Dubai considers a Three-Year Rent Freeze on New Contracts

by Zaara 12, May 2020

Dubai is currently considering a proposal on a no-rental hike provision for three years after a lease agreement is signed between landlord and tenant. The Dispute Resolution Committee is studying such a proposal, but no decision has been taken on the if and when to roll it out, says a Dubai Land Department’s spokesperson.

The spokesperson also added saying that right now, all rental decisions are based on the Dubai Rent Index, and it will continue to be so until the three-year no-hike proposal is cleared. Currently, Sharjah has a three-year cut-off on new contracts when one looks at the rental increases.

The move is still in the proposal stage as Dubai follows always uses the Rental Index system. Hence, it is still unclear whether the DLD will decide if the proposal only extends to residential properties or would cover all manner of real estate categories, including retail premises. If it were to become an all-inclusive plan, it would have a massive bearing for all of the retail sectors, whereby retailers have complained vociferously about how mall operators set and hike rents, even though the market conditions do not dictate them.

The proposal comes as Dubai introduces a slew of economic reforms aimed at enticing expats and investors. Among the current measures, the emirate is planning to grant long-term visas of up to ten years and approved new budget employee insurance policies to help retain talent and attract investors.

Foreign investors will be able to wholly own a company in the region- a significant departure from the current policy which restricts foreigners to a 49% stake in entities outside free zones, requiring them to forge partnerships with stakeholders from the Emirates.

Why is this Rent Freeze considered?

In the last few years, Dubai has witnessed several constructions and developments. The supply for residential areas has increased, whereas the demand has slowed down. According to a study conducted in the region, the rental prices have dropped by 11% compared to last year.

If this trend continues in Dubai, the real estate market in the region may suffer, landlords would be forced to lower rental fees. Lower-income leads to fewer people being encouraged to make new investments in Dubai. Hence, DLD considers this three-year rent freeze as one of the potential solutions for this problem. It shall benefit not just the landlords but also the tenants.

Does this help?

With this three-year contract in place, the landlords are given a possibility to earn continuously for three years. Easily put, freezing rents allow landlords to avail a guaranteed ROI and consistent cash flow.

At the same time, tenants would enjoy a fixed rental rate for three years, helping them avoid getting hit by the constant rental raise. Hence, assisting in budgeting.

Both landlords and tenants could save more time and money as they only need to renew the contracts every three years.

Is it needed?

A few experts argue that this three-year rent freeze might not be needed as of now. Even though it may indeed encourage financial stability for landlords and tenants, it also could potentially lead to other problems.

If you take a rented studio space as an example, a couple may have an additional member joining their family and hence, the small studio may not be sufficient. So, they may want to leave the space to go for a bigger one before their three-year contract expires.

Three years could be a long time for a contract. A tenant could have an unanticipated situation in his life, and that could affect the contract. A tenant may look at a three-year contract to be too inflexible for him.

Why Do some Experts think it Benefits the Tenants?

Tenants are benefiting a soft market with rentals under constant stress. But there might come a day when the market turns, and rents hike up the steep pathways. Experts think it benefits the tenant because a landlord can’t demand more money on his whim. Hence, it also allows tenants of a suitable time frame before they need to spend more.

And in recent times history, it is evident that when markets turn around quite quickly, rents are one of the first things to get inflated.

With a three-year rent cap, a tenant would know his exact expenses for rent over the next 36 months, hence facilitation planning, which is integral to their economic ambitions and targets.

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