Two-tiered rental market emerges in Dubai

Dubai is witnessing an emergence of two-tiered rental market as the gap between renewals and new lease rents continues to widen.

Prathyusha Gurrapu, head of research and consulting at Cushman and Wakefield Core, said a rising number of tenants in Dubai are becoming property buyers and end-user occupiers as rents continue to see sharper increases compared to sales prices.

“Tenants prefer to stay in existing units as rental increases during renewals are considerably lower than new leases and are regulated by the Rera (Real Estate Regulatory Authority) rental calculator. This is creating a two-tiered rental market with a widening gap between renewal and new lease rents,” she said.

She further explained that for existing tenants, the Rera cap applies so landlords can’t increase more than the permitted limit. But the new tenant has to pay the market rent which is higher than the nearby buildings.

“So the rental market has become two tiers. There is a lot of divergence between existing and new rents.”

Gurrapu expects rental rises to continue for new leases in 2024, particularly in established central locations such as Downtown and Business Bay, where high occupancy levels will exert upward pressure on rent. “That said, with a greater number of deliveries in the sub-urban locations, we expect rental increases to be moderate in the newly handed over districts.”

Moreover, she added that a section of tenants, despite the high sales prices and interest rates, are becoming end-user buyers to avoid frequent renewal negotiations or relocations.

Gross apartment yield levels in Dubai stood at 7.3 per cent, the highest level in the last 7 years, while the city-wide villa gross rental yield dropped from 5.5 per cent to 5.3 per cent due to sales prices increasing at a sharper pace than the rental prices, it added.

Gurrapu said although residential rents continue to rise, the pace is slowing down as rents in 2023 saw a 19 per cent year-on-year increase compared to 27 per cent in 2022.

She expects rents to rise on average 8-12 per cent, but central locations could see higher increases. “Outer and suburban locations are expected to see relatively lower levels of rental increases, however, with a growing disparity between rents in new leases and renewals across the city.”