Why rents in Dubai are not falling

Residents are increasingly crying foul against reports that claim rents in Dubai are falling when the market reality is in stark contrast. Talking to a vast majority of Dubai residents reveals that they have all faced rent increases upon recent lease renewals.
"My landlord has increased rent each year for the past three years at the rate of five per cent per year. This year, he has added Dh1,000 extra for maintenance charges per year. In effect, the increase in rent this year is eight per cent," says Shaila Khan (name changed on request), an insurance professional who lives in Al Nahda 2 in Dubai.
"I already live far from my workplace on Shaikh Zayed Road. I drive a minimum of 75km each day. I am a single mother, living with my daughter in a studio apartment even though we are finding it very hard to survive in that space. Moving to a cheaper accommodation would mean having other implications such as the locality being filled with bachelors and not very safe probably. At the moment, we have decided to put up with all the rising costs as we do not see viable options in Dubai," she adds.
In another example, Deepa Pillai (name changed on request), a media professional who rents a one-bedroom in Discovery Gardens in Dubai, is contemplating a move to a cheaper location such as International Media Production Zone or Remraam to evade rising rents.
"I've been living in Discovery Gardens for the past seven years and hate having to move out. My landlord has upped my rent to Dh50,000 this year. It has been rising every year for the past three years. This has left me with no choice but to find alternative accommodation. But this is expensive too, considering the relocation costs, broker commission and the deposit that need to be paid upfront. My salary has not budged though," she adds for good measure.
Rent caps
However, the point to note here is that in some cases tenants have been historically paying low rents which came into force after the market downturn in 2008. Subsequent rent caps have ensured that landlords could not increase rents arbitrarily.
If a tenant has been in a property for 10 years, the rent cap has had an impact on rental increases. Therefore, the tenant could be paying 50 per cent less than what the landlord could get if you moved out. Therefore, although market reports indicate a reduction in rents, tenants may already be paying considerably less.
"The rents within existing contracts are obviously historic. In some cases, they could be the same or lower than the current market rent. As a result, some landlords may still try to increase the rent upon lease renewal. Under the current rental law, they may be permitted to do so as long as there is sufficient variation between the contracted rental and the latest Rera [Real Estate Regulatory Agency] index," says Erik Volkers, senior consultant, research and consultancy, CBRE Middle East.
The Rera determines the maximum rent increase when renewing lease contracts by comparing the existing (contract) rent with the average rental value, determined by Rera for a specific location. However, Rera only determines rental ranges rather than rents for specific buildings or units.
"If the existing [contract] rent is less than the average [market] rental value, the landlord may be permitted to increase the rent by a set per centage [five per cent to 20 per cent]. We recommend tenants to be aware of the Rera regulations when renewing a lease contract and if required to seek advice from Rera or a Rera registered agent," Volkers adds.
New stock
Rents are said to have declined in some areas, particularly for villas and high-end apartments, in Dubai over the past year. Areas such as Al Nahda and Al Qusais have noted a rent reduction of two per cent, according to Asteco.
"We expect new stock to exert downward pressure on rents in the next few months; and through to 2016, with 13,000 more apartments due for completion. As supply enters the market, landlords will look at incentives such as increased numbers of cheques or rent-free options," says John Stevens, managing director, Asteco.
Talking of new inventory, there have been reports that approximately 20,000 to 25,000 residential units will be delivered to the market in 2015 and thereby drive down rents.
However, the big developers in Dubai such as Emaar, Nakheel, Dubai Properties and Damac together account for only circa 10,000 units. So, is all this talk of the impending oversupply overexaggerated?
CBRE estimates that around 20,000 residential units [apartments and villa/townhouses] will be delivered during the whole of 2015, with a number of projects already pushed out into next year. This will reduce this year's figures slightly.
Asteco research forecasts 7,000 apartments to be handed over by year end and a further 13,000 anticipated in 2016, assuming there are no construction delays.
Smaller developers
"Much of the supply will be located in the sub-markets of Dubailand and other secondary locations. While the major developers such as Emaar, DPG and Damac remain active, there are also many smaller sub-developers that have delivered projects this year or are expected to before the end of the year," says Volkers.
"There are a significant number of small to medium developers in the market whose cumulative units make up a substantial amount," adds Stevens.
Asteco contends that considering the high number of off-plan projects launched over the last few years, together with new projects announced, the total supply in Dubai could increase to nearly 70,000 units (apartments and villas) by the end of 2020, assuming all projects get built.
But with Expo 2020 beckoning, demand for real estate is bound to increase, with both the government and private sector in Dubai creating new jobs. We'll have to wait to see until then whether supply outpaces demand or vice versa.- deepthi@khaleejtimes.com