Sunday, August 21, 2005

Abu Dhabi residents call for body to monitor rises in rent :: GN

Residents yesterday called for the establishment of a body to monitor unnecessary rises in rent in the emirate. According to them, the absence of such an organisation has been encouraging landlords and other private real estate agencies to increase annual rents for their properties whenever they wish.
. . .
Another resident called for an organisation responsible for both the monitoring of rent and checking maintenance and conditions of buildings.

M.A. Ragunath said: "The maintenance of the building I live in is very poor. We have problems almost every day. A poor sanitary system is the biggest problem. We keep on at the maintenance people, but they don't care."
Mr. Ragunath's landlord apparently does not fear that tenants will leave, probably because there aren't apartments available at the same rent that are better maintained. From this perspective, Mr. Ragunath wants something without paying for it.

As the population of the UAE continues to grow rapidly -- due to large numbers of foreigners obtaining work visas -- the demand for housing grows. This pushes up the price of all housing including existing rental property and raises the return to investment in housing. The higher return induces new construction which over time will bring prices back down.

Thus, it is not simply a matter that owners can "increase annual rents for their properties whenever they wish." There needs to be an increase in demand. As renters find they cannot find vacancies at current rent levels, owners find they raise rents without losing renters. Market rents will rise until there is no one who cannot find an apartment who is willing to pay the market rent.

For a statement on the popularity of economists go here.

UPDATE: This story in today's Khaleej Times says an update in federal law governing landlord-tenant relations is in the works. It states further that regarding existing law
the tenant has the right to complain if the rent was increased by over 20 per cent over the actual rent every two years. They stated that some tenants had filed complaints and that the department had redressed the situation as per the laws.
But enforcement is an issue:
In the event the contract was for two years or less, the landlord shall maintain the right to increase the rent specified in the contract once every two years within the limit of 20 per cent. The two-year period, shall either, commence from the time the contract was concluded or from the date the last rent increment was effected. In all cases the landlord shall inform the tenant of his desire to increase the rent at least three months before the expiry of the contract.”

But when the tenant rejects the increase, the landlord simply abstains from renewing the contract. Now the tenant who has refused to accept the proposed increase in rent will have to look for another apartment and later be obliged to pay to the landlord the money for declining the apartment, which in most cases are high and equivalent to a year's rent.

Although it is illegal for the landlord to ask the tenant to vacate the apartment, the Department of Social Services and Commercial Buildings (DSSCB) did not do anything to address the issue. After all, the tenant would be the biggest loser, and will subsequently have to accept whimsical rent increases.
That sounds not merely whimsical but seemingly abusive. Let's walk through this:
  • After 2 years the landlord offers to renew your contract but at a higher rent
  • You decline the offer
  • The landlord charges you a year's rent for declining the apartment
Suppose that the renter knows up front when he signs the initial contract that refusal to renew will mean a charge equal to a year's rent. Such contracts could be a landlord's way of charging more for a short-term lease than for long-term lease and is not abusive per se. Someone whose intention to stay for more than 2 years would not have to pay the fee. But this contract has a built-in moral hazard. Upon renewal the landlord can raise the rent knowing that if the tenant refuses to renew they will collect the penalty for non-renewal. Thus, the renter should demand some protection in the form of a limit to the size of any increase. The law limiting price increases would be that form of protection.

The abuse comes in if the renter is mislead into believing that this law limiting prices increases is enforced at little or no cost to the renter. If it is actually difficult or impossible to have this law enforced, then the mislead renter will not anticipate the potential for abuse built into the contract whereby the owner can use the non-renewal penalty to squeeze more out of the renter.

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