The only way towards sustainability? Why Dubai's property market needs a rent-to-own option
People from various geographies have landed in the UAE to make a new beginning. The one thing that many of these new residents are looking at is either renting or buying a home. I am referring to genuine buyers, who are ready to spend a considerable amount of time in this country.
In addition, there are several expats who have been here for years and now looking at buying a property, but are finding it difficult due to the current mortgage cap restrictions.
Exponential value growth has made buying a property a near difficult proposition for the majority of end-users. Mortgage regulations requiring 50 per cent of down payment for expatriates on off-plan purchases has made the option even more expensive. These regulations have stabilised the market and at the same time made property investment an “unaffordable deal” for most expats who usually cannot cough up the down payment requirements.
What is the solution? How can the developer and the genuine end-user benefit from this current scenario? Bring back the rent-to-own schemes that were there in the past.
These schemes offer an attractive solution to potential investors and sellers alike. Contrary to popular belief, they can also be adopted in good times, for projects that target middle-income expatriates. UAE’s past experience with rent-to-own schemes has been short-lived. For instance, there was one from a master-developer that allowed tenants to adjust 100 per cent of the first year’s rents as ‘home finance’ if they decided to purchase the property within ten months of living in the home.
Aldar launched similar schemes during 2011, when investor demand had hit record lows. Most of these have since disappeared. However, the time is apt for developers to reconsider the proposition. This can enhance their corporate performance and also provide residents with an opportunity to buy a property.
Imagine a plush two-bedroom home in a great neighbourhood with good schools within a vibrant gated community in Dubai. It has been freshly painted and ready to move in. But budget-conscious expats are not able to buy given the current scenario.
The objective of rent-to-own schemes will inspire confidence and reduce the risk element in buy. They would benefit investors and sellers in the current scenario, where property prices have become stable after exponential growth over the last year.
A typical rent-to-own agreement is structured like an option contract. It allows the tenant to purchase the property at a fixed price within a specific period of time. A portion of the monthly rent paid during the lease period is counted towards the down payment.
Usually the property is leased higher than the market rate to cover the option price or the deposit that tenant has to pay to activate the option. If the tenant is unable to exercise the option to buy, the owner is then free to rent or sell the property to another.
The arrangements benefit both parties. While sellers get an option fee and potential buyer, tenants get to live-in the property and try out the neighbourhood before actually settling in for the long-term. It also provides an opportunity for the seller to sell the property at a higher asking price because buyers who cannot own a house in any other way are usually willing to offer a higher future price based on the assumption that the market will improve.
However, there’s a risk of the renter opting out of buying your house at the end of the lease. Another issue is that in an upmarket locking the future price would not allow the seller to achieve full realisable value of the property.
Buyers typically prefer a long option period in these types of contracts. That is because this gives them a longer period of time to get their finances to qualify for a favourable mortgage. The option is favourable for projects that target salaried expats who may not have ready cash to make the down payment but might eventually save enough to be eligible.
The challenge for buyers is that during a downside, they might end up paying higher than market values or losing the option money. However, looking at the current market conditions, the industry is definitely moving forward and there are multimillion dollar projects that will take shape before the Expo.
— The writer is the country manager at Chesterton International.
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