‘To Cap or not to Cap?’ a question that has devoured endless hours of debate and discussion in Dubai over the past two years when in 2006 the Government of Dubai issued the first Rent Cap Law capping any rent increases to 15 percent. This was recently followed by Dubai’s second Rent Cap Law for 2007 which introduced a cap of 7 percent on rents.
This debate was discussed further today at the Dubai Property Group’s (DPG) monthly networking event which hosted Lisa Dale, Head of the Property Department at Al-Tamimi & Company, who discussed the new provisions of the Rent Cap Law 2007 and its effects on both landlords and tenants, and the health of Dubai’s economy as a whole. She also discussed how the law affects different rent and lease agreements which were agreed before the issuing of the law.
“The Rent Cap Law will act as a stabilizing factor in the booming real estate sector in Dubai and will help both landlords and tenants make longer term decisions,” said Adel Lootah, Executive Director of Dubai Property Group. “In this respect, DPG will act as a forum for the real estate industry to express their opinions and feedback with regard to the Law, and will raise these issues with the relevant authorities.”
The majority of Dubai’s residents are tenants – whether of residential premises, business premises or maybe both. Rents are therefore a major overhead that directly and significantly impacts on the cost of living which drives inflation. The massive rent increases witnessed since 2001 have caused some businesses and families to question whether they can afford to live and work in Dubai.
“The capping of rent increases is an effective method of slowing down the huge hikes in rent that have been witnessed in Dubai over the last five years in the interests of bringing stability to the market and confidence that Dubai will remain a competitively priced place to live and work in the short and medium term,” commented Lisa Dale. “The Government’s Rent Cap policy was designed to meet this challenge head on. For Dubai to retain its position as a business hub for the region and for it to sustain its current growth path, it must remain competitive.”
“The Rent Cap policy that was introduced in 2006 and which has brought further rent increase restrictions for 2007 will, I believe, give confidence to all those businesses and workers that represent Dubai’s potential for growth in the future. However, I do question whether simply imposing a mandatory rent increase cap on all landlords and tenants and in respect of all properties is a total solution,” she continued.
Firstly, the Law assumes that a rent being paid by a tenant is representative of market value in the first place. Cases have emerged where new shopping malls and commercial complexes, where a developer will offer discounted rents during the first year of operation as an incentive to attract tenants to the development. Landlords who signed such tenancies in 2006 cannot now apply any increase in the rents in 2007 to bring them in line with market rates.
“Combining a cap on rent increase with the publication of recommended ranges of rates per square foot for different types of property would help to ensure that landlords continue to obtain a fair rent for their property relative to the market,” she commented.
Consideration could be given as to whether the provisions of the Rent Cap Decree should be mandatory on all landlords and tenants or whether in some cases the parties should be free to contract upon their own terms agreed between them with the Rent Cap Law acting as a safety net for tenants if landlords demand too high a rent when discussing renewal of the tenancy. The argument for this is particularly strong with regard to commercial property, where the parties often enjoy equal bargaining power. This will become more the case as more new units are delivered on to the market during the course of 2007 and 2008 and supply and demand begin to equalize.
“The Rent Cap Law applies to all properties in Dubai whether they are residential, offices, shops, warehouses and so on. It is not correct to say that the 7 percent cap on increases applies to all tenancies since, as is often the way, there are exceptions to the rule. What the law says is that rent shall not be increased by more than 7 percent for tenancies that are renewed during 2007,” said Dale. “But there are circumstances in which no increase at all will be permitted and other circumstances in which increases of perhaps more than 7 percent maybe permitted.”
This means that the 7 percent increase can only be exercised by landlords on tenancies that did not witness a 15 percent increase in 2006 or if the tenant leased the property from the landlord for the first time during 2006. On the other hand, the Rent Committee may allow an increase in rent in excess of 7 percent in respect of leases of three years or more that are renewable during 2006 or 2007. In such cases, the Rent Committee will allow an increase in rent to bring it in line with market rates.
“Historically, the practice of the Rent Committee has been to allow landlords to increase rents in line with the market, but without defining any exact percentage of increase. Up until 2002, rent increases in this way were permitted every two years. The Rent Committee changed its policy from 2002 through to 2005 when it would permit annual rent increases in line with market rates,” she continued.
To put Dubai’s Rent Cap Law into some perspective, it is useful to look at the policies of the other Emirates on this issue. All other Emirates apart from Fujairah seek to impose regulatory controls on rents within their Emirate. Abu Dhabi restricts rent increases to 7 percent for tenancies that have a term of three years or less. Sharjah allows no increases in rent during the first three years of a tenancy but after that the rent may be increased in line with market values. In Ras Al Khaimah, rent increases are capped at 15 percent following a Ruler’s Decision. Ajman permits an increase of 20 percent once every three years, and finally, Umm Al Quwain permits an increase of 10 percent per annum but, uniquely, permits the landlord and tenant to reach some alternative agreement.
Independent of favor or influence, DPG represents the combined interests of Dubai’s real estate community. The Group’s 170 members include some of the highest profile real estate players in Dubai, such as the Dubai Development Board, Cluttons chartered surveyors and property consultants, Arenco Real Estate, Union Properties PJSC, Better Homes LLC and facilities management firm, Asteco Property Management LLC.
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