One of the most important announcements to come out of the real estate market recently was the update to the Dubai RERA (Real Estate Regulatory Agency) Rental Index. Tenants currently have to deal with inevitable rent increases.
The RERA calculator, recalibrated in March 2024, has become a representative of open-market pricing, as it will be revised periodically for certain communities and buildings to reflect current market rental rates. It shows whether or not a rent increase is allowed and uses criteria such as location, property type, current rent and number of rooms, and works by comparing properties with similar ones nearby.
As per the property consultancy Cushman & Wakefield, rents in Dubai surged by 19% in 2023, compared with 27% in 2022. It also said that many tenants were opting to stay put because rental increases during renewals are much lower compared to signing new leases, but several renewing in 2024 will face higher rent due to the adjustment in the RERA calculator.
In this article, Global Business Outlook will decode the intricacies of the RERA calculator and its impact on Dubai’s real estate landscape.
Decoding the noise around the rental index
Dubai tenants who have been getting lease renewal requests are seeing sharp rent increases as landlords are now trying to bring rates to ‘market averages’. The rent hike is touching the 20% ceiling.
The trend has been prominently felt in the mid- to upper-mid-market residential communities, rather than in the premium end of the rental market. The development comes immediately after the RERA Rental Index witnessed a revision in its average rental values for popular residential locations in Dubai.
Till a few months back, most of the rental averages in the RERA index were skewing towards 2020 figures or thereabouts. However, as per the market sources, there has been a comprehensive revision to bring the index closer to the Dubai rental market dynamics.
“Even earlier, the demand pressure for rental options from a fast-expanding resident base had landlords going in for sizable hikes. It was easy if it was a brand new building and thus getting first-time residents. In older buildings, landlords were forcing up rates on renewals, and when they were not getting it, forcing evictions,” Gulf News reported.
Citing the RERA index update as ‘more of a catching up’ with actual market rates, an estate agent remarked, “This implies that going forward the number of eviction notices can go down and the pace of rental increases will also slow as the Dubai rental market levels up.”
According to the property portal Dubizzle, the average yearly rent for studio, one- and two-bed apartments in Dubai Marina increased by 18.33%, 17.39% and 17.99%, respectively, in 2023.
As per the market analysts, it’s unlikely that prime areas in the city will keep recording that kind of rent growth, unlike in the mid-market residential districts.
Talking about mid-market, let’s take a look at the Jumeirah Village Circle (JVC), which has its share of upper-mid options too. There, the average yearly apartment rent has increased by 32%, thereby making it the “biggest rise in the affordable rental apartment category,” according to Dubizzle, which stated, “The average annual rent for flats in JVC has jumped from Dh50,000 in 2022 to Dh66,000 in 2023.”
Also, businesses are now preferring to own commercial properties amid rising rentals, a route followed by the residents in the past to beat the rising rentals. This trend has been one of the key drivers of Dubai’s residential property market post-COVID.
Robert Thomas, head of agency at Cushman & Wakefield Core, told the Khaleej Times, “We particularly see local entities who know that their growth plans can be accommodated within the same space/building and they do not want to go through sharp rental increases or eviction notices as seen in the residential market. However, this trend is generally limited to local or regional entities, as multinational corporations and global occupiers typically do not own their real estate.”
“Real estate local brokerage entities will be an example that have moved into owning their space, perhaps linked to their ability to source attractive rates through their networks. This has been reflected in increased office sales market sale transactions which grew 24% year-on-year in 2023, accompanied by a 23% increase in median sales prices,” the analyst added.
Analysts’ take
“Last year (2023), we observed rental ranges widening for some areas by increasing the top end of the allowed price increase. The residential rental market is on an upswing stage of the cycle. Therefore, increasing the upper end of the permitted rental range allows landlords to increase their rates closer to prevailing market rents and improve their yields in the process,” explained Haider Tuaima, director and head of real estate research at Dubai-based ValuStrat, while interacting with The National.
Cherif Sleiman, chief revenue officer of Property Finder, said the recent change in the rental index also reflects RERA’s efforts to balance a fair rent increase across different communities “while fostering a healthy environment for investors, ensuring competitive rental yields aligned with global standards.”
With many tenants with historically low rents set to face significant increases in their next renewal, John Lyons, managing director at Dubai-based Espace Real Estate, said, “This will increase the churn rate of rental stock within many communities, while also accelerating the trend of 2023, whereby many tenants decided to buy, opting for the lower monthly costs associated with home ownership.”
“Although the updated rent calculator will inevitably cause some level of disruption for many tenants, the great pivot of housing stock from the rental sector to the end-user sector will help to create increased levels of stability for Dubai’s residential property market over the longer term,” Lyons stated further.
Jacob Bramley, senior leasing manager at Dubai-based Betterhomes, told The National that the consequence of the RERA Rental Index update could be two-pronged: any increase may prompt tenants to vacate their property to save money, which in turn would allow landlords to re-rent at a higher price, offering better return for their investment.
However, this could also lead to increased demand in “newer” and developing communities that offer better value for money, as tenants opt to downsize or move further from their ideal search location.
According to Cushman & Wakefield, Dubai is currently seeing a two-tiered rental market, with a widening gap between new contracts and lease renewals. The reason behind this is the trend of tenants opting to stay put due to rental increases during renewals, as this move is more lucrative than signing new leases, with the latter being decided by the RERA calculator.
Prathyusha Gurrapu, head of research and consultancy at Cushman & Wakefield, said, “Villa rents have risen 16% year-on-year and are up by more than 17% from their 2014 peak values, while apartments have seen a sharper increase at 19% year-on-year – albeit apartment rents are 2% below their 2014 peak values. We expect rental rises to continue for new leases in 2024, particularly in established central locations, where high occupancy levels will exert upward pressure on rent. That said, with a greater number of deliveries in the sub-urban locations, we expect rental increases to be moderate in the newly handed over districts.”
Apartment rents in Dubai increased between 20-30% in 2023, according to data compiled by Better Homes. While average villa rents also increased in communities across Dubai, these rises were typically in the range of 10-20%. And yes, affordable apartment districts have witnessed the sharpest rental increases in the past 12 months due to relatively lower bases.
Demand has, however, remained on the higher side, with more people opting to buy their own homes, Gurrapu noted further.
More than 39,400 units were reportedly handed over to owners in Dubai, in 2023 (the highest number of handovers since 2020).
“In 2024, while there are more than 65,000 units slated for handover, our conservative estimates are at around 32,000 units, of which 76% are expected to be apartments and 24% villas,” Gurrapu observed.
Dubai is continuing to witness strong population growth, with an addition of 100,240 residents in 2023. The city currently has more than 3.65 million residents. With the 2040 Dubai Urban Master Plan, the city’s resident population will likely increase to 5.8 million in the next 17 years. That reflects an increase of more than 2.15 million residents.
As per Gurrapu, Dubai will need nearly 30,000 residential units consistently every year until 2040.
“Although we don’t think the market will experience sharp levels of price increases as seen in 2023, we think there will be moderation in the market as the difference between ask and bid prices widens, pricing end-users out of the market,” Gurrapu continued, while stating, “With very limited post-handover payment plans now seen in the off-plan market, and the potential lowering of the interest rates later in 2024, these are expected to support the secondary sales market and help moderate the sales price increases.”
In case the apartment vacancy rate goes higher due to the upward revision of the RERA Rental Index, will real estate prices decline? Experts believe in this possibility, but it all depends on how eager the market is to find new tenants.
However, some experts don’t want to buy into this logic, as they feel that the price increases won’t be as sharp at the top end of the market as there has been. They also anticipate a slight increase in prices in the lower and mid-range as more tenants move out in search of more reasonably priced options.
Luxury Property Leasing Director Simon Boden said, “Affordability won’t be a problem when it comes to rent increases above a particular threshold. The timeline, on the other hand, will be the issue. For instance, if the RERA Index permits a 20% increase in rent for a tenant paying Dh150,000, that would be an additional Dh30,000 annually. Not immediately, but over the course of the year, that rent might still be reasonable.”
“Renters must have time to produce that cash flow. As a result, there has been pressure for longer payment terms and more checks. As an alternative, tenants may be comfortable with receiving a single check for the entire amount of the previous rental price, with the additional amount spread out over a few months. Although landlords currently have the power to request a higher rent at lease renewal, they must collaborate with tenants. If a tenant is unable to pay a 20% premium upfront, it makes little sense to evict them and leave the apartment unoccupied for three months while you hunt for a higher-paying tenant who can pay the entire amount due in one go. In actuality, many renters will have to make some difficult choices, such as selling their current residence or purchasing a home in order to avoid any problems with rent,” Boden added.
Meanwhile, in November 2023, S&P predicted that house prices would rise by 5% to 7% in 2024 and as per Tatiana Leskova, associate director of Corporate Ratings at S&P, there is no sign of a slowdown in Dubai real estate prices.
Dubai’s real estate market is thriving, as evidenced by the rising momentum in rents, property values rising in tandem with the construction of new high-rise buildings, and a sharp increase in property transactions. The owner of a one-bedroom apartment in Dubai Marina at Colife saw a notable 21.2% increase in monthly income to $2,970 over the previous year.
According to Leskova, owners should expect even larger returns in the neighbourhood of $3,415 per month in 2024. Real estate experts predict a steady demand for residential space in Dubai due to the city’s growing population and ongoing influx of international professionals.
Betterhomes CEO Richard Waind stated that the tenants who have lived in their properties for over two years will see a bigger increase when renewing their lease due to the changes. He estimates rents could rise 10-20% in the short term for areas that have experienced significant rental growth in the past two years, such as popular villa communities and waterfront apartment buildings.
However, Waind also believes the updated RERA calculator will help stabilise neighbourhood rents long-term. Before the revision, there was a large gap between benchmark renewal prices set by RERA and actual market rents, especially for coveted neighbourhoods. This discouraged tenants from moving out and led to a lack of supply on the market. By making renewal costs more reflective of current values, the new calculator may motivate more tenant turnover and open up more listings.