Rise of UAE rent-to-homeowners

Ashraf Metwally, who says rent-to-own is the only “reasonable” way to buy flats, with his daughter, Jumana, in their new home in Sun Tower on Reem Island in Abu Dhabi. Silvia Razgova / The National

Ashraf Metwally is not a "flipper", an investor looking to buy and resell a property for a quick profit.

A project manager with Abu Dhabi Municipality, Mr Metwally wanted to buy a home and live in Abu Dhabi with his wife and young daughter. However, like most prospective home buyers, he is wary of making a commitment because of the turmoil in the global economy and home prices dropping.

"Nobody knows anything," says Mr Metwally, who is from Egypt. "I'm not going to make a decision for the long term now."

The solution for Mr Metwally was a new rent-to-own programme offered by Sorouh Real Estate, Abu Dhabi's second-largest developer, in Sun Tower on Reem Island. After three years of leasing the property, he will have the option to buy the one-bedroom apartment in the 65-storey tower for Dh1.5 million, with 90 per cent of his rent to be turned into equity in the apartment.

"Our long-term plan is to stay here," says Mr Metwally, who moved into his new home two weeks ago. "It's the only reasonable way to buy flats."

In recent months, the capital's two largest developers - Sorouh and Aldar Properties - have launched rent-to-own plans, hoping to boost sales at a time when people are wary of buying homes.

The idea is relatively simple: a renter agrees to a lease rate for an apartment for a certain period of time, usually two or three years. At the end of the period, they have the option to buy the apartment at the price agreed upon at the start of the lease.

The best part for tenants tired of throwing away their hard-earned dirhams through leasing is that the majority of the money paid in rent can be converted into equity.

Rent-to-own programmes are relatively common in other parts of the world, such as the UK, Australia and the US.

Emaar Properties, Dubai's largest developer, announced a rent-to-own programme in 2008, offering renters an option to covert their first year of rent to equity if they committed to buy the property in 10 months.

But the Sorouh and Aldar plans represent the first major support for the rent-to-own scheme in Abu Dhabi, as well as a sign of new flexibility from the emirate's major developers. More developers in the UAE are likely to follow.

"I think it's a natural option for developers when they have stock on their books," says Andrew Covill, the head of investment sales for LLJ Properties in Abu Dhabi.

In recent years, Abu Dhabi developers didn't need to offer flexible purchase plans. Prices were high, supply was low and buyers were throwing money at them to buy units.

But the global economic slowdown has pushed prices down by more than 40 per cent in Abu Dhabi.

At the same time, an unprecedented number of residential developments are about to be completed in the capital, adding more than 50,000 new apartments and villas to the current supply by the end of 2013, according to Jones Lang LaSalle, another property company.

"Rent-to-own schemes are an effective way of stimulating demand," said Elaine Jones, the chief executive of Asteco, the property firm, in a recent report.

The rent-to-own option addresses what may be the biggest issue in the market today: a lack of consumer confidence in buying.

"People are still not necessarily ready to make a commitment now," says Paul Middleton, Sorouh's executive director of sales and marketing. "It clearly offers our customers an alternative."

The developers would rather sell property outright, but that is difficult in the current climate, he says.

"It's the reality of the market. You have to listen to the customers."

The response from prospective home buyers has been positive so far, Mr Middleton says. Of the 90 lease deals Sorouh has signed in Sun Tower since it announced the scheme in June, about half have been rent-to-own deals.

Both Sorouh and Aldar executives say they are considering expanding the programme to more properties.

"It's been doing very well, both in the number of take-ups and the number of clients," says Rami Nasser, the director of sales and commercial leasing for Aldar.

The Sorouh and Aldar plans differ in a number of small ways.

Aldar's rental term is two years, instead of three offered by Sorouh, and Aldar charges a fee if the tenant leaves before the two years is up.

"We're not looking for tenants, we're looking for people interested in rent-to-own," Mr Nasser says.

But Aldar offers to turn 100 per cent of the first year's rent into equity, and 90 per cent of the second year. Aldar also allows the client to transfer the equity to another party if they decide not to buy.

"It's identical to renting," Mr Nasser says. "However, the benefits are [that] they are upgrading their lifestyle and getting an option to build equity and if they don't want to buy, they can transfer the equity."

But there are downsides to the plans. Customers have to read the fine print and investigate the market. You have to commit to a lease rate for the length of the contract, as well as a sales price. The prices may be above market value.

And both lease rates and sale prices may drop in the next few years, diminishing the value of converting rent to equity.

"As long as the price is right, that's the bottom line," Mr Covill says. "If the buy-out price is attractive enough, it isn't a bad option."

Customers can walk away from the deal and if they don't want to buy the apartment after the term, there is no penalty. "There is very little risk," Mr Metwally says.

He was tired of commuting to work from Dubai, where he had lived for five years, and was eager to find an affordable apartment in Abu Dhabi.

Mr Metwally eventually paid Dh105,000 for his one-bedroom apartment, a 5 per cent premium on the typical Dh100,000 rent. But he didn't have to pay an agent's commission.

"I can leave anytime," Mr Metwally says. "If rents go down, I can move."

The Facts

Pros

• Convert rent to equity

• No agent commission on rental

• Get to live in apartment before you buy

• Down payment not necessary

• Can walk away at any time

Cons

• Initial rent higher than market

• Rental rates may go down

• Comparable sale prices may be lower in three years