Rents — down but not out

NEWS that rents rose at a slower pace than the previous quarter may seem like there is light at the end of the tunnel but the figure belies some worrying facts.

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Published: Fri 25 Jul 2008, 10:22 PM

Last updated: Sun 5 Apr 2015, 4:02 PM

Most obvious of these is the way property purchases are being funded. There is something resembling 'mutual dependency' between borrowers who leverage property purchases and the banks that fund the transactions. In a bullish market all well and good.

Simply put purchasers frequently flip the transaction for a quick profit with no intention of actually owning the property. The banks grant the leverage and make sizeable profits from this form of lending. This activity is most frenzied with 'off-plan' properties where a flip can occur several times. Banks continue to report handsome profits — albeit from a number of sectors. Some analysts and bankers themselves point to the fact that some lenders appear to be putting profits before socially responsible lending. Now is a good time for them to affirm their adherence to the latter. Theoretically, finished properties should sell at a premium to unfinished properties but rampant speculation is distorting the market and that is in turn feeding through to the rental market. With some property prices having risen as much as 42 per cent in the first three months of this year according to Colliers International this suggests grounds for urgent regulation.

Rents on Shaikh Zayed Road have risen 51 per cent in the last year according to Asteco and there is little evidence of relief in the short term. However a likely rapid rebalancing in supply and demand could pull the rug from underneath the overheating rental sector. We are fast approaching the tipping point in this regard.

There seems to be little else that can be done beyond the rents caps already being applied. In addressing the speculative buying activity so prevalent in Dubai regulators would be doing many a favour by preventing a painful correction.

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