The Dubai Land Department (DLD) confirmed a draft law to freeze rents for three years in Dubai has been reached.
To understand how this impacts renters and property owners, we interviewed the offices of BSA Ahmad Bin Hezeem & Associates LLC.
The following are answers provided by Michael Kortbawi – Partner, and Taronish Mistry – Paralegal.
Q: Does the rent freeze apply to any apartment, regardless of size, price, and location?
A: Based on the currently available information, there is nothing to suggest that the freeze will have limitations in its application to residential property.
The announcement by the Dubai Land Department in January this year, and the recent coverage of the draft law refer to “residential” property. However, this may change once the actual text of the law is released, as it may have carve-outs or limitations on the application of the rent freeze.
Q: How will this impact the rental space if owners are not able to sustain profits and incur losses?
A: There are two ways to look at the impact on owners. On the one hand, rising costs will result in losses for the landlords. On the other hand, landlords that properly forecast their costs and set fair rents are less likely to have the property vacant. The general idea behind this freeze is to bring stability to the market, by making it easier for tenants to stay in the property. Losses resulting from a vacant property are of course far more than those, if any, from an occupied property.
With the increased likelihood of businesses using flexible work strategies, residential properties will probably be in greater demand. Barring any extreme and unforeseen changes in the owners’ costs, property owner bankruptcies are unlikely to be causally related to this initiative. Sharjah and Abu Dhabi have each implemented a rent freeze and a cap on annual rent increases respectively, so this initiative is not something that Dubai is implementing without due diligence.
Will RERA provide tax relief for owners to balance what could be losses due to rising costs (labor, materials, and otherwise) and inflation?
A: RERA has not announced any initiatives yet. However, it is likely that RERA will monitor the situation and take necessary actions if any problems become pervasive in the market.
There is no confirmation as to how long this three-year rent freeze initiative will apply. If the aim is to bring some short to medium-term stability to the market, the rent freeze may be lifted or modified once Dubai feels the market has been sufficiently stabilized.
Will working tenants commit to 3 years or long-term leasing in current workplace uncertainty for employees?
A: The DLD announcement made no reference to a lock-in period. Given that a key purpose of this new law is to help stabilize tenants in Dubai, we believe tenants are unlikely to be forced into a lock-in period. This is especially true given that most of the renting population are expats, whose residency often depends on their employment.
What does the leasing law say about long-term contracts and will the law need to be amended to reflect the new freeze conditions?
A: Currently, there is no prescribed period for a tenancy. The lease term/period is decided between landlord and tenant. Whilst long-term leases (of more than one year) are allowed, they are not very commonly used. The most common lease period for residential properties is one year.
By definition, new laws would change old ones either because they repeal and/or replace old laws, or because they bring additional provisions to the prior laws. Without the actual text of the draft law, we cannot say what provisions of the existing law would change.
How does the real estate investment sector look at this from legal and business standpoints?
A: Investing in real estate involves a certain amount of forecasting, and depending on the area, size of the investment, economic activity in Dubai, investors may value the stability this initiative brings to the market.
Dubai’s real estate rental market is quite diverse. General trends may exist, but the impact can vary depending on the area. Unlike many other major cities, Dubai has physical space to grow. Going from one Arabian Ranches to three, the development of the new airport and the Expo site, as well as Deira’s redevelopment project, there is certainly room for building new residential projects in Dubai.
From a legal standpoint, Dubai (and the UAE) has introduced significant initiatives in the last year to attract residents and expats. Albeit without the actual text of the rent freeze law, the amalgamations of the initiatives may well increase demand for residential property in Dubai.