons for this are the influx of expat workers in Dubai, which had been boosted by the winning World Expo 2020 bid. An increase in population in the region of three million is projected by 2020.''

But the rent surge has also raised concerns, especially as prime rents continue to outpace wage inflation in Dubai.

There are also concerns about the growing cost of living due to the rental surge. ''The rising cost of living in the emirate is now starting to become a very real concern for many residents, with rentals having risen by an average of 45 per cent during the past two years,'' says Mat Green, Head of Research and Consultancy — UAE at CBRE Middle East.

According to CBRE, the residential sector has seen rents surge by an average 22 per cent year-on-year, with apartments registering an increase of 29 per cent, while villa rentals have grown by 15 per cent.

The strongest sub-markets for apartments were Dubai Sports City, Downtown Dubai, Jumeirah Beach Residence, International City and Dubai Silicon Oasis. For villas, the best-performing markets were Al Warqa and Springs.

Many industry experts are wary of the sharp turnaround in rental values, which began in 2012 due to the strong rebound of the economy and the subsequent increase in job creation. The situation was further aggravated when landlords started asking higher rents on the heels of Dubai winning the rights to host Expo 2020.

''Rental price increases started in 2012 and have been going up ever since,'' says Mario Volpi, Managing Director of Prestige Real Estate. ''This raises concerns about affordability for individuals, families and companies alike.''

Volpi attributes the surge in rent to a number of factors, including the positivity surrounding the market following Dubai's Expo 2020 success. He says many people were convinced Dubai would win the rights to host the event, so the positive sentiment was already growing long before the announcement in November.

''Winning the right to host the Expo has pushed the government and private developers to announce bigger and better developments,'' says Volpi. ''Improvements to infrastructure and general additions to Dubai's attractiveness will improve the desirability of the city and this is already evident as the emirate was voted recently the fifth most popular city to visit in a survey commissioned by MasterCard.''

Affordable alternatives

Analysts have warned of a potential backlash for property markets that grow very fast. With rents continuing to outpace wage inflation many budget-conscious residents, for instance, are expected to downsize their homes, move further out of the city or ultimately relocate to other emirates, particularly Sharjah and Ajman, says Garrett.

''We expect an increase in flight to affordability, with occupiers starting to consider Sharjah and the northern emirates as a cost-sensitive alternative to Dubai,'' says Green.

In recent months, the market also saw many tenants moving further to Ajman after landlords in Sharjah started quoting exorbitant rates to cash in on the sudden surge in rental demand.

''Ajman is now taking over the mantle as the relocation destination for budget-conscious residents, as landlords in Sharjah ask higher-than-average rental rates, particularly for brand new buildings in popular locations such as Al Nahda, Corniche and Al Wahda,'' says John Stevens, Managing Director of Asteco.

Ajman's residential real estate sector grew 7 per cent in the second quarter, driven by the affordability of property in the emirate, with two bedroom apartments available for Dh30,000-Dh45,000 per year compared to around Dh80,000 in Sharjah, according to Asteco.

Although the Dubai Government introduced a rental cap last year to discourage arbitrary rental hikes by landlords, it seems to have no strong impact on rental inflation. The new decree, which came into effect on December 18, allowed only a certain percentage of rent increase based on the average price of similar properties in the area.

But it has been a challenging task for authorities to enforce the law as many landlords try to circumvent it. ''As it stands, the rental caps haven't been enough to control rental hikes and it looks like the government will need to take more measures to control it,'' says Garrett.

Market corrects itself

Some market observers, however, feel that natural market forces should be capable of slowing the rate of growth, even without government intervention.

''Rent caps are a blunt instrument,'' says Richard Sweetman, Managing Director of British Arabian Asset Valuers and Chartered Surveyors. ''The strategic control of economic circumstances, created by statute and other factors, is a preferable method of control.

''Rent caps create a one-size-fits-all scenario, and the system is fraught with abuse by landlords, despite the good work done by the Rent Committee representing beleaguered tenants.''

Sweetman, who is also a member of the Rics Valuation Professional Group, suggests that schemes such as the Rics Valuer Registration in the UAE could support the drive to adopt international best practice standards and help deliver healthy, sustainable, longterm growth in the country's property market.

''This can mitigate the risk of poor valuation practices by unregulated and sometimes unqualified valuers,'' he says.

Industry observers agree the government is doing its job in curtailing rent increases through legislation. However, they also believe there are problems with the enforcement of government regulations, such as the rent cap. It is therefore important to educate the public about the mechanisms of relevant property laws.

From tenants to buyers

In an ideal market scenario, people will look at buying options when rental prices go up. Since rental spikes have also coincided with a deceleration in house price growth in recent times, market players are hopeful this will create a compelling environment for renters to buy property, as they would be better off getting a mortgage than paying high rents. This could also help banks improve their businesses.

''Dubai is the most expensive location for rental property in the Middle East,'' says Paul Trowbridge, CEO of United Arab Bank. ''Estimates suggest that the cost of renting a threebedroom unit increased by more than 30 per cent as demand across Dubai continued to accelerate this year. Rising rentals is attracting more end users to buy property, as the monthly instalments are turning out to be cheaper than the rents.''

Although the rental spikes are encouraging some renters to buy their own property, there are a few things that are holding them back. ''The doubling of the transfer fee and the mortgage caps that came at the end of last year has led some people to defer their decision to buy,'' says Garrett.

Sweetman says it's not going to be easy for renters to buy property when the mortgage cost is very high.

''The cost of buying through a mortgage is now close to 40 per cent of the cost of the property. Many renters simply do not have that kind of cash available,'' he says. ''There will be exceptions to this, but remember the growth in rent values probably still lags behind the growth in capital values.''

Rental outlook

It is estimated that 200,000-250,000 people will settle in Dubai each year until 2020. Initially, a lot of these expatriates will look to rent, especially the whitecollar workers, before possibly buying.

Despite the positive outlook, industry experts say the high growth in rental values is unsustainable and a period of slower growth is likely in the short to medium term.

''Slow growth is stable and usually sustainable,'' says Sweetman. ''High growth in both capital values and rental values demonstrates a lack of market maturity and owner sophistication.

''Such high growth is usually fuelled by greed and all too frequently by unscrupulous agents inflating prices.''

Although it is difficult to predict exactly what will happen in the future, some industry experts don't see the current growth trajectory as sustainable. And until the rental market shows signs of cooling off, tenants will continue to have a tough time.

Source: Syed Ameen Kader, Special to Property Weekly


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