Sunday, May 29, 2005

Key Money, Part II :: Khaleej Times
Key money has once again raised its ugly head though few would care to admit it. With government-owned residential apartments almost out of their reach since strict laws were put into place regarding the transfer of tenancy, the players have moved on to newer and more fertile grounds. They now, it is said, operate in places where landlords have not raised their rents and in old buildings where the rents are relatively low. How does one nip this operation in the bud? You cannot, simply because it’s hard to find anybody coming forward with a complaint that he had to fork out key money to the former tenant. To do so would be illegal to start with, and worse, because of the market situation, the confessor, more than anybody else stands to lose more than the player.
As usual, I'm sitting in my ivory tower and using my imagination to fill in the blanks. Or trying to. Here goes:

It seems that there is a profitable business signing leases on apartments for the sole purpose of subletting them. The unanswered question is why these opportunities exist. Either the players are better at finding tenants than the landlord, or the landlord is setting the price below the market rate, perhaps by ignorance.

In the case of government-owned housing, the price is presumably below the market rate on purpose. Only nationals could rent those apartments, but until recently they transfer tenancy to non-nationals. This created a profitable arbitrage opportunity for enterprising non-nationals, and many government-owned apartment blocks became occupied by non-nationals. This loophole has now been addressed (closed?) by the government.

There have been news accounts of landlords electing not to raise rents out of social consciousness towards their poorer tenants. Their intent is like the government's intent: to provide housing at below market rates. The difficulty is the same: the intended subsidy from landlord to tenant is easily captured by arbitragers and the generous landlord's intent is defeated.

To keep the landlord in the dark, perhaps the sublet agreement has the occupying tenant pay the monthly rent to the landlord. The arbitrager likes taking his or her money up front as key money. Should the occupying tenant fall behind on the rent the arbitrager keeps the key money, evicts the tenant and sublets again.

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2 Comments:

Blogger Keefieboy said...

Here's how it works. To the best of my knowledge, all rented property in the Emirates is let on an annual lease basis. This means that the renter has to sign a one-year lease contract, and the rent payment will be in three or (if you're lucky) four installments, covered by post-dated cheques. Remember that you can be jailed for issuing a bouncy cheque in this country.

For many buildings, finding an apartment can be a question of bribing the watchman, and I believe that 'key money' still exists. I have heard of many such situations where I live because the rents are extraordinarily low and demand is fantastically high.

To the main point. Lower-paid workers can never afford the commitment involved in renting an entire apartment for a year. While they would ultimately love to have an apartment to themselves, what they NEED is a bed for the night. So these folks rent a bed from an entrepreneur who has managed to rent an entire apartment. They may pay daily, weekly or monthly, and will undoubtedly have to share a room with a bunch of other folks. 'Legality' has to go out of the window in this situation - everybody knows (including, I hope, the Gubment) that there is no other way for a very large chunk of the population to find somewhere to live.

9:15 PM  
Blogger Keefieboy said...

Having read your post again, John, you suspect that "It seems that there is a profitable business signing leases on apartments for the sole purpose of subletting them. The unanswered question is why these opportunities exist. Either the players are better at finding tenants than the landlord, or the landlord is setting the price below the market rate, perhaps by ignorance.
"

The answer is all in my previous comment - low-paid individuals simply cannot afford to take on an entire apartment. Even if they could scrape the money together, they could not provide the various deposits required (landlord's security against damage, utility company, phone company etc). All these guys want is a bed to sleep in.

You say "There have been news accounts of landlords electing not to raise rents out of social conciousness for their poorer tenants. Their intent is like the government's intent: to provide housing at below market rates. The difficulty is the same: the intended subsidy from landlord to tenant is easily captured by arbitragers and the generous landlord's intent is defeated."

I say that landlords in this situation are not losing much by nor raising their rents. If they do raise them, their tenants will flee. We are talking about old, unmaintained properties - the construction cost has been covered many times over. The rents they get now are essentially unearned. There may be some altruism involved, but I think it's more likely to be a case of pragmatism. The owners know the kind of clientelle they have, and therefore know that raising rents will decrease their income rather than increase it.

The Dubai property market right now is scarier than it has ever been, especially for people on a fixed income. Don't forget there isno general market understanding of inflation - there are no official Gubment figures. Cost-of-living increases are pretty much unheard of, and the recent announcement of a 25%/15% salary hike for Gubment employees is only going to skew the picture more. Private sector companies cannot hope to emulate that, and so the whole economy gets even more distortion. I hate economics, and I'm so glad I don't understand it.

9:38 PM  

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