Recommendations to improve the standard of rental practices in Dubai’s market
One of the pluses of living in Dubai is the urgency with which the government makes key decisions and strives to remain at the forefront of harnessing new innovations and practices. We always have to keep in mind that some things take time, whether it is developing a law or otherwise encouraging the public to accept a new way about a certain common practice, but the tenacity with which the Dubai government issues decisions to better the social and economic progress of the city is quicker than anything I have witnessed elsewhere.
With the wave of changes to the residency laws and business practices in Dubai, it would be another welcomed initiative for the relevant authorities to take a look at redefining some practices within the rental space as well. As Dubai continues to attract talent from around the world, many come and are shocked at the idea of having to pay their rent in one lump sum. While some will argue that the once-popular one cheque norm is now a thing of the past, proprietary data from Data Finder, Property Finder’s real estate insights and data platform, shows one’s annual rent in Dubai is most commonly paid in four cheques and then unsurprisingly in one cheque as many are able to negotiate a lower price if doing so. Whether you are new to Dubai, and many are expected to be so over the coming years, or are a seasoned resident, it would be beneficial for all parties involved for there to be additional parametres around certain aspects of rental arrangements.
Dubai has been able to scale architectural developments and other urban and economic feats because it has learned from some of the best practices and trades from around the world. When looking at how to revitalize, regulate and smarten the rental space, there are a number of lessons from other global cities that can easily be adopted in Dubai. From San Francisco to New York, Montreal to London, Paris, Singapore, and Taiwan, there are a lot of similarities in practices or regulations between a number of these cities that provide trust and ease when two parties are transacting for a living arrangement.
The United States
When it comes to the United States, practices from San Francisco on the West Coast and New York City on the East Coast tend to vary somewhat. In San Francisco, it is common for a tenant to put down the first and last month’s rent upfront. Very seldom does a broker get involved as landlords and tenants have ways of finding one another online through a variety of platforms such as Zillow or Trulia, two of the top property portals across the United States.
Considering that San Francisco is notoriously expensive, there is a form of rent control that has been imposed on multi-storey buildings that were built before 1979. The control stipulates that a landlord can only increase rent, if the market dictates, at the rate of 1.6 percent per year. When it comes to a security deposit, the maximum amount is two months’ rent, but could be any amount that is settled upon. However, whatever the amount is, it must be held in escrow and the interest is paid to the tenant.
In New York, rent is also paid monthly and typically via bank transfer as that is easier than exchanging cash or a cheque. If a landlord wishes to use the services of an agent, the landlord pays the agent’s fee, which is typically one month’s rent, and contracts are a standard 12 months. Should you be a tenant looking for an apartment, whichever apartment you settle on, the landlord will still pay the agent’s fee as they are the beneficiary in the deal. In most cities, it is common for a landlord to run a credit check against a potential tenant(s) and the results would be a factor in a security deposit and the terms of the contract. Similar to other large cities, if a tenant wishes to end the contract during the term period, they should notify the landlord within 30 or 60 days of their intended departure and there would not be any penalty imposed or security deposit confiscated as it is assumed this is a sufficient period of time for the landlord to find a new tenant. Should a notice period not be adhered to, then some sort of financial penalty would be worked out. Similar to San Francisco, and again due to great demand, some buildings stipulate rent control or stabilization measures and have a number of stipulations to qualify for either such as the age of the building and also the type of building and number of units it has. Furthermore, in order to account for the owner’s operating costs, rent can be increased by a maximum of 7.5 percent every two years.
Canada
Further north in Montreal, rental practices are also highly regulated by the local government. Similar to the United States, it is somewhat common to put down the first month’s rent and last month’s rent as a deposit, although this is done on a case-by-case basis as conducting a successful credit check will allow a tenant to avoid having to do this. The tenant will typically pay the agent’s commission so they have access to full inventory.
However, this is only for the first year in a new apartment, as renewals do not incur additional charges thereafter.
A lease contract is automatically renewed year on year unless the tenant provides a three to six-month notice for wanting to terminate the lease. Throughout the term, the landlord can only increase the rent in order to account for operating expenses, such as an increase in property taxes or for general renovations of the property. However, the landlord has to provide sufficient evidence for any of the above. The maximum increase as a percentage allowed has been on a sliding scale each year and has been reduced to 2.4 percent of the total expenses incurred, as of 2017, and the tenant reserves the right to refuse.
The United Kingdom
Across the pond in London, rent is paid via a bank transfer. A refundable deposit is capped at six weeks’ worth of rent or five weeks’ worth of rent should the annual rent be less than £50,000, under a new amendment put forward in the House of Lords. Any deductions to the security deposit could include fines for late rent payments or lost keys, however, the costs must be reasonable and be supported with written evidence by the landlord or estate agent involved. Considering the frequency with which rental properties move in London, for example, a refundable deposit to reserve a property is also common and this is capped at one week’s rent.
What is interesting for London’s case is what is called the tenancy deposit protection (TDP) whereby a security deposit is government-backed and registered with one of three local agencies. A landlord has 30 days to register a tenant’s security deposit or otherwise face a fine. Upon termination of the tenancy, any agreed deduction is taken and the tenant has to receive the deposit or any remainder back within 10 days.
Switzerland
In neighboring Geneva, and with little surprise, rental arrangements are highly regulated affairs, which are rendered to be quite fair for both parties. A tenancy period is defined through one of three different options; a fixed period, which is whatever time period that is set out, but at the end, it is not renewable. Should the tenant not leave at the end of the period though, the same terms renew. The second type is an indefinite period, which is a minimum of one year and can be renewed or terminated with three months’ notice. The third period is a three-year period, which is an option for landlords and tenants who wish for this level of security, A security deposit cannot exceed three months’ rent and the money is deposited into an account with the tenant’s name. Additionally, a document is provided to the landlord as proof of this. When the contract has come to an end, the landlord will give the holding bank permission to release the amount back to the tenant. Within these arrangements, early termination is possible with three months’ notice of vacating and the tenant should find a replacement tenant.
France
As one of the most bureaucratic nations, we can expect nothing less than a litany of regulations in France that help to regulate the relationship between landlords and tenants. Both parties ensure that every point regarding the tenancy agreement is noted in their contract. Tenants in France pay their rent monthly and via bank transfer as cheques are looked at as being too risky. When it comes to providing a security deposit, it can vary between one and three months of the rental amount. If you want to end your contract prior to its expiration date, regulations in larger cities such as Paris, Bordeaux, Nantes, amongst others, will stipulate that you provide a one-month notice. Considering the demand in larger cities, the landlord will typically have his pick amongst prospective tenants and can choose which tenant he would prefer based on their income and other conditions. Depending on how your income is looked at, it is not uncommon to have a guarantor such as a parent, who
will provide their own documentation to prove their ability to cover the property’s monthly expenses and would be held liable in case of default on payments.
Germany
Similar to Switzerland and France, although to an additional degree, rental practices in Germany are highly regulated and practices, as well as laws and regulations, are almost entirely in favour of tenants. Germany has a fascinating history and its ownership and rental practices have been shaped in part due to its history as a divided and then a united nation after the fall of the Berlin Wall in 1991. The markings of a Soviet past are not just present in the architecture of eastern Germany in cities like Berlin, but are also antiquated within the laws of wanting the city’s population to remain diversified as far as economic classes.
Government available housing, which are essentially buildings owned by Germans who fled during the war, are owned by the government and used as a form of subsidised housing, although they are available to potential tenants from any economic status. Doing this ensures that people of higher, mid and lower incomes live within the same neighbourhoods and also attend the same schools. Additionally, when a tenant takes a property, it is very common that they inhabit the same property for years to come. The tenant therefore may make upgrades to the property for their own use, but with the added value for the owner’s benefit as well. When a tenant does decide to leave, they will give a three-months’ notice of this intention and could help to find a replacement tenant.
Singapore
With the world’s top 20 fastest growing cities all being located in Southeast Asia, it is no surprise that common rental practices are regulated and efficient affairs in one of the region’s most successful countries. In Singapore, the commission due for a property is paid by the landlord or the tenant as it is dependent upon who hired the agent. This amount could be one month’s rent if a lease is two years or half a month’s rent if the lease is one year. The rental amount for a lease is paid monthly and by whatever mode is agreed between the parties. In order to initiate a new contract, one month’s rent as a deposit upfront for a 12-month lease and two months’ rent for 24-month leases is common. There are no penalties for breaking a contract mid-way as long as a notice period is provided to the landlord.
Taiwan
Further east in Taiwan, the process is fairly simple and straightforward, regardless of the city. Tenants usually transfer the money to the landlord monthly and contracts are on a 12-month basis. The security deposit is typically one to two month’s rent, and by law, cannot be more. If the contract is cancelled during its validity period, the deposit will be taken as the penalty of early termination.
Three Recommendations to Improve Dubai’s Rental Market
By looking at a number of cities around the world that all have diverse populations with a healthy mix of nationals as well as foreigners, students, visitors and otherwise, we can make parallels to Dubai and what could be improved in the local system to be more in line with useful practices around the world. What is common in all these cities is a strong set of institutions and regulations that are in place to protect and uphold agreements. Additionally, some cities have gone as far as to ensure that security deposits are protected by law and have even used them as a way to earn interest either for the tenant or to create a rolling income such as in London.
Dubai could regulate the rental system in three ways that would make the ecosystem more equitable while also improving important metrics such as transparency and rule of law. Rather than focusing on initiatives like rent control, which do not suit the market’s current dynamics, the following would have a more immediate and sustainable impact. Initially, by instituting a practice in Dubai that would allow landlords to gauge a tenant’s ability to pay their agreed rent through a credit check or a salary certificate from a company, residents could be absolved of having to write post-dated cheques and landlords would not have to waste time dealing with cheques to deposit. As there is a government mandate for Dubai to be a paperless city, this initiative would be a head start on something that is otherwise an inevitability.
Secondly, Dubai could create and manage a deposit system whereby a tenant and landlord place a security deposit in a government-backed account, which the government could charge a fee for facilitating, so earnings are Sharia-compliant. Having a deposit system that is regulated by the government would turn the attention of officials from managing disputes raised through a misuse of the security deposit to mitigating these disagreements. This process can be facilitated by creating a smart method whereby agents can create a move-in condition report, with sign-off from the tenant and landlord, and upload that to a system. This is later followed by uploading a move-out condition report, that would account for any deduction of a deposit. That is then reviewed by an authority, and any payment due is issued to the landlord and the remainder returned to the tenant, electronically. Considering the number of rental transactions that take place annually, this could be a positive source of income while also working to the benefit of the transacting parties. The ease with which this part of the agreement is done will also alleviate pain points for both parties that often see this as a grey area that causes some unease.
Finally, an additional recommendation would be to regulate a tenant’s rental payments to be on a monthly basis. While there is no law in place against that, landlords are accustomed to receiving a lump sum once or a few times throughout the year. For those who earn a regular salary and can prove their earnings with a salary certificate and bank statements, they are compensated monthly and should then be able to pay their rent on a monthly basis, as is the condition in many other countries around the world. Although rental prices have come down, an additional factor in affordability is ensuring that residents can facilitate cash flow and do not have to resort to taking out a loan just to pay their rent in a lump sum.
In a system that should equally prioritize the rights of both landlords and tenants, all parties will benefit from the ease with which they are able to regulate one of their most important relationships with these adaptations. In the effort to be constantly innovative, adopting any of these recommendations can get Dubai one step closer to being the happiest city in the world.
Note: Property Finder’s employees comprise 50 nationalities and have lived all around the world. I could not have written this article without the help of my knowledgeable and very multicultural colleagues
CARLA MARIA ISSA
Senior Research Analyst,
Property Finder
