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James Smith (name changed by request) felt very lucky when he successfully renegotiated his rent agreement in June last year. He got a much lower rate than what he had to pay in the previous year for his two-bed villa at Al Reef Villas, Abu Dhabi.
However, when it came to renegotiating the agreement with his landlord in June, he realised how difficult his life had become.
That's because the government in November last year came up with a directive that lifted the rent cap limiting yearly increase to 5 per cent. This meant rents will be determined by market forces, including the location and condition of the apartments. This gave landlords a free hand.
''My landlord proposed a rental increase of 21 per cent — which we told him was ridiculous.
''He seemed to think that because we got a good deal the year before, it was his turn to reap the dividends of the Abu Dhabi Executive Council's decision to scrap the 5 per cent rental cap,'' says Smith, a British national living in Abu Dhabi with his family for the past six years.
Smith previously had a good relationship with his landlord. ''But his greed forced us to look elsewhere,'' he says.
However, Smith's agony didn't end there. ''When we looked around, we found other landlords in areas previously within our budget were doing the same thing. So we took a decision for my wife and three children to move back to the UK and I would find a studio on my own,'' he says.
Smith wasn't the only one to face a drastic hike in rent when their agreement was up for renewal after the rent cap removal came into effect. If industry reports are to be believed, many areas in Abu Dhabi have seen increases as high as 47 per cent — unaffordable for many.
David Dudley, Regional Director and Head of Abu Dhabi Office, JLL Middle East and North Africa, says, ''The highest levels of growth have been in secondary properties that were historically leased at low rents.
In some instances, increases have been dramatic within secondary stock as landlords take the opportunity to increase rentals in an unregulated market.''
He warns there is a danger that this will be pricing out the lower income earners within Abu Dhabi's workforce, causing the emirate to become uncompetitive on cost of living, as was the case from 2007-09.
According to JLL figures, the prime residential market saw an annual rental increase of 17 per cent last year, and an aggregate of 12 per cent during the first three quarters of this year. ''While Q3 did not see rental growth, we expect rental growth to occur during Q4 resulting in annual rental growth in 2014 at a similar level to last year,'' adds Dudley. Many in the industry feel that the pendulum has swung too far in the favour of landlords. As long as there are more tenants than landlords in the market, this problem will persist. Also, every sector in the UAE has seen a massive recruitment drive, despite the push for Emiratisation, and that shows no sign of subsiding.
Since new developments are slow, landlords can afford to milk the cow for all they can until something is done to address the balance.
Smith, who holds a senior position in a media company and considers himself fortunate to earn decent money, says, ''I don't agree that it's still a tenants' market. I've had to pay Dh120,000 for a three bed apartment — something that would have cost maybe Dh105,000-110,000 before the cap removal. I had to take it because no other units were available and I risked having nowhere for me and my family to live by the time they moved back over from the UK this month. Hopefully my wife can find work to supplement our income. Finances will be tight on what we pay in rent and if they increase next year, I just don't see how we will survive.''
Though some tenants have moved to cheaper areas, it wasn't an easy call as they had to deal with issues relating to finding good schooling and social infrastructure for their family, besides facing heavy traffic at peak times.
''Affordable housing is a massive problem, especially when taking other factors such as the lack of school places [and high fees] into consideration. If you have a low income and still have to pay for school and high cost of rents, Abu Dhabi can drain you very quickly,'' says another resident who didn't wish to give their name.
Industry observers say the captial needs to improve its social infrastructure in order to offer attractive proposition for people who are looking to relocate to newer areas under development.
Jerry Oates, General Manager, Asteco Abu Dhabi, says, ''Abu Dhabi still needs more schools to accommodate demand from prospective students and their families, and there is also room for expansion with the provision of new shopping areas and community facilities that offer leisure activities at the weekends. This remains a strong persuasive argument for daily commuters to consider relocation,'' says.
However, Oates says Asteco has seen a marked increase in the number of new developments that offer facilities such as pools and gyms, and it is anticipated that this will become a reality for Abu Dhabi over the next few years.
Mat Green, Head of Research and Consultancy UAE, CBRE Middle East, says the creation of more integrated mixed-use developments and the continued expansion and improvement of infrastructure facilities reflects the government's vision to make Abu Dhabi more attractive for visitors and resident workers alike.
''However, while there has been significant progress in developing residential elements, many master-plan developments are still lacking cultural, retail and community facilities — elements that will ultimately make these locations more liveable and importantly attractive to investors,'' he says.
Reinstate the rental cap?
Many in the industry are of the opinion that the government should reinstate the rent cap, at least for the affordable and middle-income housing segment. However, some analysts say they haven't seen any evidence of this law being removed or relaxed in the near term.
Dudley says, ''Given employment growth is occurring in both government and private sectors, ultimately there needs to be more housing supply coming through, or Abu Dhabi could once again face a major undersupply and sharp spike in rentals, as was the case in 2007 and 2008.''
He says many sectors may not require a rental control mechanism as these can be controlled entirely by market forces. ''However, for affordable-to middle-income housing, we consider that it is important that a rent control mechanism stays in place to protect people on lower incomes and keep Abu Dhabi cost competitive,'' he suggests.
There is an understanding in the market that the government is currently looking to implement a new rental control mechanism based on a rental index (similar to Dubai), rather than a maximum permitted increase across the entire market.
However, industry experts suggest the best way to achieve this will be through government programmes to deliver more affordable housing stock.
Have a look at the rising rental rates across the capital
Source: Syed Ameen Kader, Special to Property Weekly