Research firm assails rent control in Middle East

Published April 13th, 2008 - 07:10 GMT

Rent control, seen by many economists as old-fashioned, has recently made a surprising comeback in one group of high-growth, dynamic economies – the Gulf.

In December 2007 Dubai’s government toughened up its 2005 Rent Law and reduced the maximum 2008 rent increase to only 5%.  Abu Dhabi has likewise capped 2008 rent hikes at only 5%.

In neighboring Qatar, a rent freeze has been implemented while the government is determining the new rent increase cap. For the past two years to February 2008 rent increases were limited to 10% annually

In adopting rent control the Gulf has moved in the opposite direction to the rest of the world.  Elsewhere, rent control regimes have generally been dismantled or softened since the mid-1990s.

Rent control has been removed in most of Eastern and Central Europe.  Asia has also followed the trend: China, Japan, Malaysia and Singapore have lifted rent controls since the early 2000s.

The Gulf measures have dismayed landlords, and alarmed property investors.

In an extended research article published today, the pros and cons of rent control regimes in about 40 countries are reviewed by the Global Property Guide (http://www.globalpropertyguide.com), an international research firm.

“We believe that rent control is generally harmful,” says Prince Christian Cruz, senior economist at the Global Property Guide.

“But rent control can be benign, if: 1.) it is implemented so that its market-restraining effects are modest; 2.) it helps to defuse public protest about high rents; and 3.) it assists landlords and tenants by providing an agreed framework for contracts,”  he continues.

“Most of these conditions are not present in rent control measures in Qatar and UAE. If rent control persists in its current form, the property market boom might grind to a halt,” Cruz notes.

In defense of rent control
A common (and much abused) justification for rent control is the right to housing, which is sometimes protected by the constitution.

Another justification is to correct market inefficiencies such as information asymmetry and high transaction costs. Because of the high cost of moving, tenants can arguably be pressured by landlords to accept rent increases. Tenants may also be unaware of the real condition of units until they move in. If the tenant complains, the landlord may threaten to increase the rent.

Standard contracts perform a service to both landlords and tenants.  In many cases in modern society, the state intervenes in contractual relations between individuals in order to provide simplicity, clarity, and order.

Both landlord and tenant are helped if standard provisions exist, for instance, which determine what should be agreed on - the initial rent, rent adjustments, date of payment, penalty for delays, conditions for eviction and such. These can provide both flexibility and security.

The problem with rent control
The principal argument against rent control is that it tends to distort economic incentives, leading to inefficient distribution of resources.
• Rent control reduces the incentive of landlords to supply rental units. Rental units tend to be in scarce supply under rent control. Ironically this leads to an escalation of complaints against the landlord class. Vacancy levels tend to be relatively low and available units tend to be rented only under strict conditions, again aggravating relations between landlords and tenants.
• Rent control discourages landlords from maintaining and repairing units till the end of a tenancy.
• There is also an incentive for landlords to discriminate against tenants likely to stay for a long time, like retirees or couples with children.
• In some countries, landlords collect key money to offset the losses occasioned by rent control.
• Rent control tends to lead to bullying and illegal behaviour by landlords. If rent increases are allowed between vacancies, landlords will try to evict tenants in any way possible. This will likely translate into demands for government protection for tenants, i.e., into a further layer of bureaucracy and policing.
• Tenants in tenancy rent controlled units are less willing to move to other places, despite the possibility of earning higher wages.
According to a study by economists Basu and Emerson, “he removal of rent control can not only increase efficiency in the rental market, but can also lead to a general lowering of rents, making all tenants better off.”

Lessons for rent control
When might rent control be desirable? Where it will help provide all parties with contractual certainty.

Global Property Guide believes that rent control can be harmless or even (in some cases) mildly beneficent, where it occurs in the context of standardization of contract structures, designed to increase market certainly and to provide guidance for citizens.

However as noted before, rent control should be minimalist.

1. The rent control scheme should be simple.
It should be easy to determine if the unit is covered by rent control or not. It is generally easier to determine if the unit is covered by rent control if the basis is the actual rent, and not property value or construction cost. Using furnished vs. unfurnished for rent control delineation can also lead to confusion.

2. The basis should be transparent.
Using the CPI or inflation as the basis for rent increases is generally desirable,  because it is transparent. Most central banks and statistical agencies regularly report inflation.

Using a formula that only the rent tribunal can understand and configure creates abuse and corruption.

3. The rent control system should allow capital recovery.
The rent increase structure must allow landlords to recover their investments and certain costs.  Without this basic precondition, private housing investment will grind to a halt, with all the attendant evils mentioned earlier.

4. The scheme should be predictable.
If the allowable rent increase is changed annually, then the government must announce it early to allow landlords and tenants to negotiate and evaluate their options.

5. The rent control scheme should be easy to implement and enforce.
Decisions must be easy to execute and implement. Given the cyclical nature of the rental market, prolonged litigation and eviction proceedings can lead to substantial losses for the landlord and/or immense distress to the tenant.

6.  Special courts can help
The legal system is an important variable.  In most countries in Europe, and countries with English common law systems, a rent tribunal or rent board hears complaints regarding rent adjustments. The decision can only be appealed to the tribunal itself.  The process is usually swift and efficient.

In many other countries, on the other hand, cases related to rent adjustments are handled by generalized courts and can be appealed to the highest courts – which usually means a cumbersome and expensive process
“Qatar and UAE can learn a thing or two from Canada,” says Cruz. “Although the laws appear to be pro-tenant, the system is not entirely disadvantageous to landlords. Allowable rent increases are based on each province’s CPI, allowing regional disparity,” he continues.
A landlord can usually petition for a rent increase above the "rent increase guidelines" set for the province. Landlords doing so have to apply to that province's rent authority. Landlord-tenant disputes are resolved by the provincial (small claims) court system, or through a tribunal/arbitration system. The system is very efficient.


The Arab World takes the spotlight at The London Book Fair 2008
The London Book Fair is proud to host an array of events and seminars to tie into its Arab World Market Focus 2008 programme. The Market Focus initiative is targeted at boosting trade with one particular region, with the ultimate aim of helping to build long term business partnerships and trade between the international publishing community and the Market Focus region, which this year is the Arab World (defined as the 20 countries and the 2 states that make up the Arab League and have Arabic as their registered official language).
This is the largest Market Focus programme ever run by The London Book Fair and has been three years in the making. It was devised with the British Council and the programme is the result of collaborative efforts of the past few years.

The selection of the Arab World as Market Focus is timely, with statistics showing strong trade growth in this area. In 2006 UK exports alone to the Middle East/North Africa increased by 13.3% to total £91 million, the largest increase from any region of the world, according to the UK Publishing Industry Statistics Yearbook (© PA 2007). Combined with a market of some 300 million potential readers, the Arab World represents a vast trading bloc full of potential to the international community. The London Book Fair will provide a forum to build cultural and commercial bridges with this region, and will showcase the richness and diversity of Arab literature.

The London Book Fair is honoured to announce that the opening event of the Fair will feature
H. E. Mr Amr Moussa, Secretary General of the League of Arab States, who will give the keynote speech at the Chairman’s Breakfast on Monday 14th April. This will be on the subject of “Arabic Partnerships: Opportunities and Complexities”. This will be followed by a tour of the Fair and a press briefing. Mr Moussa was previously Minister for Foreign Affairs in Egypt, and became Secretary General in 2001. He was awarded the Grand Cordon of the Nile, Egypt, May 2001 and the Order of the Two Niles, first class, Sudan 2001. He has received high Decorations from Ecuador, Brazil, Argentina & the German Federation.

Many new stands have been taken at this year’s Fair by exhibitors from the Arab World including:
         Mohammed Bin Rashid Al Maktoum Foundation (Translation scheme, UAE)
         Cambridge-Obeikan (Publisher, Saudi Arabia)
         Ministry of Information, Culture & National Heritage (Bahrain)
         Dar Al Saqi Lebanon (Publisher)
         Nahdet Misr Publishing & Printing (Egypt)
         Basemah Al-Failakawi (Kuwait)
         Ministry of Heritage and Culture, Oman
         National Council for Culture Arts and Heritage - Doha
         Ministry of Culture Youth & Development (UAE)
         Abu Dhabi Authority for Culture & Heritage
         Ministry of Culture, Lebanon
         Jordanian Publishers Association
         General Egyptian Book Organisation
         The Royal Embassy of Saudi Arabia
         Dar Al Shorouk (Publisher, Egypt)
         Motivate Publishing (UAE)

Other key Market Focus features include:

-          Alaa Al Aswany, the bestselling Egyptian author of The Yacoubian Building, will be Author of the Day on Tuesday 15th April. Born in 1957 he is a dentist by profession, and for many years practiced in the real Yacoubian Building in Cairo. He has written prolifically for Egyptian newspapers on politics, literature and social issues. He has been a strong campaigner for the need for free press and rule of law.

-          Forty Arab authors will be attending the Fair and taking part in an extensive seminar and events programme, organised in conjunction with the British Council. Participants include Rajaa Alsanea, Saudi author of The Girls of Riyadh, Jordanian writer Elias Farkouh and Khaled Al Khamissi, author of Taxi Stories.

-          Literary Café interviews will take place with Mourid Barghouti, the Palestinian Poet; Bahaa Taher, the winner of the International Prize for Arabic Fiction; and Egyptian author Khaled Al Khamissi.

-          A series of events aimed at facilitating trade between international and Arab publishers will take place including: Copyright and Publishing Contracts in the Arab Countries (hosted by ALECSO), Reviving Translation in the Arab World (hosted by Kalima) and Children’s Publishing in the Arab World (hosted by Oxford Brookes University)

-          A collection of Qur’ans and Arabic manuscripts from the 8th to the 19th century AD will be on display, kindly provided by the Khalili Collection. Professor Nasser D Khalili has been collecting art since 1970 and has assembled impressive art collections in a broad range of fields, including one of the most comprehensive collections of Islamic art in private hands which comprises some 20,000 items.

-          Launch of the first ever Emirates Airline International Festival of Literature – 11.00am Tuesday 15th April in the Piccadilly Room.

-          Press conference for Beirut as World Book Capital 2009 – 11.30am Tuesday 15th April at stand H905.

-          A Mezze bar selling Arabic food, featuring The London Book Fair / Banipal Display of Modern Arab Literature. This is a collection of fiction (novels and short stories), poetry and memoir by Arab authors, which have either been translated into English, or written in English. The display is designed for booksellers and librarians to show what is on offer from the Arab World in English, and also to encourage more translations from Arabic or French or other languages, into English and other languages.

-          An Arab Authors Evening at Foyles Bookshop on Charing Cross Road takes place on Monday 14th at 6.30pm. The panel will be chaired by Dedi Feldman from Words Without Borders, and will include Alaa Al Aswany with Khaled Mattawa and Hisham Matar. It will be a general discussion about Arab writing and will include a Q&A with the public. The event is free.

Emma House, Exhibition Manager International Development, The London Book Fair says:
“I’m delighted that we have put together such an impressive range of events and other initiatives to mark the Arab World as Market Focus 2008. I have found the experience of forming business partnerships with people from the Arab World and discovering more about its literature extremely rewarding, and I’m sure this experience will be shared by everyone attending The London Book Fair. I have always had a warm welcome wherever I have travelled in the Arab World, and I am pleased to be able to offer the same hospitality to our Arab visitors. There is clearly great interest from Arab publishers in attending The London Book Fair and grasping potential commercial opportunities. I hope this will lay the foundation for many fruitful business partnerships for the future.”

British Council Director of Literature, Susanna Nicklin, says:
”Improving cultural understanding is the driver behind the Arab World seminar  programme, while the backdrop of the fair provides the crucial business networking opportunities to complement that. The ultimate aim is to create relationships between organizations, people and countries. The result could be  more Arabic books translated for the UK market and more Western works reaching Arab readers, giving people the opportunity to read what others have written and engendering more acceptance and understanding between our communities.“
The London Book Fair has already been involved in initiatives to open up the Arab World to the benefits of international trade with publishers. The team have been working closely with the British Council, which has been instrumental in building relationships with the region. This has included joint trips to book fairs in Damascus, Sharjah and Cairo to help facilitate contacts between British and Arab publishers, and to introduce them to the mutual benefits of trade.


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