Ending rent cap will test supply and demand

Some tenants are concerned, but normal market forces should ensure Abu Dhabi rental prices don't go sky high.

The Executive Council’s decision to remove the rental cap on residential properties in Abu Dhabi has had a mixed response. As would be expected, landlords have welcomed the move, but tenants have voiced concerns that their apartments and villas will become unaffordable.

The original announcement last week was brief, allowing room for various interpretations. As The National reported yesterday, some property lawyers have suggested that there will be "unjustifiable increases" in rentals in light of the decision.

While there may be some opportunistic manoeuvres by landlords in the short term, fears of widespread, annual above-inflation increases are most probably unfounded – because, after a period of adjustment, normal market forces of supply and demand will take hold.

The cap was put in place in 2006 at a time when demand from people moving to the booming capital was far outstripping the housing supply. Rents were rising on an almost daily basis and by capping rises, first to 7 per cent of the annual rate and then to 5 per cent, the authorities were reacting to extraordinary circumstances.

By 2008, prices peaked. Since then, the supply of property on the market has increased to a point where many people have seen their rentals stabilise or even drop. This year, the market has absorbed a new influx of Abu Dhabi government workers who were required to live in the emirate, and new developments are opening up on a regular basis

The rent cap was always going to be a temporary measure, and its removal was bound to cause some pain.

Some tenants will see rises in their rents as property owners move to recoup the losses they have sustained since the cap was introduced. But it is also true that many tenants will have the opportunity to move to a newer property for the same, or lower, rent.

Those content to stay in older properties may, over time, see their rents drop as the lure of new developments reshapes the market. However, it’s also likely that their landlords will invest little in the cost of refurbishment as the refunds will be too low.

In a market economy, and under normal circumstances, government has no role in setting prices, but it does maintain responsible oversight. It may be that further mechanisms, such as a property valuation system to guide prices, will be needed in the future.

For now, to ease concerns and avoid overreactions, what is required is more clarity on how the changes will work.