Friday, March 16, 2007

Surge of demolitions in Abu Dhabi

A commenter (Macthompson) wondered, "Do you have a mathematical model to share with your readers which can explain the business model behind decisions to knock down thirty year old buildings housing rent-capped tenants?"

Here's the story he's referring to: New law triggers demolition surge. Key extract:
[A] source at the municipality explained that many of these buildings do not need maintenance. "The problem is that since the rent cap law was issued, we receive many claims for general maintenance work, a permit that entitles the landlord to evacuate the building, hence avoiding the three-year term for leases... and offering the property without the seven per cent cap restriction," he said.

"The average number of monthly demolition applications was 5 to 10 [buildings] before, but in recent months it surged to 15, especially after the introduction of the new law," the source added. With an extreme shortage of affordable housing in the short-term, increasing the number of demolitions adds to an already compromising situation for residents. However, contractors insist the mechanism is based on a free market approach.

"Any landlord can put in a request ... if he has no financial commitment to the Shaikh Khalifa [rent control] Committee and given that he successfully evacuates the building from existing tenants," explained Mohammad Hussain, deputy general manager of Al Mansouri Contracting Company.

There's the answer to the question: if you own a rent controlled apartment you are allowed to demolish the building and replace it with a building that is not rent controlled. The difference in rents may be sufficient to induce owners to choose demolition and replacement. Based on the numbers above, it appears that this has increased the rate of demolition by about 100 percent over the rate prior to rent control. (It's not clear from the article, but it appears that "demolitions" includes knocking down buildings and substantial renovations short on knockdown.)

Why has government not controlled the rent on new apartments? Because it realizes that no new construction will be occur unless rents rise to a level adequate to yield a market rate of return on investment. And we know new construction is desirable because we know the demand for housing has grown.

Why has the government allowed knockdown-and-replacement? Perhaps because it realizes that one alternative to knockdown is for the owner is to stop maintaining his building.

(The story reveals that another way around the rent control is permitted: obtain a permit for general maintenance, and evict the tenants.)

A note to end on:

Rent control appears to be the most efficient technique presently known to destroy a city--except for bombing.

-Swedish economist Assar Lindbeck

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