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Dubai property market: Accommodating all?
Real estate advances and challenges facing Dubai’s tenants.
September 25, 2013 12:42 by Muhammad Aldalou
In the midst of rapidly rising property prices – both commercial and residential – and a seemingly endless trail of announcements about new real estate projects, Dubai’s government is working on new rules to prevent an excessive rise of property prices that could end in a crash.
“We are working on our regulations,” says Sheikh Ahmed bin Saeed Al Maktoum, chairman of Dubai’s Supreme Fiscal Committee, according to Reuters. “Sometimes I don’t think (high property prices) are a good thing. We don’t want Dubai to become an expensive city.”
However, despite signs indicating the lead-up to another crash – with property prices soaring (38 per cent for apartments and 24 per cent for villas over the past 12 months) and the International Monetary Fund warning, in July, that the Dubai government will soon need to intervene to prevent another boom-and-bust cycle – many of the industry’s experts disagree that this would be the case.
Over the past month, there have been numerous studies stating that this rapid and continuous growth in the market – the result of improved economic fundamentals, strong demand and job creation – is not driven by speculation.
While this growth of property value may be welcome among owners and investors, the rapid surge in rental costs (versus a much smaller hike in wages over the same period) means tenants are struggling to keep up.
Recent reports claim that surging rents are forcing tenants into bed spaces, while other studies say that, as average rents rose by approximately 11.3 per cent in the first six months of 2013, more people are, instead, considering buying their own homes.
Bharat Kumar, marketing director at Dubai-based Property Finder, says: “As rents are rising, people are evaluating whether it is financially better for them to invest in a home, as this offers a better alternative in certain circumstances.”
He adds, however, that renting will still remain very popular as the UAE remains a transient society. “For some people, buying a home is neither practical nor financially possible due to the entry price (for example, they need to have at least 20 per cent available for a deposit and this may rise to 50 per cent because of the mortgage cap).”
According to Jonathan Fothergill, head of valuations at Cluttons UAE, spiraling rents in Dubai saw neighbouring Sharjah benefit, as tenants took advantage of the comparably more affordable rents.
He explains: “We are seeing this phenomenon repeat itself once more, as cost-conscious tenants turn their attention to submarkets in Sharjah that sit in close proximity to the Dubai border, such as Al Nahda and Al Majaz. Sharjah has long been viewed as an affordable alternative to Dubai, however, even here the increased level of tenant requirements pushed rents up by 7.1 per cent during Q2.”
He adds that rising rents mean that some households are being “priced out” of certain communities and are either being forced to downsize or move elsewhere.
“We are also recording a rise in the number of tenants contemplating the transition to property ownership in Dubai, as a means to avoid being caught out by rising rents. We expect to see this trend gather pace, particularly in the lead-up to the proposed mortgage cap rule, which is expected later in 2013.”
Current demand levels, according to Cluttons, suggest that there is enough momentum in the market to sustain growth in rental values in the short-term, particularly as Dubai is still a long way off the peak market rents of 2008. However, the average pace of salary increases is currently hovering at the five per cent per annum mark.
“Although we expect rents to continue their upward creep towards the 2008 peak over the long-term, the rate of acceleration is likely to slow in the medium-term, as rents close in on a tipping point and affordability becomes a limiting factor to strong and sustained growth,” says Fothergill.
Following the recent announcement to set up a landmark rent dispute resolution centre, Dubai intends to control rental increases within reforms in the real estate sector, according to Sultan bin Mijrin, director at Dubai Land Department. He added that a new standard rent contract will be enforced in late 2014.
“The department is closely monitoring changes in the real estate and rent sector. There will be a continuous review of any increase in rents,” he adds in an interview with the Dubai-based daily Emarat Al Youm. “We also intend to introduce significant changes to the rent index, so the results will be more accurate and offer a real indicator for the market. This index will be compulsory to all.”