Dubai's rental index updated for 2018 and now includes land

Experts welcome new land rental index, but say rates on the standard index "under reflect" the softening market

New residential units coming onto the market in the second half of the year will push property prices further down, according to a new report by Property Finder. Reem Mohammed / The National

The Dubai Land Department (DLD) updated the emirate's rental index for 2018 on Saturday, adding a land rent index for the first time.

While the index typically includes data on residential, commercial and industrial properties in Dubai, the inclusion of annually renewable lease contracts for land is a new development.

Core Savills’ chief executive David Godchaux said the land index will bring transparency to the market, although it will not affect most retail customers as the majority do not own land.

"Time will say how close it is to the market reality, but this is very good start," Mr Godchaux said. "An index that only updates once a year is good for land as it is not a fast-moving market."

However, he said rental rates listed on the new index "under reflect" the market.

"As rents are softening across most districts in Dubai, there is a lot of 'viscosity' and lag in the adjustment, due to the very inelastic nature of the rental market, with rents typically adjusting only once per year for a given property," he said.

"This lag and length in the adjustment means that the average rentals are under reflecting the actual amplitude of the softening until a very large part of the market has adjusted, and this statistical bias is difficult to avoid as most indexes capture some averages."

Rents for apartments and villas experienced "low single-digit declines" during the three months to end-September, according to the property consultancy JLL, as vacancies increased in residential buildings. This saw tenants negotiate rents downward by an average of up to 7 per cent, it said. Office and retail rents also softened in the same period.

For this reason, Mr Godchaux said the index is a "great tool in reflecting that there is still room for further softening in the market". "It somehow also works as a moderator, balancing market forces and slowing down an adjustment that would probably be faster without it," he added.

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The DLD said it adopted a variety of mechanisms to carry out the upgrade process for its 2018 index, including assessing the average data of tenancy contracts registered in the Ejari system as well as its own real estate data. The index includes a rental calculator that helps users determine the rental increase of any leased properties before they negotiate a contract.

“The rental index is based on a calculation of the increase in rental values, reflecting average rents in different areas, the rental value of registered leases, and the properties offered for leasing," said Mohammed Yahya, the deputy executive director of the rental affairs sector at DLD.

“Updating the rental index once a year helps us to maintain transparency in rental transactions for the various properties available for leasing throughout the emirate. This limits conflict between the parties involved, especially as it is a reference that everyone can rely on.”

The rental index was first set up in 2009 to help landlords, agents and tenants map out maximum allowable rent increases on the expiry of a lease in developments across the city. It has since been used as a reference in dispute cases between tenants and landlords over rental values.

While it was initially revised every four months, this was scrapped in August 2015 when the DLD said it would only update it once a year

Mario Volpi, the chief sales officer for Kensington Exclusive Properties, said the rental calculator, in its present form, "is not very accurate".

"The calculator was designed to regulate rental increases, it doesn’t really follow what is actually happening in the market today, especially when rents are softening," he said. "As a result [it] only calculates the rent from the average rent and does not take into consideration aspects such as views, amenities, modernity or actual size. That said, the Government is working hard to bring a newly upgraded version which will take these factors into consideration."

By law, rent increases in Dubai are allowed in the following cases: a 10 per cent increase if the rent is 21 to 30 per cent less than the average rent for similar properties; a 15 per cent increase if the rent is 31 to 40 per cent less than the average standard rent for similar properties; and a 20 per cent increase if the rent is 40 per cent less than the average rent for similar properties.