With rents, it is a waiting game for Dubai’s tenants

At the start of 2015, the press was awash with stories about property selling prices and falling rents in Dubai. There were even reports of possible rent-free periods, free flights being offered and other inducements for new tenants.

So, as we reach the end of 2015, why have we only seen a fall in sales prices and with little impact on the rents? The forecasted drop in sales prices has been borne out throughout 2015, with the declines adding up to the initial forecast of between 10 and 20 per cent.

Although people have been saying that the monthly 1-2 per cent drops are not much, it has all added up to make the forecasts correct. Part of the reason for this is additional supply ... although over-estimated at the start of this year.

The other reason for this is a lack of demand, as with a strong dollar, and therefore a strong dirham, Dubai property prices for overseas investors in their local currency has increased. For example, the Russian rouble had depreciated by 60 per cent; this means that a property buyer from Russia would have to pay 60 per cent more than they did in the past to buy the same property.

It is the same story of currency depreciation for India, Brazil, China and other emerging market economies. This coupled with the decline in oil prices, which hit local investment, has led to the demand drop off in Dubai realty. The last ingredient to add to the mix is cheaper off-plan property being launched.

This leaves investors asking themselves whether they to want invest in a new property, with certain guarantees, or invest in a property that is 5-10 years old that may need some major maintenance.

Rental prices have remained reasonably steady throughout the year, with reported declines in the less fashionable areas of the UAE, and even then, by only around 5 per cent. This is far less than expected.

The main reason for rental prices to continue their upward trajectory is due to the RERA (Real Estate Regulatory Agency) Rent Index and the lack of mobility from incumbent tenants. For a tenant to consider moving homes, or negotiating a lower rent, they would need to see a rent reduction elsewhere of over 10 per cent (i.e., more than the deposit and agent fees).

This is clearly a significant drop, and one that would take time to play out. With the RERA Rent index not being updated since January, rents that have decreased are not accounted for. Thus an incumbent tenant may well have their future rent calculated against an Index that may be artificially high.

Therefore, the rent increase may be inflated. In time the calculator will be adjusted in line with the movements witnessed in the rental market. For the moment, the only people benefiting from lower rents are those who know little about what has gone before.

With positive net migration to the UAE, new residents to the country are able to pay slightly cheaper rents as an empty property is classified as a depreciating asset. At the end of the day, landlords are businessmen, their property is an investment, and for that property to serve its purpose as an investment it must be rented out.

It is on this basis that rental decreases have been reported as landlords with empty properties seek to make their investments pay.

There were numerous gimmicks talked off to induce tenants to certain property or areas. Two of these, ‘rent-free periods’ and ‘free flights’ were used as tools to advertise developments and attract coverage. Little more has been heard of these since early 2015 and they are certainly not the norm.

As we look to 2016, reports are beginning to be published expecting further drops in sales and rental prices. We have no doubt the trend seen for the last 12 months will continue, but a lot will depend on global economics, interest rates and, ultimately, net migration into the UAE.

For now, if you want to see lower rents, it is nothing more than a waiting game and patience is key. 




Source: Toby Young, Special to Gulf News GN

The writer is the Managing Director of www.propertyrights.ae


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