Posted: 27 January 2014
A recent decree in Dubai which eases rent cap regulations – allowing landlords to increase rents by up to 20%, overriding the previous 5% cap – could improve stability in the market after a recent surge in property prices. Eli Hyder, Managing Partner of Bond lawyers says: “Given Dubai’s recent surge in property prices, it makes sense to change regulations to allow landlords to bring prices closer to market rates. The new rules lowers the inclination to evict tenants who, through no fault of their own but because of the previous cap, are paying significantly less in rent than their neighbours in comparable properties. At the same time, maintaining a maximum cap, albeit at a higher level, gives tenants protection from exorbitant rate hikes”.
Dubai’s GDP growth accelerated to 4.9% in the first half of 2013 – the fastest expansion in six years – driven by strong expansion of trade and tourism. This contributed to property prices soaring by more than 40 per cent over the course of the year. Dubai’s successful bid for the 2020 World Expo is likely to further strengthen the property market.
Mr. Hyder added: “One challenge is to be wary of rents rising too quickly: the property crash of 2008, after prices almost quadrupled in the previous six years, is a stark warning. Remember that the reason the 5% cap was introduced in the first place was to curb inflationary pressures. But the new regulations have been structured in a way that mitigate against excessively large or rapid hikes. Moreover, the current boom in Dubai’s property market does not seem to be driven by speculation, like in the run up 2008, but rather by improving fundamentals”.
Average rents, against which the permissible price rises will be determined, will be established by the Real Estate Regulatory Agency’s retail index, applying to landlords in both public and private sectors. Earlier this year, the government replaced a committee, which settled rental disputes with a new centre, which has substantially increased capacity.
Under the new rules, the permissible rent hikes depend upon average prices in an area, as measured by a government index. If contracts are 11-20% lower than the average rate, the rent cap is 5%. However, contracts of 21-30% below the market rate are permitted a rental increase of up to 10%; while contracts of 40% or more below the average can be raised by up to 20%.