With the rental index having legal implications for possible rent increases in the renewal process of existing contracts, the purpose of this contribution is to provide you with strategies strengthening your negotiating power as well as to familiarise you with the methodology of the index computation.
Recently, the Dubai Land Department (DLD) has updated its rental index for 2018, covering all residential, commercial and industrial properties in Dubai. Also, for the first time, an index for land leased through annually renewable lease contracts is published.
Deliberate Delay – Smoothing Out The Peaks
While Dubai`s rental index was initially calculated on a six months basis, it is presently published on a yearly term. With the index data having a legal and real implication especially on rent increases at the yearly contract renewal dates, the approach of deliberately using somewhat delayed market data serves the purpose of smoothing out the peaks and troughs of the rental market.
For each market segment – i.e. studio, 1-bed apartment, 4-bed villa – and locality (Dubai Marina, Downtown) a specific index is calculated based on real data which the government generates through its Ejari-system (Ejari: Arabic for „my Rent“). Ejari is Dubai`s now mandatory attestation of rental contracts without which it is impossible to connect any utilities.
By sourcing the rental data through the Ejari system, the government`s market data are as accurate as they are comprehensive.
RERA Rental Index Calculator
Dubai`s Real Estate Regulatory Authority (RERA) makes the index data accessible through its rental index calculator providing a range of rental prices for any property type and location within the Emirate of Dubai, immediately informing the user about whether a rent increase as per the pertinent rental laws is possible – or not. Notably, these data are equally provided for other usage types like commercial or industrial properties.
Close Relation: The Rental Index and the Rental Law
As a general rule, the rental index determines whether a rental increase is allowed as per the law. Depending on the variance of the presently contracted rent from the market average as expressed by the index, a certain rent increase is permissible, subject to three months written notice to the tenant (prior to the renewal date), as follows:
Difference between existing rental contract and rental index |
Allowed rent increase as per RERA |
|---|---|
< 10% |
None |
≥ 10% ≤ 20% |
Max 5% of rental value |
> 20% ≤ 30% |
Max 10% of rental value |
> 30% ≤ 40% |
Max 15% of rental value |
> 40% |
Max 20% of rental value |
Accurate Data, Many Variables
However accurate the indices might be due to the comprehensive data foundation – even considering the described and assumed lag – ambiguity is not fully taken out of the game for several reasons.
Quality Variance
Properties clustered into the same size (i.e. 1-bed apartment) and location group can greatly vary in quality. Typical variance aspects are to be found in the building itself, setting itself apart from the index` „assumed average“ in parameters such as location of the building, ongoing building management, quantity and quality of building amenities etc.
Also, the unit`s features and quality can contribute to a higher scoring on the rental market. Views of the sea or landmarks like Burj Khalifa, higher floors, specifically fitted upgrades or furnishings as well as rarely availabe layouts (i.e. penthouse) may all imply a higher value compared to the index average and thus justify a higher asking price.
Size Variance
At present, Dubai`s rental index only discriminates between different unit sizes by assuming certain price ranges for properties offering similar numbers of bedrooms and grouping them accordingly. By doing so, differences in actual built-up area (BUA) are omitted. It can be argued that this factor will most likely be fairly negligible on the lower end (studios and 1-bedroom apartments), however, generously-built, large 5-bedroom villas frequently feature double the built-up area compared to smaller 5-bed counterparts. It goes without saying that such substantial differences in usable space play an important role, requiring to be taken into account when negotiating rental terms.
Roundup
The rental index provides a good general guidance for landlords and tenants with respect to a realistic market rent. In an upwards trending market as witnessed between 2012 and 2014, the allowed rental increase as indicated by the rental index will most likely be surpassed due to the described lag and a therefore increased motivation of the tenant to stay.
In any case, landlord and tenant alike are well-advised to check realistic rents for comparable, specific units on the pertinent property portals like propertyfinder or bayut. Be sure to check actual units on the market with comparable size, layout, floor level and view within the same building. In doing this, be careful not to fall for „fake listings“, typically advertising units well below realistic prices in an effort to trigger client action. Likewise, you will find asking prices that are more wishful thinking than market reality.
Your market survey might provide you with valuable arguing power vis-a-vis your landlord or tenant, why a rental increase is or is not suitable, possibly further strengthening your case in citing additional variance parameters as laid out above.
That said, consider the rental index as a valid starting point for your negotiations and start out from there. Always negotiate using well-founded arguments and consider RERAs rental dispute settlement centre as your last resort. This approach will save you money, time and above all preserve a good relation to your tenant or landlord.
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The author advises institutional investors about property transactions and handles property portfolios in Dubai since the year 2007. Should you have comments or inquiries, please contact the author on author@property-blog-dubai.com.
