Dubai acts decisively to stabilise real estate

For 2008, rental increases will be limited to five per cent for tenants who have occupied their apartments for two years, and anybody who rented in 2007 will not have an annual rise at all. However, for properties that are vacated in 2008, the landlords can charge any rent they like – in practice, whatever the market will bear.

This will be the third year of the Dubai rent cap. In 2006, the first cap was established at 15 per cent, and for 2007 this was cut to seven per cent. The rent cap came into operation after some wild rent increases in 2004-2005 with 50-100 per cent rises depending on location and property type. This helped fuel local inflation with unhappy tenants going to their employers for bigger and bigger housing allowances.

By containing rent rises, and gradually squeezing down the annual rent cap, the Dubai Government has shown its willingness to act decisively to stabilise market economics. However, it has taken several years to rein back rents and did not impose an instant rent freeze. 

This is consistent with the government’s effective management of the local real estate boom, and is a sign that a dramatic bust is unlikely to follow. The government has fully appreciated the importance of the real estate sector in developing the local economy and has no desire to see this end.

Indeed, the legislative changes seen to date, and those planned for the immediate future underline this commitment to a soft landing for Dubai property and not a boom-to-slump cycle. The escrow account law for developers decreed in July is a good example. It is good for both honest developers and their customers as their mutual interests are now safeguarded by putting construction monies into separate accounts overseen by the Dubai Land Department. And this logical market development has been enforced to the point that from the start of January all such monies have to be deposited in escrow accounts.

There has been a slowdown in new project launches as a consequence because developers are less free to manage funds during the construction process, and perhaps a few marginal projects have been dropped. But the move from a market that favoured developers unduly to a regulated market has been handled smoothly.

The next areas to watch for legislation are: strata law for apartments and a new mortgage law. Again sensible proposals borrowed from global markets will be introduced. The rights and obligations of developers and buyers in multiple-occupancy buildings will be clarified; and the rights and obligations of mortgage lenders and borrowers will be established in a clear legal framework.

This will mean that as more and more apartments and villas are completed over the next couple of years the position of buyers, sellers and mortgage companies will be legally defined, and this will ensure that the market can operate in an efficient way. Buyers will be able to get mortgages at the best rates, and more banks will be confident about lending in Dubai.

It has been a subtle transition from the time before May 2002 when foreigners could not even hold a freehold title in Dubai, with legislation first promised but not decreed, to a position where the legal framework of property ownership is evolving to be very much like that found in any other major global city, and ahead on some counts.

 

Of course, one day the market will have to undergo a correction, perhaps after a period of consolidation. But by erecting a market from nothing and doing it as a staged process with the right legal and bureaucratic infrastructure, this is a sector that will be far more resistant to any downturn than initial market doubters would have believed possible or likely.