How Much Higher Can Dubai Rents Go

Dubai rents are rising not by the month, but by the day so far in 2014. Since November 27th 2013 and after the abolishing of the 5% rent cap, in some areas rents spiked by over 50%.

Tenants are dismayed by the greed of landlords. Many receive end-of-lease notices nowadays. Removal and storage companies report extremely high activity. As a matter of fact, one may have difficulties to find still available storage facilities in Dubai.

Looking at the classifieds, one may also find steep rental increases. For example, small studious of approximately 500 sq ft in the Downtown Dubai are now offered for 80,000 Dirhams while two months ago the same were listed with rent tags of 58,000 or 60,000 Dirhams.

The dramatic rent increase spreads everywhere across Dubai. For example, in Karama which is considered a cheap area, although centrally located, the rent for a studio is now 45,000 Dirhams. In the suburban areas as Dubai Motor City or Jumeirah Village Circle, which expats prefer to call “New Dubai”, the average rent for a studio is also between 45,000 and 50,000 Dirhams. This is really surprising as the new developments are standing isolated in the desert sands, far from essential facilities and the areas infrastructure is in beginning stage of development.

The main reason for the rent increase is the abolishment of the 5% rent cap. Most of the expat property owners pay mortgages, which were obtained with low interest rates of about 4% to 5% from local banks. Now, when there is no restriction on rent increase, they get advantage on the opportunity to ask for higher profits while still paying lower interest rates. Why the interest rates are still low is not understandable, because there is already officially registered significant monthly inflation. And why there is an inflation is also hard to explain if the UAE’s currency is pegged to the US dollar.

Availability of residential units in Dubai continues to be abundant, but a new trend arises. Property owners do not want to rent out, but to sell and many keep their apartments empty for viewing. For example, if you search for an apartment in the Business Bay area, security guards at the buildings receptions will tell you that there are many vacant units, but for sale only. Most of the units are still owned by the project developers such as Deyaar and DAMAC, but not by individual property investors. At present, there are approximately 17,000 more listings “Property for Sale” than “Property for Rent” on Dubizzle only. In addition, since a month there is a new government-managed website for property listings with a significant inventory by now.

Meanwhile, real estate agents from well established firms say that there is no much activity on the property market right now. Sellers are more than buyers. More and more vacant homes are listed with higher prices and rents, but tenants are not very keen paying so much. Longer term residents pressured by high rent demands fled to Sharjah or even Ajman, because otherwise they will not be able to make ends meet.

Hotel occupancy rates remain strong in Dubai as the season is high for the tourism business. There are many visitors during the Dubai Shopping Festival. However, they remain only tourists and don’t buy or rent homes on annual basis.

Meanwhile, well-paid job offers remain rarity, while low-paid jobs are plenty. The number of job applicants proportional to the number of job offers on LinkedIn is at all time high. On the other hand, companies keep offering less for more, despite the fact that low salaries in the service sector result in a poor quality of services in most of the public and private domains.

Since 2012, many people are looking to open small businesses in Dubai. Most probably this is a right move factoring the need of the expanding population. However, the high cost of setting up the business combined with elevated rents will prove an obstacle.

How much higher can Dubai rents go from here?

There are two scenarios. If the past two months spike which can be explained as a knee jerk reaction to the 5% rent cap abolishment and the news about the World Expo  2020 bid win is the peak of Dubai rents for 2014, rentals will easy from April onwards. Why from April? Because by then the tourism business will enter a less active season and businesses will slow down with the coming of the summer season and Ramadan. However, there is also the possibility for Dubai rents to keep rising. It very much depends on how well consumers will adjust to the higher cost of living. Judging from the not so distant history of Dubai ‘s property market, sharp rise in cost of living leads to a painful correction. At present, property analysts suggest that the upcoming correction may be in the range from 15% to 30%.