Dubai’s rental market seeks rent-to-own cure
Such schemes can be the only long-term solution to landlords unilaterally jacking up rents
Published: 16:35 October 16, 2015
Dubai: Dubai’s landlords may soon have cause to regret making unjustifiable rental demands on their tenants, who could soon be given the options they never had in the past. And it’s up to the tenants to decide whether the status quo needs changing.
Some master-developers are reviving ‘rent-to-own’ schemes, and if offered at certain price points should have no trouble finding buyers. In rent-to-own, the buyer enters an arrangement with the developer whereby the monthly rents will count as instalments made on acquiring the property in full.
Dubai South (formerly Dubai World Central) has already confirmed that rent-to-own will be part of the incentives attached to its massive The Villages development. That this project will create as many as 20,000 homes — prices are yet to be revealed — within the cluster makes it even more influential in setting the future dynamic of Dubai’s property marketplace. And the first of these units should be ready by 2019.
Another sprawling development, the Falconcity of Wonders is also having a version of rent-to-own. That this community already has a sizeable inventory makes it even attractive for a buyer to make the switch now from living in rented premises to one that he can call his own in time.
Any which way one looks at it, Dubai’s residential tenants — especially the sizeable section of the population with household incomes of less than Dh20,000 a month — are near breaking point on their rent situation. After the recent round of increases, many saw their rental-related outgo go well past the 40 per cent mark of their overall household expenses. In an ideal situation, rentals should not constitute more than 30 per cent of a household budget.
Unfortunately, from a tenant’s perspective, the slide recorded in the property market has not extended to rents. Market updates suggest that whatever “corrections” there have been on rental, has been limited to low single digit dips. Contrast that with the 15-20 per cent decline recorded in Dubai’s property sales values.
According to the real estate database portal Lookup.ae, rentals “remained quite steady, appreciating about 10 per cent on average. From early 2013 to their peak in September 2014, average rentals have appreciated 30 per cent.
“Since then, rentals have declined only slightly and in most cases are holding quite steady.”
This is where a well thought out rent-to-own scheme can upend the landlords’ vice-like hold in dictating terms.
“There are several expats who have been here for years and are now looking at buying a property, but finding it difficult due to the current mortgage cap restrictions,” said Robin Teh, Country Manager at Chestertons Mena. “But rent-to own schemes have benefits for both tenants and developers.
“Sellers get an option fee and a potential buyer, while 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 at a higher asking price because buyers who cannot own a house in any other way are usually willing to pay based on the assumption that the market will improve.”
According to Gibran Bham, Co-Founder of lookup.ae, “Apartment rentals will correct more significantly than villas — there are approximately 41,000 apartments under construction and 8,000 villas and 7,000 town houses.
“But much depends on how much of [the intended] 2016 supply gets pushed back. There are still many inaccurate reports that claim 20,000 units will be released in 2015. This is wholly inaccurate.
Much of the 2015 deliveries have been pushed back to 2016 and some of 2016 supply could be pushed back as well. Construction delays are common in Dubai.
“Either way, in terms of raw supply numbers, rentals will correct. It is just a matter of how significant it will be.”
For Dubai’s tenants, even the subtlest of change in their equation with landlords will be welcome.
• Residential rental values peaked in early 2009 and then began a steady decline of about 35 per cent and reached their absolute low in mid-2011, according to lookup.ae estimates.
• An estimated 40 per cent of future apartment supply is graded as high-end and 10 per cent as luxury.
• “One of the reasons why rentals have not corrected like the sales market is because many investor-landlords who are looking to sell [or may want to sell in the near future] decided to not rent out their properties as they become vacant,” said Gibran Bham, Co-Founder of lookup.ae. “Once a unit is rented out, it is not easy to get it vacated and that could impact a potential sale. We believe that at least part of the reason we aren’t seeing a shift downwards for rentals is artificial.
• “Historically, we are used to seeing drastic movements in Dubai realty,” said Bham. “This has not been the case since 2014. Both sale and rental values are moving in more subtle ways. This market is less prone to shocks. Therefore, any corrections we see will be gradual.”