Thursday, July 27, 2006

the Rent

Ain't nothin' goin' on but the rent. You gotta to have a J-O-B if you wanna be with me.Gwen Gutharie

Coming from the US, it once seemed inconceivable to me that tenants in apartments and houses could be required to pay a year's rent in advance. It isn't uncommon in the US for tenants to try even to negotiate the required one month advance security deposit, in effect having to put up no more than two-months' rent in advance.

Obviously, circumstances vary from country to country, and the UAE is probably not exceptional in having prospective tenants pay so much up front. It is a combination of market forces and indifference on government's part in looking after the interest of the renter. In a not fully developed economy as the UAE's, consumer protection of any kind is limited, especially in light of the fact that the majority of business and property owners, landlords and the like are UAE passport holders while the vast majority of renters and consumers are holders of foreign passports.

Such being the case, it would be bad enough if it were only the requirement of the lump sum payment. What makes matters all the worse is that over the past two to three years, year-on-year rental rate increases have been in the range of 20% to 50%--with the not too exceptional cases of even 100% increases. Such is the crisis being faced by renters (pre-dominantly expats) in the UAE rental market.

The Lucky Not So Few

A large percentage of the expatriate population are provided housing by their employer. I can only speculate on how many--probably less than 50%. Then again there are hundreds of thousands of laborers in country being provided bed-space, who would also not be among the pool of renters.

The presence, nonetheless, of a large group who need not be concerned with the cost of accommodation means that the outcry over 50% year-on-year increases is muted. The fact, too, that it is often a company paying the rent rather than an individual is one reason why landlords are emboldened to charge so much.

These factors would figure into the market forces side of the equation. Remove either of these variables and prices, or at least price increases, might begin to fall. The bottom line, literally, is that many people in country, native and expat, are not directly impacted by the spiraling cost of renting.

The Not So Silent Majority

This still leaves what is probably a majority of the UAE resident population having to pay rental fees that amount to a form of extortion. This situation has created, or at least exacerbated, the phenomenon of the bed-space bachelor, more commonly and euphemistically called the executive bachelor. This group perhaps out-numbers or at least equals the number of laborers living in company provided bed-space accommodations on the outskirts of the cities. The executive bachelors are usually found in large numbers at city centers, and are often harassed if they try to take up residence in nicer or less crowded neighborhoods.

These renters cope with the rental increases by crowding ever more into rooms and apartments originally designed for single-occupancy or small families. Families also double and triple up in single units or villas. Those with higher salaries rent rooms instead of flats--rooms in multi-room apartments or villas.

As for prices, what may have cost Dhs 20,000 three years ago, could have risen to Dhs 26,000 in the first year, 34,000 in the second and 48,000 in the third. In US dollar terms that would be an increase from about $5,500 in year one to $13,000 by year three. The same scenario plays out for those whose rental properties, like villas, will have increased from say Dhs 60,000 to over 140,000--close to $40,000 for just a year's rent!

Cost of Living

The problem is compounded by the fact that year-on-year salary increases are small in the UAE if they occur at all. The traditional mentality is that people come and work for two or three years then leave. For a company it is cheaper, if not necessarily cost-effective, to hire the next new arrival than pay more to keep the existing worker.

Renters are responding to the escalation in fees in a variety of ways:

  • cutting back on all discretionary spending
  • increasing reliance on credit cards, bank loans and other forms of debt
  • sharing accommodation (usually illegally)--with numbers rising to 20 and more in a 3-bedroom apartment or villa
  • sending dependents back to the country of origin
  • moving further and further away from place of employment
  • finally, just quitting the UAE altogether
For the 50% or more who live in rental accommodation these coping strategies have become the reality of life in the UAE. The lucky ones are those who can, in fact, manage by cutting only discretionary spending. Perhaps the most unlucky are those who go the route of taking on more debt, which could eventually place them into a predicament more worrisome than high rent or inadequate accommodations.

The Bigger Picture

As bad as it is, the rent crisis is just three or so years old. People are muddling their way through it. The government murmurs about action it might take. Meanwhile, thousands of renters are being pushed toward the world of freehold. A construction and property market has taken hold of the UAE in a manner perhaps never before seen in the world. The dynamics, one way or the other, are incredible. The rent crisis appears to be a transitional issue. Rental inflation may turn into deflation when tens of thousands of housing units hit the market within the next couple of years. Salaries may rise as Dubai and the rest of the UAE compete with other countries among the booming Gulf economies for workers.

The good news is that the rental crisis is not an entrenched problem. Those in its grips may need to continue to struggle and cope, but there is something at the end of the tunnel—hopefully a bit of light.

995 words
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Related Discussion and Commentary: Who Pays the Rent?, at the UAE Community Blog.

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2 comments:

Anonymous said...

Even though the company may give the landlord the rental cheque, that money is still calculated as a percentage of your salary.

When your package is negotiated, you are given a housing allowance with which you can do as you like. Pay rental or share accommodation.

If you do rent and your rental goes up you could request a larger housing allowance, find cheaper accommodation or pay from your own pocket. If you are lucky your employer may grant you a larger allowance, but this rarely goes furhter than 5%. Otherwise, it is your own expense.

BD said...

Thanks for the added explanation. So, there is certainly some grey area. Even those with the company perks can be affected by the rate increases.

I was one of the lucky ones--for about 5 years. Everything associated with housing was provided and how much it cost was never my concern.

But there was a caveat. On a few too many occasions I was forced to shift flats on a momments notice. If I didn't like it--well no one was forcing me to keep the job.

Enough was enough--I had had it with the uncertainty and lack of control. So I've since gone the route of freehold. It's bad enough to be at the mercy of the employer for your job, but to have your housing and the right to remain in country also in the hands of an employer is too much.

Freehold held out the option of not only providing a permanent place to live, it would also provide an alternative source for a visa. So, for me it has ever since been viva freehold.