Rent freeze vs. rental cap: How is it different and how can tenants, landlords benefit financially?

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Dubai: Research from property consultants have showed that several residents across UAE have moved out of apartments and into villas over the past year, due to remote working and the desire for more personal space during the coronavirus pandemic.

However, surveys from a personal finance standpoint indicated that a reverse trend was also observed wherein residents opted for a smaller living space as opposed to a bigger one, to expand their emergency fund and save up more for the future after the health crisis tightened purse strings.

Whatever be the trend, there have been financially beneficial tenant-oriented initiatives that have been announced in the past years in the UAE, like the ‘rental cap’ and ‘rental freeze’ laws, but there was a need to differentiate between the two and evaluate how they can benefit a renter money-wise.

‘Rent freeze’ or ‘rent caps’ are all forms of rent control or rent regulation

Rent freeze or rent caps are nothing but globally recognised ways to regulate or control rent. It is adopted by numerous countries worldwide.

Is rent regulation recognised elsewhere in the world?

Rent regulation is a system of laws, administered by a court or a public authority, which aims to ensure the affordability of housing and tenancies on the rental market for dwellings.

The loose term ‘rent control’ covers a spectrum of regulation which can vary from setting the absolute amount of rent that can be charged, with no allowed increases, to placing different limits on the amount that rent can increase; these restrictions may continue between tenancies, or may be applied only within the duration of a tenancy.

As of 2016, at least 14 of the 36 Organisation for Economic Co-operation and Development (OECD) countries have some form of rent control in effect. (The OECD is an intergovernmental economic organisation with 38 member countries, founded in 1961 to stimulate economic progress and trade.)

Rent regulation is one of several classes of policies proposed to improve housing affordability, alongside subsidies and policies aimed at expanding the housing supply. There is a consensus among economists that rent control reduces the quality and quantity of rental housing units.

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What is a ‘rent freeze’, in a broader sense of the term?

What is a ‘rent freeze’, in a broader sense of the term?

Typically, the term “rent freeze” refers to a situation in which a tenant’s owed rent amount stabilises, or remains ‘frozen’, at a fixed rate for a certain period of time.

In such cases a tenant’s rent would not increase accordingly with changes in the economy or housing market (or rather, any increase would be covered while the tenant’s contribution remains the same).

What is the rent freeze law all about in the UAE?

Last April, the Dubai Land Department announced considering a rent law proposal that is meant to help the UAE’s real estate market achieve the major post-pandemic recovery hoped for.

According to the new proposal, tenants can enjoy a rent price freeze once they sign a rental contract for at least three years. The proposal that has been perceived as pro-residents one, will prevent landlords from increasing rental prices for the three years that residents commit to staying at the property.

Similar limits placed on rent increases have been implemented in other emirates as well. Other emirates, such as Sharjah, currently have similar rental freezes and Abu Dhabi has, in the past, limited increases within leases of three years or less.

Stock Rental lease agreement contract
Similar limits placed on rent increases have been implemented in other emirates as well.

How does freezing rents financially impact renters and landlords?

Real estate industry experts believe that the rent freeze law will drive colossal investments into the Dubai property market and will also have a favourable impact on the occupancy rate.

Furthermore, the law will eradicate all elements of uncertainty and boost tenant’s confidence by allowing them to plan their finances more effectively. The law will also channel more investments into the sector.

Although the Dubai rent freeze law will act as a boon for the landlords in overcoming the challenges involved in securing tenants due to the oversupply of rental properties, this regulation will also boost the occupancy rate of the properties as most of the tenants leave the properties in search of low-rental accommodations, majorly due to frequent increases in rents. Once the tenant leaves due to an increase in rent, it becomes an uphill battle for the landlords to find a replacement.

Furthermore, the losses incurred by the landlord due to vacant property until they find a new tenant are much higher than the profits from the increased rent. It makes sense for the landlords to watch the market as well as the competition while negotiating rents with the potential tenants. The best bet for the landlords is to convince the tenants to pay a fixed rent for three years to ensure the property remains occupied for the whole term.

The experts view the rent freeze law as a step further to Dubai’s rent cap law which exercises restrictions on increasing rents at renewal. The rent freeze law will facilitate tenants in effectively managing their rental liabilities as the rent will remain constant for the specified term. Furthermore, fixed rent will also encourage the tenants to continue at the same property after three years.

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How does ‘rent freeze’ differ from ‘rent cap’ – aren’t they principally the same?

How does ‘rent freeze’ differ from ‘rent cap’ – aren’t they principally the same?

There was already a degree of protection under the ‘rent cap’ or ‘rent ceiling’ law limiting increases at renewal, and the proposed new law goes further to help tenants manage their rental liabilities by knowing that their agreed rate will be fixed for the proposed period.

Now to understand what the rent cap is before moving onto how these regulations can help renters benefit financially from either of the rules.

What is ‘rent cap’ and how is this different from ‘rent freeze’?

Rent cap is nothing but limits put on by how much the rent can be increased by. Otherwise known as ‘rent ceiling’, it simply refers to the maximum amount of rent a landlord is allowed to charge a tenant.

While rent freeze involves keeping the rent unchanged for a fixed period of time, a rent cap differs with varied factors. If you are renting an apartment or villa in the UAE, how often your landlord can increase the rent is dependent on the emirate in which the residential unit is located.

Rent freezes are often viewed as an added feature to rent cap regulations, and although similar in principal and essentially has the same goal of keeping renters protected from unreasonable price surges, they are not the same.

On the other hand, ‘rent caps’ or ‘rent ceilings’ are a form of rent control and are usually set by law, limiting how high the rent can go in a specified area at any given time.

This type of rent control law is effectively the opposite of a price floor, a term for a government-regulated limit on how low pricing for a particular commodity can go.

Not all countries are subject to rent ceilings – or any type of rent control laws at all. In fact, legislation controlling the price of housing is rare these days. That said, rent stabilisation measures are most common in densely populated metropolitan areas where rental housing is common.

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Not all countries are subject to rent ceilings – or any type of rent control laws at all.

How did ‘rent ceilings’ or ‘rent caps’ come about?

Rent ceilings – and rent control laws in general – are said to date back to the early part of the 20th century. In the US, the first wave of rent control laws took hold shortly after World War I as a result of public pressure due to increasing amounts of rent profiteering.

These measures gained popularity again in response to the vast housing shortages that occurred shortly after World War II. Finally, in the 1970s, there was a third wave of measures passed in response to former US president Richard Nixon’s price and wage controls, some of which are still in place today.

What are the economic advantages and disadvantages of rent caps or rent ceilings?

In truth, economists are split on whether rent control, and more specifically rent ceilings, actually help communities. This article lists some of the most common advantages and disadvantages of this kind of legislation so you’ll know whether investing in an area with rent control measures is right for you.

Some key perks

One of the biggest advantages of rent ceilings and rent control laws is they provide affordable housing for those who need it. Particularly in high-priced, many people cannot afford market-price rent. Price control measures ensure the housing market is accessible to a greater number of people, protecting their interests against unreasonable price hikes.

In addition, some economists argue affordable housing plays a key role in neighbourhood stabilisation, theorising a tenant in a rent-controlled apartment is far more likely to stay in place long term than one subject to regular rent increases. By extension, the longer a tenant stays in place, the more likely they are to invest in the betterment of their local community.

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One of the biggest advantages of rent ceilings and rent control laws is they provide affordable housing for those who need it.

Some downsides

From an investor’s perspective, it’s easy to see one disadvantage. In this scenario, there’s a limit to the amount of profit you can make from investing in communities where rent control measures and rent ceilings are prevalent. As a result, many landlords there are dis-incentivised to make improvements to their buildings, which leads to substantial deterioration of the quality of housing.

However, on a broader scale, ‘rent ceilings’ or ‘rent caps’ tend to throw off the demand curve. Since more people can afford housing when rent is lower, there is a greater demand for rent-controlled units. In turn, this lowers overall supply and creates a surplus of available renters.

For most investors, rent ceilings are not usually something to worry about, since they were more common in past iterations of rent control laws. If you are thinking of investing in a market with rent control measures, make sure you’re well aware of what these measures entail and what that means for your bottom line before making a purchase.

However, veteran investors opine how buying rent controlled properties can be a great investment strategy for investors with a long term, buy and hold strategy. Investors with a long-term time horizon may benefit from the cash flow predictability that rent-controlled units offer.

How the ‘rent cap’ rule is implemented in Dubai

If the existing rent is:

• Less than 10 per cent below the average market rental rate – no rent increase is permitted.

• Between 11 per cent and 20 per cent below the average market rental rate – maximum 5 per cent rent increase is permitted.

• Between 21 per cent and 30 per cent below the average market rental rate – maximum 10 per cent rent increase is permitted.

• Between 31 per cent and 40 per cent below the average market rental rate – maximum 15 per cent rent increase is permitted.

• More than 40 per cent below the average market rental rate – maximum 20 per cent rent increase is permitted.

Here are some examples to illustrate the rule:

Example 1: The average market rent for a one bedroom apartment in area X is Dh100,000 per year. A tenant is paying Dh95,000 per year, being 5 per cent below the average market rental rate. On renewal of the lease, the landlord is not permitted to increase the rent in accordance with the new ‘rent cap’ rule.

Example 2: The average market rent for a commercial office in area Y is Dh2 million per year. A tenant is currently paying Dh1.5 million per year, 25 per cent below the average market rental rate. On renewal of the lease, the landlord is permitted to increase the rent by a maximum of 10 per cent (being Dh150,000) as per the ‘rent cap’ law. The new rent cannot therefore exceed Dh1,650,000 or Dh1.65 million.