Last week the Dubai Property Group held a breakfast briefing on the 2007 rent cap legislation which imposes a seven per cent limit on rises this year. But on the margins of the meeting realtors fretted about the impact on investors and prices, and hoped that the market mechanism would reappear as soon as practical to set rents.
Rent caps are a short-term solution to inflationary pressures driven by rising capital values and landlords looking for a market rental return.
But they quickly lead to market distortions that help nobody if they are left in place for too long. For example, people find that they can not move apartment because the rent on a new let will be prohibitively high; and landlords tend to neglect property that is paying a poor return.
You could even find that landlords decide to offer residents a 'take-it-or-leave-it' purchase option on their homes if they are unable to achieve a commercial rent.
What is for sure is that the longer rent caps stay in place the more distorted the marketplace becomes. There is also the important consideration that landlords will not actually invest in property if they can not see a rising return, and that may eventually result in an undersupply of property and shortage of accommodation.
Dubai is short of accommodation but that hardly applies at the present moment in time with so much property under construction. But the word at the DPG was that some investors are already beginning to think again about Dubai property because of the rent cap.
This is only logical. A rent cap imposes a limit on the growth in the return you can expect on your capital, and therefore also limits the likely upside in terms of capital appreciation. It is a measure that dampens both the cost of renting and investor interest in real estate.
Perhaps this is no bad thing in Dubai where many market studies suggest that supply is set to outpace demand significantly over the next few years. But equally this may prove to be a notable factor in cooling the market down.
Last rent cap?
It may well be that the Dubai authorities choose to abandon the rent cap in the near future to encourage the flow of funds into the real estate sector; and this would be one way to support the market through a period of weaker demand or excess supply.
However, property investors have begun to pay attention to rent caps and their impact on the real estate market. If nothing else this legal limit to the upside potential of rental revenues suggests that the best days for capital appreciation are probably over.
On the other hand, for those potential buyers now weighing up the merits of renting versus a mortgage the calculation is now more predictable, and that might be an encouragement to owner occupiers to buy.