Will rent-to-own be the next big thing for Dubai’s property market and its developers? With more buyers starting to look at ready properties rather than just stick to off-plan, this could well be the time for developers to make a strong case for rent-to-own.
More so, as stretching post-handover payment plans seems to have reached a saturation point in convincing off-plan buyers.
So, who would be tempted by rent-to-own offers? This is where developers open up their homes to renting and then try and convince those tenants to turn into actual owners. As part of these agreements, the rents are structured as payment instalments towards acquiring that property.
Dubai’s master-developers are currently offering rent-to-own schemes at some of their recently completed developments. The take-up rates have been gradual, but that is exactly how rent-to-own schemes typically fare and without nothing of the mad rush seen in off-plan buying.
In 2010-11, a handful of developers did have rent-to-own offers, and which went on to do quite well. But then followed the revival in property buying set off by the Arab Spring and the inflow of investments from the region into Dubai’s property market. And rent-to-own was cast aside … until now.
“This untapped segment of rent-to-own is for those end users who haven’t purchased their primary homes and still can‘t afford the 25-35 per cent down payments,” said Firas Al Msaddi, CEO of fäm Properties. “Or they don’t qualify for bank finance, or lack an adequate employment history or have fluctuating cash flow situations in the case of the self-employed.
“The rent-to-own option allows a buyer to purchase the property within a specified time period at a set price, with the flexibility of pulling out without any liability if they change their mind.”
To be honest, developers in Dubai have no option whatsoever (other than try out rent-to-own schemes). If the current outrageous flow of supply continues, then new demand must be created. The new 10-year residency visa announcement is one way to create such demand among end users.
But developers will still need to get regulatory clearances before they do rent-to-own. “Because these are effectively marketing schemes, they will need a sign-off Land Department/Rera [Real Estate Regulatory Agency],” said Sameer Lakhani, Managing Director at Global Capital Partners. “If done properly, developers could now use rent-to-own schemes to clear their inventory and provide incentives to their tenants to become an actual end user. It’s the inventory that needs careful managing now.”
This year about 15,000-18,000 new homes are likely to be delivered in Dubai, well below estimates made at the start. These numbers are more or less similar to what the market absorbed in each of the last two years.
But industry sources insist that even with the lower-than-forecast handovers, new supply will need to handled carefully by developers. Particularly when they have unsold stock.
In a recent interview, Nick Maclean, CBRE’s regional head, said: “Some development schemes in Dubai are facing a large quantity of stock in one location and at the same time. That undermines developers’ position in terms of pricing.
“They need to adopt policies that delivers housing stock in good quality and quantity over the next five to 10 years and spread over a wider field. This way they don’t flood the market in a handful of locations.
“For now, even with an increase in off-plan transactions last year, there is still a significant amount of stock coming in. We don’t yet know whether the stock will be matched by demand — we suspect they won’t be.”
Al Msaddi concurs: “The true knock-on effect of the [unsold] inventory is likely to hit developers over the coming three to six months. Small and large developers are on the same page in terms of risk, but surely the master-developers will raise the red flag to the government who, I’m certain, will react accordingly.”
What developers shouldn’t do with rent-to-own schemes
The one thing that developers must refrain from is overprice their rent-to-own stock.
“This will defeat the purpose and also requires RERA to move faster to set the regulations and for the framework around it to mature,” said Firas Al Msaddi of fäm Properties. “Developers need to be quick to introduce the right schemes to compete with landlords who offer reduced rents in multiple cheques and with more rent-free months among other incentives.
“Rent-to-own rules must be perfectly clear to all to cover termination and protect both developers and buyers.”
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