Dubai Expat Rents Exceed Pay Hitting Competitiveness

Sarah El-Said is relocating for the fourth time since coming to Dubai from New Jersey in 2008. The mother of two and her husband will pay 43 percent more for a similar-sized apartment, moving their children away from friends after disagreeing with their landlord over terms of a new lease.

“This is insane,” said El-Said, who pays 8,750 dirhams ($2,400) per month for an apartment on the Palm Jumeirah manmade island. “It’s like you have to move house every two years. You feel no stability in where you live and you’re always at the mercy of landlords whose sole interest is making more money.”

Rent increases and the conflicts that go with them are climbing in the city of about 2.2 million, rattling a workforce that’s mostly foreign, as a rebounding property market and a surging economy embolden landlords. Buying a home has become more difficult after the central bank damped lending for most of the year by proposing tighter mortgage restrictions and imposing new transaction fees.

Rents rose by 15 percent for apartments and 14 percent for single-family homes on average in the past year, Jones Lang LaSalle Inc. wrote in an October report, citing data compiled by researcher Salaries for non-government employees increased 5.6 percent in the United Arab Emirates during that time, according to a survey of more than 200 companies by Mercer LLC, a New York-based consulting firm.

“Dubai should be worried about rising rents because there is no upside to the government or society,” said Farouk Soussa, the London-based head of Middle East economics at Citigroup Global Markets Ltd. “It goes against Dubai’s best economic interest because it erodes its competitiveness.”

Conflicts Rise

Legal disputes over leases have jumped since the property market began to rebound, Sultan Bin Mejren, director general of Dubai’s Land Department said in September. The regulator in September said it will create a rental dispute tribunal to simplify the way disagreements are handled and more than double the capacity to about 250 cases a week. The purpose of the center is to achieve “social and economic stability for all concerned,” the Land Department said in a statement.

Dubai’s economy is headed for the fastest expansion in six years as it benefits from an increase in hotel occupancy and manufacturing. Gross domestic product grew 4.9 percent in the first half, compared with a 4.4 percent increase in 2012, the statistics office said Nov. 6.

Employers Concerned

Rents are “definitely becoming a concern for companies as prices have shot up in the past 12 to 18 months,” said Nuno Gomes, who advises businesses on employee compensation for Mercer. “If things continue at this pace, the allowances that are being provided won’t be enough.”

Average annual rent for a mid-range three-bedroom home in Dubai is equal to about $58,000. Rents range from $46,000 to $92,000 a year depending on the quality and location, according to Cluttons LLC. That compares with $46,344 a year in Manhattan, where rents, charged monthly, rose 0.2 percent in 2012 to an average of $3,862 per month.

Rents started to climb in Dubai’s more sought-after developments in 2012 and the gains spread to most parts of the city this year, Jones Lang said in a report last month. Increases will continue over the next 12 months, although at a slower rate, it predicted. The broker estimates that about 45,000 new homes will be completed in Dubai by the end of 2015, tempering rent growth in a market that already has “significant” vacancies.

Mortgage Effect

Leasing costs in Dubai rose this year amid expectations that the government would step in to cool the emirate’s surging homebuying market. Mortgage lending stalled in the first quarter after the United Arab Emirates central bank said it would cap the value of mortgages taken by foreigners to 50 percent of a first home’s value.

After holding talks with lenders, the central bank in October limited mortgages to foreign buyers to 75 percent of the value of a first home valued at 5 million dirhams or less. It also capped loans for second homes and barred down payments made with credit cards or personal loans. Dubai doubled property sales fees to 4 percent from 2 percent in October.

“Making it more difficult to buy will force more people to stay in the rental market,” said Craig Plumb, head of Middle East research at Jones Lang. “Rents are going up a bit more than prices at the moment, which makes properties that are completed and rented more attractive investments.” That pushes up values and leads to more landlord-tenant disputes, he said.

Strong Returns

Landlords in Dubai are already getting yields that are twice the global average. Rental income as a percentage of the purchase price ranges from 5 percent to 6 percent in Dubai compared with a world average of 2 percent to 3 percent, Goldman Sachs Group Inc. said in an Oct. 21 report.

Ludmila Yamalova, a partner at law firm HPL Yamalova & Plewka JLT, said the number of tenant cases her firm handled this year has more than tripled from 2012 and risen more than fivefold from 2011, when the property market was mired in a slump. While some clients are landlords seeking advice on evictions and sales, the overwhelming majority are occupants battling owners trying to charge more, she said.

“Dubai is unique because it’s a cocktail of nationalities and cultures with different expectations and sense of entitlement,” said Yamalova, who regularly argued cases before the rent committee that’s being replaced. “A prevalent mindset among landlords is ‘this is my property and I can raise the rent or evict any time. On the other hand, you live in the property, so if a pipe bursts and floods the whole place, it isn’t my problem.’”

Foreigner Mix

Creating one set of rules for such diverse landlords isn’t easy. Foreigners make up more than 80 percent of the population of the U.A.E., which includes Dubai and Abu Dhabi, according to government estimates.

Dubai residents come from more than 200 countries and most property investors are from India, Pakistan, Iran, Russia, Central Asia, Europe and the Middle East and North Africa. Construction was the biggest industry as of 2012, accounting for almost 26 percent of jobs, according to government data. Wholesale and retail trade, and manufacturing were the next biggest group and 12 percent worked in real estate and related industries.

Dubai’s’ Real Estate Regulatory Agency allows increases of 5 percent to 10 percent based on an index that tracks the values across the city. Conflicts arise when the owners try to get tenants to move out to achieve a bigger increase, Yamalova said. Some try to push occupiers to leave or sign renewals promising to leave in a year by halting payment of fees to the property manager, resulting in suspended maintenance and services, she said.

Evictions Restricted

Owners must inform tenants of their plans to impose an increase at least three months before the expiry of a contract and evictions must be justified. The committee handling disputes charges 3.5 percent of the annual rent to review cases, an amount the losing party has to pay.

Limits on rental increases may reduce Dubai’s appeal to global property investors, many of whom reside outside the city, Vikash Shah, managing director at Amoli Hong Kong said in a Nov. 6 interview. The company, which spent more than 100 million dirhams on real estate in the emirate since 2004, slashed rents by 25 percent to 45 percent after the market collapsed as tenants threatened to move out, he said.

‘No Protection’

“Now, when the market goes back up, landlords can’t raise the rents to make up for losses in previous years,” he said. “As an investor, you are limited on the upside and you have no protection on the downside.”

Amoli gets a rental yield of as much as 6 percent now, compared with 8 percent to 10 percent before the crash. That compares with 3 percent for properties Amoli owns in Hong Kong, Shah said.

“The eviction process is long and cumbersome with a lot of documentation required for landlords who don’t live in Dubai,” he said. “Investors need to do their due diligence before looking at the high return.”

Even with greater government involvement, landlords in Dubai have more leverage than their peers in most other markets. Rents are usually paid a year in advance, often with several post-dated checks. A disgruntled tenant who stops payment on an advance check would be committing a criminal offense in the U.A.E.

“More and more people are standing up to their landlords as they become aware of their rights,” Yamalova said. “It’s a huge change from the boom days, when many viewed Dubai as a place they can make money in for a couple of years before moving on. Now more people are putting down roots here.”

Faced with a rent increase they couldn’t accept, El-Said and her husband agreed to vacate the house in one year. Their new home, also on the Palm Jumeirah island, will cost 45,000 dirhams more, plus another 20,000 dirhams in moving costs and fees.

“This isn’t justified, because salaries didn’t climb anywhere near the rents,” she said. El-Said is already making plans to return to the U.S. before her children reach school age because the additional costs “make moving back a no-brainer financially.”

Before it's here, it's on the Bloomberg Terminal.