Although Dubai suffered price falls of up to 60% in some locations during the economic downturn, prices have been rising strongly again and new mortgage rules means it is harder to get a loan, especially for expats.
International property agency Chesterton believes that rent to own schemes, which were popular during the early 2000s when Dubai was establishing its own property marketplace, would help those struggling to afford to buy amid stricter regulations designed to cool rising prices.
According to Robin The, director of valuations at Chesteron MENA, such a move would also inspire confidence in buyers and reduce the risk element in buying into the UAE market.
‘There are several expats who have been here for years and are now looking at buying a property, but are finding it difficult due to the current mortgage cap restrictions. Exponential growth in the UAE property market has made buying a property a near difficult proposition for the majority of end users,’ he explained.
Mortgage regulations requiring a 50% down payment for expats has also hit the loans sector. So while the regulations have stabilised the market, they have at the same time made property investment unaffordable for most expat residents who usually cannot manage the deposits needed.
‘The solution to this is a rent to own option which gives owners the flexibility to terminate the contract towards the end of the tenure if the decision has not been made to purchase the house without any penalty,’ he added.
A typical rent to own real estate agreement is structured like an option contract. It allows the tenant to purchase the property at a fixed price within a specific period of time. A portion of the monthly rent paid during the lease period is counted towards the down payment on the property.
Usually the property is leased higher than the market rate to cover the option price or the deposit that tenant has to pay to activate the option. If the tenant is unable to exercise the option to buy, the owner is then free to rent or sell the property to another buyer.
‘Rent to own schemes have various benefits for both tenants and developers. While sellers get an option fee and potential buyer, tenants get to live in the property and try out the neighbourhood before actually settling in for the long term,’ said Simon Gray, managing director for Chesterton MENA.
‘It also provides an opportunity for the seller to sell the property at a higher asking price because buyers who cannot own a house in any other way are usually willing to offer a higher future price based on the assumption that the market will improve,’ he pointed out.
‘From the developer's point of view, offering a lease to own scheme will surely open up an additional pool of potential buyers and is an option worth considering as the market starts to further consolidate,’ he added.
‘The objective of these schemes will inspire confidence in buyers and reduce the risk element in buying into the UAE market. Such schemes would benefit the investors and sellers in the current scenario, where the property prices have become more stable after exponential growth over the last year,’ he concluded.