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The rent-to-own model exists in many markets including in the UK and US. While plans like these are popular among people with a low purchasing power, it is not exactly a common practice.
These schemes typically provide an option to the tenant to own the property at a later stage, so that the buyer gets enough time to arrange the funds and also get a feel of the area and facilities before actually making the final purchase.
The property is usually leased higher than the market rate to cover the option price or the deposit that the tenant has to pay to activate the option. Also, if the tenant is unable to exercise the option to buy, the owner is then free to rent or sell the property to another buyer.
Currently, the UAE’s secondary market is slowing down and speculative interest has dried up. It’s a good time to bring back the scheme to attract more end-users and further consolidate the industry for the long term.
Rent-to-own schemes were first introduced during the early 2000s when Dubai was carving an identity for itself in the property domain. During that phase, these schemes presented an attractive solution to potential investors and sellers. These allowed tenants to adjust 100 per cent of the first year’s rents, as part of their mortgage if they decided to purchase the property within a stipulated time of living in the home.
I distinctly remember my friends buying properties in Dubai during that period and this new rent-to-own scheme was a key point of discussion in several conference rooms. People who were planning to stay and work in Dubai for five years and more were happy to jump on to the bandwagon.
This scheme faded away as the market improved, and developers once again wanted to capitalise on the growth. However, this was later reintroduced a decade down the line, when investor appetite was on the wane.
Towards 2013, when the market regained confidence this particular concept was again put on the back burner.
However these days, when you are driving down the Shaikh Zayed Road, you may see several hoardings with rent-to-own advertisements. Due to the current rental market condition and the supply situation, some developers have refloated the concept to attract potential customers. These are developers with ready to move in properties with the desired amenities.
It now all depends on the tenant — or the buyer — to take that leap of faith and buy the property of his or her dreams. Most times, the main hurdle is finance or mortgage as well as the buyer’s eligibility criteria and the payment capacity.
But to have a win-win situation, both parties have to come together on a common ground and ensure that it is mutually beneficial.
Actually, the time is now ripe for more developers to strategically reconsider this particular proposition. This can enhance their bottom-line if executed well and also provide residents with an opportunity to buy a property in Dubai.
The current market situation indicates that it may be stabilising, which means there is not a significant upside. In such situations, developers can adopt this option to protect them from any pitfalls. It may restrict large upside gains, however, on the positive side it will reduce the other associated risks significantly.
The rents don’t show signs of easing; at the same time there are new residents who are currently either looking to rent or buy a property. The mortgage cap situation is also something that might not be feasible for many expats who are planning to buy here. Therefore, such schemes should be tailored appropriately to suit the requirements of both buyers and sellers.
Challenges to be addressed
The main hurdle is the uncertainty faced by the seller. Under a typical rent-to-own model, during a stipulated period the seller cannot sell the property to another buyer. At the same time the tenant can still exercise the option to not buy the property at the end of this agreed period.
Therefore, the seller bears more risk in this arrangement as compared to the buyer, which is why the arrangement is not widely popular with developers. However, if the proposition is well-balanced, then it might change this situation to the benefit of both parties.