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Rent hike puts tenants in dilemma

Tenants in both the emirates cannot help but wonder if they will be able to renew the lease for their existing apartments at the end of the year in face of the inevitable annual rent hike (supposed to come every three years in Sharjah).

Most cannot keep pace with the hikes and follow a predictable and an almost universal pattern: Moving on - either from a two-room apartment to a single-room flat or a studio, or from Area A to the Area (cheaper) B, or shifting base to Sharjah, where the rents were once relatively (and considerably) lower, or accepting the ultimate and unwillingly share accommodation with another family.

This deterioration of living standards, pertaining mainly to accommodation, is compounded by the fact that while the rents have gone up across the emirates, the house rent allowances and other perks offered by employers have remained more or less unchanged over the years.

In this special report, .f+i.Khaleej Times.f-i. focuses on the impact of rent hikes and the reasons behind the phenomenon.

For Dubai, the explanation behind its real estate becoming dearer every year is the rapidly increasing population - just over a million today and is expected to double in the next seven to 10 years, and the manifold increase in the emirate’s commercial activity in a very short period of time. The rents in Dubai are a direct reflection of the market, and are driven entirely by the supply-demand equilibrium.

“If the current rents in Dubai were really considered too expensive to lease, there would be no demand for them and we would have seen vacant apartment blocks everywhere. The fact that finding accommodation in Dubai is difficult even at these rents means that there is immense demand. And when demand overtakes the supply of a particular commodity, it eventually raises the cost of that commodity,” the manager of a Dubai-based real estate firm pointed out.

According to Humaid Al Shamsi of the Dubai Land Department, rent increases due to high demand for a comparatively limited number of available buildings. “The rent can be determined according to the building’s location and specification, and the number and size of rooms in the apartment. There is limit for rent hikes every renewal, and this generally ranges between five to 10 per cent annually,” he explained.

There is no specific federal land or rental law in the UAE, and each emirate is left to establish its own rules, he said.

“For low-income groups there are government houses in Al Qusais and Al Barsha and the annual rent is only Dh15,000. But in some emirates there is no government housing. During the coming 10 years, we expect the government to put plans to increase the number of buildings to keep pace with the increase in the population of UAE residents and visitors, and also take into consideration how many visit or residence visas are issued daily,” he said.

Demand and supply condition seems to be true of Sharjah - once considered a haven for those looking for accommodation at reasonable or cheap rents. The construction boom evident in the emirate cannot keep pace with the rate of influx of new residents. The traffic jams in most places in the city at all hours are a proof of the sudden increase in Sharjah’s population.

Mohammed Abdulla Saqr, a landlord in Sharjah, attributed the increase in rents to the increase in the number of projects in Dubai, which lead to increase in population and eventually a high demand for residential blocks.

Abu Jassim, also a landlord, blamed it on the economic factor. “We depend on our buildings, our only source of living. If there are valid reasons that require us to increase the rent, we do it,” he said and added that the cost of building material has gone up in the last two years “and we need to pay the banks the construction costs”.

Mr Jassim pointed out that landlords used to hand over buildings to the real estate agencies who had a monopoly in the market and they determined the prices according to the existing demand.

Omer Sinjalawi of Al Saud Real Estate said that between 1979 and 1998, there was high demand for buildings and a lot of investors entered the building and construction sector. Between 1999 and 2001, the supply had exceeded the demand so the investors started to prefer other types of investments. Also there was an increase in the cost of building material, he added.

The rents are relatively lower in Sharjah than in Dubai, but there is a catch. Commuting to Dubai, where a large chunk of Sharjah residents are either employed or have businesses, has become a nightmare that motorists experience twice (or four times) everyday. Of late, rents in the emirate have been hiked by steep margins, and in many cases were not even legal.

Ali Al Mazroui, of the Real Estate Rent Section at Sharjah Municipality, said that the landlord should not increase the rent before three years, and the increase should be valued according to the prevailing market rate. The public should protect their rights. If a tenant sees that the increase is unjustified or excessive, he or she should write a petition to the rent disputes committee, which has an absolute authority to accept or reject the petition.

Legal adviser Murtada Majid pointed out that there is no limit to how often the landlord can increase the rent, but a specific procedure for the hike has to be observed.

“The  tenancy agreement does not mention an express system for rent increases for the landlord to follow. The rules depend on the types of tenancy and in which emirate the property is located,” he explained.

According to Mr Majid, a landlord in Sharjah cannot increase the rent until the tenancy contract has been renewed twice (total period of three years). Only exception to this regulation is if the tenant and landlord are in accord over an increase. In Dubai, a landlord may increase the rent at the renewal of a lease, but cannot effect the increase during the term of the lease.

Mr Majid explained that a landlord should inform the tenant of the increase in rent through an advanced notice, as mentioned in the lease agreement, otherwise the agreement is deemed automatically renewed with the same terms. Before the rent increase can take effect, a landlord must give notice, which must be at least one rental period (notices of changing other terms of a tenancy contract must be at least three months).

According to an official at the Planning and Survey Department in Sharjah, no study has yet been conducted on the real estate sector in the emirate. The department is planning to conduct studies in collaboration with the concerned authorities in the near future, the official said.

Housing problems and their solutions

The Planning and Survey Department of Dubai Municipality on Expatriate Housing and its Current and Future Impact on the Real Estate Sector conducted a study. The study shed light on some of the root causes behind housing-related problems in the emirate.

Expatriate housing in Dubai is different from national and labour housing. The private sector is responsible for providing housing to this social category (expatriates) which represents 40 per cent (excluding labourers) of the total UAE population.

The percentage of expatriate families is four times that of national families according to the statistics of Department.

Expatriate housing represents 80 per cent of the total residential units in Dubai.

The economic boom in Dubai, which attracts international companies, led the private sector to increase investment in luxury housing resulting in decrease in the development of housing for low-income group. The investor likes to invest in high rent developments to get a higher profit.

The increase in number of middle-class and low-income expatriate population led to an imbalance in the market. The supply exceeds the demand in luxury housing while the demand exceeds the supply in low-income group housing. (A direct impact of this, the study reveals, is that some 50,000 moved to Sharjah or in low-income housing in the Central Business District (CBD) in Hamriya, Abu Hail, Satwa, Barsha, Deira and Karama. The rents in Sharjah are 30 to 50 per cent lower than in Dubai.

The rise in density of population in some old areas led to the phenomenon of shared apartments. Only  10 to 15 per cent of expatriates live in luxury housing.

The annual population growth for the year 83-93 was five per cent while that for 1997-2000 reached 6.3 per cent. Between 1993-97, the annual growth of families was 5.7 per cent, while the annual growth in residential units was 5.3 per cent.

The deficit in residential units as compared to the number of families was recorded at three per cent.

Land prices in certain areas are very high while the low-priced land is available on outskirts which lack basic services.

Some of the recommendations of the study:

*The government should encourage the private sector to invest in low-income housing.

*Dubai Municipality’s experience in constructing houses in certain areas such as in Ghusais is a successful model for development of low-income group housing.

*The private sector should continue to remain central to expatriate housing and the government should create an institution to follow the developments in the market, provide information to concerned sectors and develop housing programmes.

*The private sector should be encouraged to invest in the low-income housing through incentives and raising the floors limit (storeys) in buildings, and reconsidering specifications to make it economical for the builders.

*Steps should be taken to minimise the shifting of low-income families to Northern Emirates through investment in low-income housing without affecting the beauty and look of Dubai.

*The government could get involved indirectly by providing land in different areas at special prices, without creating ghettos.

*Establishment of real estate banks, financial institutions, subsidise replacement of old buildings with new ones to suit low income families.

LANDLORDS VS. TENANTS

THE Rent Committee of Dubai Municipality, which resolves rental disputes, was set up following a decision issued by Shaikh Hamdan bin Rashid Al Maktoum, Deputy Ruler of Dubai, UAE Minister of Finance and Industry and Chairman of Dubai Municipality.

.f+y.From November 2002 onwards, in April 2003, May 2003, June and July 2003, November 2003, the rental dispute cases totalled 1,761 (statistics for March, August, September, and October were not available). The disputes in the given period were estimated at Dh297.43 million..f-y.

As many as 1,308 of a total of 1,761 cases, or 74.27 per cent of all cases, were filed by landlords for delay in rent payment. A total of 34 tenants asked for annulling the rental contracts and demanded the balance rent and deposit back. This category represents just 1.93 per cent of the total cases under review.

Around 183 cases were categorised under “Other Disputes”, that’s 10.39 per cent of the total cases under review.

Only in 0.28 per cent (or five) of the total number of cases under review, landlords demanded higher rents. Cases involved residential, commercial and industrial real estate.

As of April 14, 2004, the total number of real estate companies (renting) in the emirate of Dubai has increased to 2,541.

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