Abu Dhabi rent index will relieve pressure on housing costs, say experts

Ben Crompton of Crompton Partners Estate Agents quoted among a number of MENA real estate experts on the proposed Abu Dhabi Rent Index. This article first featured in The National News paper. Read the original here.

Proposals for a new rental index in Abu Dhabi to replace the cap that was abolished in November 2013 should help to relieve spiralling housing costs, which nudged inflation in the city to a six-year high of 5.3 per cent in April.

The index, which is being drawn up by the Department of Municipal Affairs (DMA), could be introduced by the end of this year, according to comments made recently by Abu Dhabi Urban Planning Council’s executive director, Mohamed Al Khadar.

The capital is expected to mirror Dubai’s adoption of an index that would split the city into various zones and then set a guide rent for each zone. Attempts to contact the DMA to verify the format and the timeframe of the index were unsuccessful.

Simon Gray, the managing director of Chestertons Mena, says the removal of a rent cap in Abu Dhabi “basically led to a unrestricted increase in rentals, increasing rental inflation and making most properties unaffordable, as they are beyond the current income bracket of most residents”.

Meanwhile, a new Q2 Property Watch report by Land Sterling says rental growth has “become a pressing issue in the absence of rental caps” in Abu Dhabi.

“We do not expect this trend to abate in 2015, as housing supply is expected to be at its lowest since 2009.”

Craig Plumb, the head of research at JLL Mena, says rents in the capital increased by 4 per cent in the first quarter of the year, continuing a trend that had increased by 11 per cent last year and by 17 per cent in 2013, which he also attributes to the removal of the cap and the “limited quality supply across all price points”.

Ben Crompton, the managing director of Crompton Estate Agents, says there has been “a popular clamour” for a return to a rental cap ever since its removal in Abu Dhabi. However, he argues that, in the long run, caps are not good either for landlords or for Abu Dhabi’s property market.

“It dissuades people from building when it is most needed. It makes the market a less attractive prospect for developers and it discourages investment in buildings,” he says.

“If you build a property and it’s immediately tenanted, then over time the market increases ahead of the cap. You can have tenants in there who end up paying rents at a discount of 30 to 40 per cent of the market around them. When that happens, landlords are able to stop providing services and proper maintenance in the knowledge that the tenants can’t go anywhere.

“They don’t have the ability to vote with their feet and move elsewhere, because they can’t afford it. It’s not a long-term solution in a rising market.”

Faisal Durrani, the international research and business development manager with Cluttons, argues that an index, which calculates typical price rises in an area and gives tenants a basis for appeal against extortionate increases, works better than a cap but even that is not perfect.

For instance, the Dubai index gives a general guidance for prices within a certain area but does not take into account the age, layout or condition of specific buildings. Despite this, he says “in an emerging market, it is always good for landlords to have a barometer to calculate market performance”.

He says many landlords who have invested in Dubai do not live in the UAE and can sometimes have an unrealistic view of rental values. An index gives both them and their tenants some reassurance about market conditions.

Yet an index only goes so far in addressing the issue of affordability. The other issue that needs to be tackled is the lack of supply in freehold areas.

Mr Crompton says the only way to solve the affordable housing issue in Abu Dhabi in the long run is to build many more homes at lower costs. There are two ways of doing this, he argues. The first is to build smaller units in the existing popular freehold areas – such as the new Meera Shams Abu Dhabi apartments being built by Aldar Properties at Reem Island. The second is to build in more remote areas where land is cheaper.

He says Abu Dhabi “needs something like [Dubai’s] International City – a fully-formed community with good transport links but in an area that is not as desirable”. Apart from Al Reef and Al Ghadeer, he says most of the freehold communities in Abu Dhabi are in premium waterfront areas.

However, Matthew Green, the UAE head of research at CBRE, argues that “you can’t address affordability issues by selling freehold properties”.

“History tells us that if you sell something cheap it doesn’t stay that way,” he says. “The impact of speculation in Dubai [has been] significant and it often pushes properties beyond the reach of many.”

He says the best way to provide large-scale amounts of housing cheaply would be for some form of public-private partnership (PPP) or landlord to build – and retain – large numbers of units from which they can generate guaranteed income at fixed rents below market values.

“There is a place for a government-led body or a PPP to address that market.”

Mr Durrani favours a rent-to-own model, which has previously been trialled by Emaar Properties in Dubai, as a way of making sure mid-income families can become owner-occupiers.

He also believes Abu Dhabi could benefit from the introduction of the type of planning restrictions seen in London, New York and elsewhere, which specify that developers of major projects provide a percentage of affordable units.

He says Abu Dhabi is still an emerging city that does not need to artificially create areas that are only filled with low-cost units.

“I wouldn’t like to see low-income housing pushed into low-income regions which are cut off from the rest of the city.”