How will Dubai's potential three-year rent freeze affect the property sector?

News that the UAE government has started to issue five-year residency visas to entrepreneurs this month is music to the ears of property developers. So too the pronouncement from the International Monetary Fund that the local economy may have turned the corner and be recovering from a five-year slowdown precipitated by a sudden fall in oil prices. Last month Abu Dhabi introduced freehold rather than leasehold-only ownership for the first time for foreign buyers, and in a new report, the Institute of International Finance has become the latest to spot the green shoots of recovery in the Gulf real estate market. With Brent crude trading as high as $75 a barrel for the first time in many years the buzz in the business community this Ramadan is more optimistic. The two would-be residential investors cited in this column recently have actually just completed purchases in the secondary market. By the autumn, unless the global financial markets take another big tumble, a return of confidence could bring back local real estate buyers. However, a revival in any property market is always a delicate matter. Basically there are two main drivers of the market in the UAE: end-users or expatriates and nationals who want to own their own home and stop paying rent; and large and small investors from home and abroad who buy-and-let property to people working in the Emirates. Both groups can be easily deterred from buying, if they feel market prices are likely to fall, or in the case of the second category if they think they will not be able to get a reasonable rate of return on their investment, matched to market performance. Two measures intended to prevent a bubble in the real estate market impacted the last ascent in property prices at the end of 2013: the doubling of Dubai property transfer taxes from two to four per cent, and a raising of deposits on mortgages of more than Dh5 million. Often in global property markets, the reversal of such measures would mark the start of a recovery, or later government action to encourage it. We have not yet seen this happen in the UAE. But this is being talked about in government circles; and today’s buyers might get this market boost in the near future. A three-year rent freeze f or new residential leases in Dubai that is apparently under discussion may be a mixed bag. Its advocates argue persuasively enough that more people might choose to move to the UAE if they could be sure of their future costs, with rental payments being the biggest item of expenditure for most residents as in any other city. But the downside would be that such security for tenants would remove some of the incentive for residents to become property buyers. It would also put off many buy-to-let investors who would be wary of such government interference in the market and its long-term implications, quite apart from the immediate impact on their future income. Current landlords would also have to reassess their position. Existing units often fare badly under rent control. Landlords find their maintenance and mortgage costs rising while rental income is static, and so fail to keep up property to a decent standard. Visit any city in the Middle East with long-term rent control to see what this means. According to the law of supply and demand, rent control will eventually limit the number of houses that can be built in a city, and by reducing the supply of available accommodation while demand is still rising, rents will therefore actually go up. A Stanford University study found that rent freezes only benefited tenants in the short term while the reduction in housing supply caused by lowering income to landlords cut the rental housing supply and caused rent increases in the long-term. Moreover, small, regular rent increases allowed landlords to keep up with market rates and avoided sudden huge rental increases in the future. Indeed, there is a school of thought that Dubai’s current two-year fixed rental payment regime and up to two-year effective vacancy notice period is too generous to tenants, and may be frustrating the recovery in the real estate sector by deterring landlords from buying. It is also a fact that Dubai landlords face a challenge to keep rents at market rates because the government's rent increase calculator never allows them to catch up with market rates once a tenant has started on a low rent. Reforms to boost buy-to-let would attract more buyers. The green shoots of economic recovery are good news in the UAE, and this Ramadan many local investors and end-users will be thinking about buying property this month. Buying when prices are cheap, as they are now, is generally a very good proposition for a long-term, often mortgaged asset class like residential real estate. Peter Cooper has been writing about finance in the Gulf for two decades

How will Dubai's potential three-year rent freeze affect the property sector?

With green shoots of recovery in the UAE's real estate market, the emirate is proposing a new rental law