Rent control in the Gulf

KUALA LUMPUR: While rent control has been removed in most of Eastern and Central Europe, with Asian countries like China, Japan, Malaysia and Singapore following suit since the early 2000s, the regime has made a surprising comeback in one group of high-growth, dynamic economies — the Gulf.

In December last year, the Dubai government toughened up its 2005 Rent Law and reduced the maximum 2008 rent increase to only 5%. Abu Dhabi also capped its 2008 rental increase at only 5%. Meanwhile, a rent freeze has been implemented in Qatar while the government is determining the new rent increase cap; rent increases for the past two years to February 2008 were limited to 10% annually.

According to the Global Property Guide (www.globalpropertyguide.com), an online property research house, the move has dismayed landlords and alarmed property investors. Prince Christian Cruz, senior economist at the Global Property Guide, said: “We believe that rent control is generally harmful.”

“But rent control can be benign, if: it is implemented so that its market-restraining effects are modest; it helps to defuse public protest about high rents; and it assists landlords and tenants by providing an agreed framework for contracts,” he said.

Cruz noted that most of the conditions mentioned were absent in the rent control measures in Qatar and UAE, and that if the matter persists, it could result in the property market boom grinding to a halt.

Global Property Guide said that a common justification for rent control is the right to housing, which is sometimes protected by the constitution. Another justification is that the rent control corrects market inefficiencies such as information asymmetry and high transaction costs.

Both the landlord and tenant benefit if standard provisions exist, which determine what should be agreed on — the initial rent, rent adjustments, date of payment, penalty for delays, conditions for eviction and more — providing flexibility and security.

However, rent control tends to distort economic incentives, leading to inefficient distribution of resources. It reduces incentives for landlords to supply rental units, discourages them from maintaining units till the end of a tenancy and leads to a host of bullying and illegal behaviour by landlords.

According to Global Property Guide, a minimalist rent control can be harmless or mildly beneficent, where it occurs in the context of standardisation of contract structures, designed to increase market certainty and to provide guidance for citizens.

“Qatar and UAE can learn a thing or two from Canada. Although the laws appear to be pro-tenant, the system is not entirely disadvantageous to landlords. Allowable rent increases are based on each province’s CPI, allowing regional disparity,” said Cruz.

By The EDGE Malaysia (by Yeong Ee-Wah)