Is this a New Rent Cap for Abu Dhabi?

Is this a New Rent Cap for Abu Dhabi?

On the 16th June 2015 Mohamed Al Khadar, Executive Director, Urban Development & Estidama Sector, of the Abu Dhabi Urban Planning Council (UPC), told Emirates 24|7 “A new law was issued regulating the property sector in the emirate and we believe that DMA will come out with a provisional rental index by year-end,”. That sounds pretty official, there will be an “index” but what is it and will it work?

In 2006 the new rental law fixed rent rises on property at 7% per year, this was revised in 2010 to 5% and has been called the “Rent Cap”. This was an emergency measure designed to curb rampant rent increases which peaked in late 2008 and was making rents unsustainable. Two things should be noted about the rent cap; firstly

It was brought in because rents were out of control as immigration caused the population to outstrip the housing supply. This was caused largely by the slow pace at which the private sector was building. In 2007 the government reacted to by creating Investment Zones (in Reem Island, Raha beach, Saadiyat etc) for foreign developers and ordering the likes of Aldar, Tamouh and Sorouh (as was) to build more accommodation to bring rents down. In their frantic building they were caught unawares by the 2008/2009 crash and had to be bailed out; secondly

What the rent cap did do was keep rents down for rent renewals, but rents for people who moved house (or just arrived in the country) were at market rate (the Rent Cap didn’t apply to a vacant unit). As a unit was vacated the landlords were allowed to raise that rent up to what the market would allow. The Rent Cap kept people’s rents down as long as you didn’t move house, but if you had to upgrade or move for any other reason you had to pay the market rent.

So what is this new “Index”? The law hasn’t yet been published but it would seem that the government will bring in an index similar to what they have in Dubai. You go onto the Dubai land Department website here, type in your current rent and the location of your property and it will tell you what rent you should be paying. If the rent you’re paying is more than 11% below the calculator then the landlord can raise your rent by prescribed amounts (i.e. if your rent is 11-20% below “market” your landlord can raise the rent 5%) each year. Again it is worth noting that the Dubai index only affects renewals and doesn’t keep rents for new leases down.

So what issues should we look for with a new Abu Dhabi Index?

How will is group units? It might be easy to group all one beds in Raha Beach for example but Bandar rents for much higher than Muneera. Also how can you group villas in Khalifa A when they are so different?
How much below market rent will they let a unit go before allowing rent raises and how much will they allow? Dubai is very tenant friendly in this regard.
Will it take into account very good units (great view, high floor) and very poor units (low floor, smaller size) ect. Currently the Dubai calculator is criticized for being very general.
How often will it be updated? The Dubai Index is updated as often a four times a year. Very useful for a fluctuating market.
Who will have responsibility for it? Dubai has its own regulatory body, will Abu Dhabi have one or will it be run by the notoriously inefficient Municipality?
Will it use the Tawtheeq system to monitor rents and ensure that they won’t be raised above the Index even if they are vacated? If it tries this expect landlords to start charging huge admin fees to rent their property!

In the end the best way to control rents is to add more supply, which brings rents down. How willing the Abu Dhabi government is to do this remains to be seen as it, and a large amount of the local population, rely a great deal on rental incomes.

Watch this space for more information. Exciting times in real estate in Abu Dhabi.