In comparison to mature markets such as the UK and Canada, rent to own (RTO) has not yet been cemented as a core market concept in Dubai. Although the overall objective is the same, which is to bring housing affordability closer to the end-user, mature markets have either government or private-based RTO offerings encapsulated by a defined legal framework to facilitate such transactions.
The literal and procedural translation of RTO in Dubai is based on the Dubai Land Department’s definition of RTO and called Ijarah, which is a variation of the Arabic word rent. Ijarah was established around Islamic financing and mortgages for property purchases, also known as Islamic mortgages.
In this instance, a registered Islamic financial institution purchases a property on behalf of the end-user and holds the title of the purchased property in the financial institution’s name throughout the mortgage tenure. Once the mortgage payments have been fully completed, usually taking 25 years in Dubai, the title then transfers to the end-user. This is a form of RTO with a higher entry price, since the end-user still needs to come up with a minimum of 25 per cent down payment to enter into this RTO (Islamic mortgage) agreement, and with a much longer period than other mature markets, hence becoming less affordable.
Currently, there is a positive and promising rise of RTO-like initiatives direct from developers, where without the assistance of a financial institution, the developer and end-user enter into an arrangement by which the end-user agrees to purchase the developer’s completed and ready-to-move-in property by paying a small upfront payment (as low as 5 per cent in some payment plans), and with a payment period of five to 10 years. Although the ongoing payments would be higher than comparable rental prices for similar units, the major difference is that all payments go directly towards building immediate equity into the prospective home to be RTO’ed.
A major advantage of this rising scheme in Dubai is that it leverages the current legal protection set up by the DLD’s framework for developers and developer sales. This would help significantly foster trust and assurance with end-users and aims to drive more appeal towards these schemes due to a much more reasonable affordability compared to mortgages.
This trend also reflects current stock level and out-of-the-box agile thinking from developers, in terms of strategies to help motivate buyers where the majority are hesitant primarily due to purchase affordability. It may not be possible for every developer to follow, mainly due to project financing and whether the developer relies largely on funding via sales or backed by capital investments. However, able developers could stand out with this trend and attract better traction in moving their sales forward if they are able to provide fully constructed properties to end-users, and at a convenient payment plan directly to them.
For first home buyers, where the home purchasing experience is critical on various levels, this purchase option will tick various basic boxes that usually surround any reservations with first-time home buying. Reservations may be centred around affordability, certainty of ownership, trust in knowing the seller and their track record as well as all their project information as registered in the DLD. Quality is also important as the applicable units offered by developers in these schemes are brand new with a standard full warranty of 10 years for structural and foundational issues, and one year for mechanical, electrical and plumbing, which is exactly driven by the DLD’s warranty requirement for all developers delivering units in the market.
Some examples of such RTO properties can be found within Nakheel’s portfolio in Al Furjan, Warsan and the Palm Jumeirah as well as other micro developers in Jumeirah Village Circle, and in Motor City by National Bonds. With the success of such examples in the market, other developers will eventually take serious notice of the trend and evaluate their ability to offer similar options to the end users.
Overall, our relatively young market is maturing at an impressive pace to compete with other mature markets worldwide. Current stock levels will likely continue to drive developers towards better RTO, and perhaps potentially help to instigate the introduction of a legal framework to transact RTO at a direct tenant-to-landlord level, which could significantly help ease stock levels in the secondary market. After all, one of the main deterrents is the higher barrier to enter home ownership via mortgages and their relatively large upfront payment in terms of affordability.
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