Are rent controls coming to the capital? Ben Crompton outlines what it could mean for us

(This article featured in Abu Dhabi Week August 2015, read the original here)

A spate of semi-official comments early in June 2015 suggested that Abu Dhabi authorities are developing some kind of rent control system for the capital. As a member of Abu Dhabi Urban Planning Council put it: “We believe that DMA (Department of Municipal Affairs) will come out with a provisional rental index by year-end”.

That sounds pretty official – but what is a rental index, how will it work and what will it mean for tenants?

Simply put, a rental index is a method by which authorities try and calculate what property is supposed to rent for and then ensure that landlords cannot charge rents higher than this.

This form of rent control is practised using various methods in several countries.

In some places, the index is used to regulate all rents including initial rents (when a new tenant moves in).

Elsewhere the index applies to renewals only – the initial rent is fixed by the landlord at market rates (which means as much as the landlord can get for the property) but any increase on renewal will be limited by reference to the index.

Abu Dhabi used to have a renewals-based system called a “rent cap”: rent rises could not exceed five percent per year. This was removed in November 2013 because it was felt that investors and landlords were being penalised unfairly.

The thinking was that there would be enough apartments and villas to rent, and because this supply would be more or less matched to demand the market would keep rents at a reasonable level.

In fact Abu Dhabi has overtaken Dubai as the most expensive place to rent in the UAE.

The new Abu Dhabi law hasn’t yet been published but it seems that the government intends to bring in an index similar to the existing RERA system in Dubai. There you can go to the Land Department website, type in the location of your property, and find out what rent you should be paying.

If your tenancy contract comes up for renewal and the rent you’re currently paying is more than 11 percent below the index’s market rent, then the landlord can raise your rent (so if your rent is 11-20 percent below market, your landlord can raise the rent five percent).

This differs to the old Abu Dhabi rent cap in several ways. First, it restricts a rise until the actual rent is a certain amount below market rent (in Dubai this is 11 percent), but then allows bigger rent rises the more the actual rent is below market rent.

It is likely we will see something very similar for Abu Dhabi and there has already been talk about dividing the city into 12 zones with prescribed rents for each zone.

It remains to be seen how the index will deal with individual areas that have very different properties – such as Khalifa A, where a five-bedroom villa could rent for anywhere between AED 180,000 and AED 400,000 per year.

What this means for tenants will obviously depend on exactly how the index works: but it is likely to be very positive. The Dubai index is very tenant-friendly, allowing rent rises only if the actual rent is significantly below market rent. So you can have a degree of certainty about your rental costs next year.

What it is unlikely to do, and what the old rent cap didn’t do, is keep rents down for people who move to a different property; you’ll have to pay market rents.

This may result in people being trapped in the same unit as they can’t afford to move. Or it may encourage illegal subletting – people do make a move but pretend they are still living in the original place to preserve a low rent for others.

What will it mean for landlords? Not great news, I’m afraid, as you are now less likely to get market rates for your investments; a rent cap of say five percent doesn’t look too fabulous if inflation is running at 5.1 percent, for instance. In theory, investors might prefer to put their money elsewhere.

But it shouldn’t have a huge effect; although rents are rising here, they are rising at a more sustainable rate than we saw in 2014. We shouldn’t be faced with the 2008 situation where tenants were paying as much as 50 percent below market rates.