Dubai property landlords must ‘adjust their mindset’ in a low-demand market

House rents and prices of freehold properties are subject to demand-supply and other market conditions, and therefore should be left to the market forces to decide – unless things go out of hand due to unnatural or drastic changes that affect the tenants – when the regulators step in.

That’s the way mature real estate markets function across the world. In those countries, rent laws are formulated to protect the tenants, rather than the landlords. Usually, the tenants outnumber the landlords – who are perceived to be well off on their own. Therefore, the rent laws in the developed countries are seen to be tenant-friendly.

The real estate market in the UAE, especially in Dubai, has reached a certain level of maturity over the last few decades. Therefore, the regulations should reflect that.

Dubai introduced a rent cap around 2005-2006 when rents had started to jump exorbitantly due to high demand. In those days, Dubai’s economy was growing at around 14-16 per cent per annum – thousands of jobs were created every month due to an unprecedented economic boom fuelled by the real estate and construction sectors.

The influx of people far outnumbered the supply of new homes. As a result, rents had started to jump 20-40 per cent per annum – forcing middle-income families to move into cheaper neighbourhoods in Sharjah and Ajman. It was a time when investors had started to build apartments and villas for freehold sale, but the deliveries were yet to materialise on a large scale.

The rent cap, therefore, was an important market intervention needed to protect the tenants at that time. However, the market has changed quite a lot over the last 15-16 years, shifting from a sellers’ market to a buyers’ market.

The market then started to soften from 2016, silently, as supplies gradually caught up with demand. By 2018-19, the market had started to show signs of oversupply, resulting in price and rent correction. Both rents and prices continued to remain under pressure at the beginning of 2020 – when most landlords started to reduce rents in order to retain tenants.

The outbreak of the Covid-19 pandemic worsened the situation, due to losses in income, business, and job cuts. Following the relaxation of the lockdown in 2020, many families had to relocate to their home countries leaving homes vacant.

The real estate market witnessed a steep fall in prices and rents last year, forcing landlords to re-think their strategies. Rental returns dropped from 6-8 per cent down to 4-5 per cent – although still high compared to most real estate markets in the world.

While property prices are stabilising due to an influx of foreign investors returning to the market since January this year, rents are yet to stabilise. In this context, a rent freeze law could come only to protect the interests of the landlords. However, the question is, can a law help stabilise the rents? Let’s look at the possible scenarios.

If a tenant sees that the rent demanded by the landlord is ‘high’ compared to declining rents, can the law force the tenant to continue to stay in the same premises, beyond the tenancy contract? The answer is ‘no’. The tenant can move to another apartment. And there is no shortage of units in the market.

So, if the tenant is free to leave to an apartment of his choice and his budget, can the draft rent law help the landlord? No. It will just encourage the tenant to shift to another apartment.

Contrary to many reports, the rent of a one-bedroom apartment begins from Dhs20,000 in certain neighborhoods in Sharjah and Dhs35,000 in Dubai. And it might go down further, due to the abundance in supply.

Most landlords might not realise it, but the rental income in Dubai is still higher than most developed markets. Rents of a Dhs1m two-bedroom apartment stand at around Dhs50,000 to Dhs60,000 per annum, fetching a 5-6 per cent return on investment, which is still better than most markets.

While landlords are used to increasing rents when the demand was high, they need to adjust their mindset to the low-demand scenario and the new norm. We are at the lower part of the real estate market cycle. Until demand picks up, we need to accept the current market reality. From a landlords’ market, it has now become a tenants’ market. This is the reality. Let’s face it.

Rizwan Sajan is the founder and chairman of Danube Group