Bubble Ahead? Dubai rents to increase even further in 2014
2013 has no doubt been a big year for the UAE property market. Dubai was recently named the world’s strongest housing market in 2013 given the city’s status as a safe haven with improved consumer and investor confidence. Home prices have been recorded at the highest levels since the downturn and the market has also gained a more favorable reputation for tighter regulation, given the spate of laws we’ve seen come into effect this year.
So much so that even as 2013 inches to a close, the government has enforced a new rental decree which allows for rents to be increased by five per cent if they are 11 per cent below the market rate for the area rather than 26 per cent, as determined by RERA’s rental index. The law will be applicable to private and public sector owned properties in Dubai, as well as those within the free zones as reported in the Khaleej Times.
With fears of a lurking rental bubble especially post the Expo 2020 win, this latest announcement can be seen as yet another initiative by the government to ensure that the momentum within the real estate sector is managed well and that landlords do not arbitrarily hike rents on renewals on any property within the city. This also makes sense given the fact that the many businesses and professionals expected to come in to the country in the years leading to the Expo could lead to heightened demand for properties, causing landlords to demand higher rents.
Reactions to the new rental policy, as expected, have been mixed. Whilst some residents consider this a better move than the recent total removal of the rent cap in Abu Dhabi, others worry that a rise in rents too quickly could drive the market into bubble territory. However, we can also look at the situation from the viewpoint of the landlord. For one, since 2008/2009, tenants in Dubai have enjoyed the benefits of relatively lower rents. Hence, landlords could argue that given the rebounding market, they should be able to pick up better returns. This may also work in the favor of tenants, as more landlords’ content with rental returns in the long run would mean fewer reasons for them to make a quick buck by evicting tenants. Also, given the huge influx of investors to Dubai in view of Expo 2020, it makes sense to realign and adjust the rental index across private and public sector and free zone owned properties in Dubai.
Amidst all this debate, there are a couple of lessons we need to take away. Whilst landlords should understand their responsibilities and abide by the law, tenants should make sure they understand the Dubai Rent Index that provides average rentals for all key neighborhoods and use the online Rental Increase Calculator to know the increase their landlords are eligible for.
The house price boom that preceded the downturn was so remarkable that to most people there seemed only one way for prices to go up. 2013 has been a year of change and growth that many hope will carry into the New Year. Whilst the housing market has indeed made great strides showing a marked increase in sales and investor interest and setting the stage for thriving demand with the Expo 2020 win, expecting the price appreciation to continue with the same fervor next year seems to me once again a self-reinforcing cycle of popular belief that prices can only go higher. This, of course, is not realistic and a sign of misplaced optimism, as for the housing market stable rather than accelerated growth is what will make it robust and keep the heat out of housing.
Ultimately, supply and demand market dynamics will override other variables. With market and economic fundamentals remaining strong, there is little reason at this stage to question that 2014 will also be a strong year for the real estate market in the UAE.
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