When landlords choose to leave units vacant rather than rent them to tenants in Abu Dhabi, something is amiss in the rental market or in the way it is regulated. While a five per cent cap on yearly rent increases and a tenant's right to renew their lease every year for five years were introduced to benefit renters, they have backfired. As landlords withhold properties for fear that renting them out now will lock them into a rate far below market value in the future, something needs to change. In November, it will. As we reported yesterday, a new law has been introduced to make it easier for landlords to find new tenants for their properties.
While the cap on yearly rent increases will remain, the right for a tenant to renew a lease for up to five years will be revoked. This change has been billed correctly as a victory for landlords but that is not the whole story. In the long term, it should amount to a victory for the market and for all those renting in Abu Dhabi. The old system provided a particular advantage to tenants who moved into their apartments before the property boom. A three-bedroom apartment on the Corniche that rented for Dh50,000 in 2006 would rent for perhaps five times that amount on the open market today. Those living in those units pay a fraction of that amount; they get a great deal but it disadvantages everyone else looking for accommodation. As the old system limited the supply of apartments available for rent each year, this became yet another influence driving prices upwards.
While average rents in Abu Dhabi have fallen since the autumn of 2008, they are still comparable with many of the most expensive cities in the world. The main reason for this is a chronic shortage of supply that no regulatory change can remedy. But there is encouraging news on that front as well. By the time the new rental regulations are applied in November, several thousand new units will be available and these represent just a fraction of what is coming online in the next three years. According to the director of research and advisory services at Landmark Advisory, Jesse Downs, Abu Dhabi will have 25,500 new units by the end of 2011 and nearly 20,000 more by the end of 2012.
Once this supply is added the Government should let the market do its work. It is the temptation of every government to believe that it can manage prices better than the simple law of supply and demand. Those who try to outsmart it do so at their peril.