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In Dubai, where residential rents have climbed as high as 50 per cent over the past two years, it's frustrating for many prospective tenants to see a sizable number of inventories remaining unoccupied throughout the year. Real estate experts believe this is because most of these are either holiday homes or investment property.
This raises fears of an artificial shortage being created in the market — something that could fuel rent increases. However, market analysts don't consider this a serious problem as Dubai is seeing a steady supply of new inventory (around 25,000 properties being built this year), which has helped mitigate rent increases this year. According to data from Asteco, average apartment and villa rents reduced by 2 per cent and 5 per cent respectively in the second quarter over the same period last year. But is it healthy for a market to have that many empty units while demand for rental homes continues to grow?
''The fact that these units are not being offered for rent is clearly frustrating for those seeking rental accommodation,'' says Craig Plumb, Head of Research — Middle East and North Africa at JLL. ''This is a reason the rental market is currently performing [better] than the sales market.
Some tenants worry that the situation might aggravate when demand and supply reach equilibrium. However, the market is still far away from that, considering the fact that Dubai has huge inventories in the pipeline for the next few quarters.
But why do people keep their houses empty? There are numerous reasons, says Gregory Lewis, Senior Negotiator at Knight Frank. ''Some are waiting for tenants to move in, while some are in the process of refurbishment,'' Lewis explains.
Lewis adds that there are also those owned by investors from Europe, Russia, the GCC and the Indian subcontinent who may be holding on to the property as a long term investment and do not wish to have people living in their apartments or villas. He adds that many people believe an empty property is easier to sell or to let than those with tenants in situ, as it allows landlords to make any necessary repairs to the property for new tenants/purchasers to move in.
''It must also be remembered that many buyers in Dubai purchase with cash, rather than taking out a mortgage, so they don't have the added pressure of mortgage repayments,'' says Lewis. ''And given that mortgage rates are reasonable in Dubai, compared to other parts of the world, even if they do have repayments to make, most vendors can cover the charges if the property stands empty.''
In fact, no one actually knows how many houses are vacant in Dubai and for how long as there is no mechanism in place to do so. According to Knight Frank, around 20-25 per cent of homes could be empty in Dubai. ''It's incredibly difficult to assess, as some are empty for as little as a week before new tenants or residents move in, while others stand empty for 50 weeks a year because they're holiday homes that are [inhabited] infrequently,'' adds Lewis.
Plumb, however, puts a more conservative figure. He says there are around 300,000 units in the freehold areas of Dubai out of a total stock of around 380,000 dwellings. ''JLL estimates that 10 per cent of these (around 30,000 units) could be entirely vacant for the whole year — many of which have not even been fitted out.''
It's a known fact that there is a large population living in rental houses, simply because many families can't afford or do not wish to buy property in Dubai. Furthermore, many houses lying vacant means there is stock available, but many of these are not up for rent.
So, are these decisions to keep property empty purely driven by greed? No, says Plumb. ''Landlords are not attempting to move the market by their actions. They are simply responding to market conditions. If prices are going up for vacant units, why bother to spend money fitting out units for rental?''
Robin Teh, Country Manager of Chestertons UAE, says, ''Many foreign investors regard Dubai as a safe place to invest in a turbulent region and, therefore, their intentions to hold on to property may be driven by safety rather than greed.''
However, Plumb says given that sale prices are no longer increasing (JLL expects them to fall at least 10 per cent this year), there is now less incentive to keep units vacant. ''More owners are likely to offer them for rent so that they can get a rental return until the market recovers sufficiently for them to sell the units for capital gain,'' he adds.
Industry observers say this trend is not unique to Dubai — most property markets across the world have absentee owners who keep their property empty. ''The percentage of empty [real estate] remains high in most desirable cities of the world, where property investment is seen as a status symbol rather than a need,'' says Teh. ''It is estimated that more than 11 million homes lie empty across Europe.''
However, regionally speaking, the issue could be more pronounced in Dubai than other markets in the GCC, given that more units are sold to property investors in the emirate.
''This does not mean it doesn't exist in Abu Dhabi and elsewhere, but the scale of the problem [in other places] is much less, given the limited number of zones foreigners can purchase real estate,'' says Plumb.
Most property experts agree the situation doesn't warrant government intervention, as market forces are capable enough to respond to such issues.
Although some overseas governments such as the UK have had imposed taxes on units that are held vacant and not offered for rent, analysts believe it's unlikely that such an approach will be adopted in Dubai.
''Governments can't legislate as to what people should do with their own private property — whether they rent it out or keep it standing empty, it's their decision alone,'' says Lewis. ''Neither can market forces dictate that investment properties should be occupied on a fulltime basis.
''There is no global standard ratio of vacant versus occupied property in a healthy market and I'm sure that if you look at the property market across the world, you'll find a similar proportion of vacant homes in any given city.''
Mario Volpi, Head of Project Sales at Asteco, believes the government is right in its current approach and would only step in in certain situations that get out of hand.
''This was proved when the market was overheating last year, so the transfer fees were put up and caps on mortgage lending were applied,'' says Volpi. ''I think that the government does believe in market forces, so it will not interfere unless absolutely necessary.''
At the moment, The agrees that the situation does not warrant any regulations as most of the investment is in the high-end segment of the market and there is limited rental demand there.
Plumb adds: ''There is a much better way that the government can protect tenants through [initiatives such as] rental control, which already exists in Dubai.''
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Source: S.A. Kader, Special to Property Weekly