Ben Crompton analyses how removing the 5 per cent cap on Abu Dhabi's rental market will affect tenants and landlords.
Removal of Abu Dhabi rent cap can also work for tenants
The Abu Dhabi rent cap was first introduced in 2006 by what has become known as the Tenancy Law. Set at 7 per cent per year, it meant tenancy agreements coming up for annual renewal could be subject only by a maximum 7 per cent increase. This was later tightened to 5 per cent in 2010 to combat increasing rental rates that were spiralling out of control because of an expanding population and very little residential construction. Prices peaked in late 2008 but fell back due to the recession and the emergence of the master-planned communities such as Reem Island, Al Reef and Raha Beach adding vast amounts of housing stock to Abu Dhabi’s stretched resources.
There is no doubt this new ruling will cause some upheaval in the market in the short term. Tenants who are currently paying below market rents will feel the pinch of this decision when their tenancy contracts come around for renewal and landlords who have had their returns on investment restricted by sitting tenants will now have the freedom to take advantage of an upswing in the market.
Looking at tenants more closely, those paying market rent will benefit, and in the long run all tenants will gain as the ruling will actually push rents down. “How”? you ask. Surely “greedy landlords” will use this as a pretext to push rents through the roof. Not so. Assuming people have an option, if they feel they’re being overcharged tenants will vote with their feet and move out – so it is in landlords’ interests, greedy or not, to reasonably price their units.
In fact prices will be pushed down in the long term because those tenants who cannot afford the rent rises in the units they are occupying will be forced to vacate. The units will then come back on to the market and the more units available means more choice, price competition and lower rents in the long term. One of the reasons one and two-bed units on Raha Beach are so expensive is because there are so few of them. Rents have risen there so quickly since 2011 that anyone who has one isn’t moving out. This ruling willresult in more of those people looking for cheaper accommodation when rents go up; their units will flood back on to the market and lower asking prices will prevail.
Rent increases, and in some cases large increases, for tenants paying below market rent will also force some tenants to look for new accommodation. Rent caps often create a class of tenants who are “trapped” in low rents. Even if these units are dilapidated, or they need more space after having children, they simply can’t afford the lifestyle change that moving out and paying a higher rent will mean. Those tenants will be most affected as they will need to look for lower-grade units or put their hand in their pocket.
For landlords, it means finally being able to ask a market rent for their units no matter how long tenants have lived there. Between the end of 2008 and the beginning of 2013 average rents almost halved but since January this year, rents in investment areas (where expats can buy) like Al Reef and Raha Beach have risen sharply. Tenants took full advantage of the rental dip after 2008 (and rightly so), getting the best prices. This badly affected landlords who bought in the boom of 2007-08, taking out big mortgages on the hope of future rent returns. Finally market rates have returned to a level where they have started matching landlords’ mortgage repayments. Those who took tenants on bargain basement rents just to occupy their unit, facing incomes lower than their repayments, will finally be able to take advantage of the reason they bought in the first place, a decent investment return.
The new ruling will also mean landlords are more flexible when negotiating rent. Owners who were wealthy enough had been happy to leave property empty rather than grant a low rent with the risk of being stuck with that rent and 5 per cent increases for a long time. Now they can grant a low rent to begin with and adjust it to the prevailing market rate upon renewal.
Also since 2010 landlords could refuse to renew a tenancy contract only under a certain limited set of circumstances (usually bad behaviour of the tenant or the landlord themselves wanted to move in). Now if a landlord wants to evict an undesirable tenant he can now simply refuse to renew the tenancy agreement.
So what can tenants do in the face of this upheaval:
1. Buy time — Article 20(3) of the Tenancy Law states that a landlord must “notify the other party in writing two months prior to the date of the lease’s expiry” if they want to amend the terms of the lease (three months for commercial buildings). Make sure your landlord doesn’t try to raise the rent if your renewal is less than two months away;
2. Be a good tenant — What landlords crave above all else is reliable tenants. Look after the property, pay on time and cooperate with your landlord where possible;
3. Negotiate — If a landlord evicts a tenant the chances are he won’t be able to get another paying tenant for about a month. That month is a loss of 8 per cent of his yearly rental income. Use this and the fact you’re a good tenant will be to your advantage when making a counter offer
4. Be prepared to move — If the landlord knows you will stay no matter what then he can charge what he likes. Prepare yourself to move if necessary; it will make your bargaining position stronger.
Ben Crompton is managing partner at Crompton Partners real estate agency