Officials in GCC countries started to set rent caps in the last couple of years in order to curb the skyrocketing inflation hitting the real estate sector and their economies in general. In the UAE, Qatar and Bahrain, rent caps were set to deter greedy landlords who were increasing rents at excessive rates without restriction. In the UAE, the rent cap for 2008 was five percent for both Dubai and Abu Dhabi, and ten percent in Bahrain. In Qatar, the cabinet decided in March 2008 to freeze rents for two years on contracts signed after January 1, 2005. No clear statement said how much landlords can increase prices after the two year freeze expires, but contracts signed before January 2005 can increase between five and 20 percent.
Experts agree that the rent caps are not very effective, since most landlords have been ignoring the law and adopting a ‘take it or leave it’ strategy. Most tenants were forced to pay the increase for fear of not finding other accommodation. The total number of complaints received by the rent committee in Dubai was 8,000 in 2007, 9,000 in 2008, and 320 by mid-January of this year.
Dodging the cap
Amin Al Arrayed, general manager of First Bahrain, believes that one way to circumvent the law is to change the ownership of the property. “Let’s say the building was in the name of the son, he transfers it to his mother’s name. That is the new owner, so she can increase the rate [as much as she wants]. And then the next month she can transfer it back to her son,” explains Al Arrayed. “You can play a lot of games to go around the rules,” he added.
An index of rental values for residential units in the Emirate of Dubai in second half of 2008
In 2009, the rent caps for Abu Dhabi and Bahrain remain unchanged and no modifications were introduced to the cabinet’s decree in Qatar. However, with the expiry of 2008’s five percent rent cap in Dubai, tenants found themselves in a state of confusion with no legal protection from extraordinary rent raises. Nevertheless, with many people leaving Dubai due to job losses caused by the financial crisis, some experts say that a rent cap is not necessary anymore since rents are likely to soften. With the demand reduced and new supply coming to the market, landlords are currently allowing more flexible payment terms and are expected to stop increasing — or even start to decrease — rents if the market conditions persist.
Marwan Bin Ghalita, chief executive of Dubai’s Real Estate Regulatory Authority (RERA), stated that a freeze in rent is needed to replace the five percent rent cap. Ghalita told Gulf News, “We don’t need a rent cap this year. We need to freeze everything. Two-thousand nine is a tough year and we shouldn’t interfere with rents too much.” Consequently, RERA has issued a decree freezing rents on residential and commercial properties in Dubai for tenants who renewed their contracts in 2008. Yet, if the rents were more than 25 percent below the recommended figures in Dubai’s newly issued rental index, then the freeze does not apply. The new index sets the highest and lowest average for residential and commercial properties in Dubai and serves only as a guideline for both tenants and landlords. The new decree stated that rents that are between 26 and 35 percent below the index can be raised by five percent. Those who are between 36 and 45 percent below can increase by 10 percent. Those between 46 and 55 percent can be raised by 15 percent. Beyond 56 percent, the increase allowed would be 20 percent.
Worries in waiting
Concerns are emerging from experts saying that some people will face hefty rent rises due to the new index. Nicholas Maclean, the managing director of CB Middle East Region Richard Ellis explained that some people might be paying much lower rents than the minimum set by the index and may be subject to a substantial and unaffordable increase in rents that would drive them out of their property.
Additionally, the rental index, which was set during mid-2008, is considered outdated and irrelevant due to changing market conditions. It also sets an average for areas where both old and new buildings exist, which can make the average rate below or above the building’s fair price. In the coming months, Dubai will have a clearer view about the effectiveness of the index since it is too soon to know if landlords will use it to their advantage in order to inflate prices or it will represent a fair guide to Dubai’s rental market.
