An executive order from Dubai Crown Prince General Sheikh Mohammed bin Rashid Al Maktoum has capped rental prices increases at 15% until the end of 2006. The Rent Committee of the Dubai Municipality will implement the order.
This decision comes against a background of surging rental prices in Dubai this year, with property agents Asteco estimating that the average rent price increase for 2005 is 38%.
This hyper-inflation of living costs has clearly worried the Dubai authorities as it undermines the cost structure of companies doing business in Dubai and threatens the long-term competitiveness of the emirate.
By acting now the Dubai Government intends to bridge the gap between the current shortage of available property – which is the fundamental force driving rents up – and the arrival of a large supply of new property in late and 2006 and 2007, depending on construction delays.
Thus this appears a timely response, although probably only a temporary measure to deal with an extreme situation. And the forces of supply and demand will likely alone determine rental pricing after the end of 2006.
For Dubai property investors this action is a reminder that the Dubai Government remains a very potent and proactive part of the Dubai real estate market.
On balance this is a positive. Government intervention in property markets can smooth out the ups and downs of the more ruthless business cycle of supply and demand. It can ensure that some short-term profits for owners are given up for longer term benefit.
However, there is also a danger in encouraging property investors to believe that the government will always intervene to protect their interests. For then investors will be more likely to overstretch themselves and deliver an oversupply of property, believing that if something goes wrong the government will always be there to save them.
Emerging market forces
On the other hand, the most successful emerging real estate markets have all seen the hand of the state working behind the scenes to sustain and develop the market, and government intervention is required to balance the anarchy of market forces.
In Hong Kong, for example, most of the city's freehold is still in the hands of the government, and incidentally the income from this freehold is a major reason why taxes can be kept so low. In Singapore and Malaysia, the government has also taken a very proactive role in developing local real estate markets.
It is of course a question of balancing interests, which is what good governance is all about. Rents need to be high enough to encourage landlords to build new property, if it is needed, but not so high as to choke a local economy with additional costs and overbuilding.
Dubai is therefore right to take pre-emptive action to stop another round of sky-high rental increases in 2006, and this should begin to cool development interest and stop a further increase in residential construction projects.