Rent to Own: Is it an option for a soft Dubai property market?
In a soft property market, developers face a major challenge in attracting customer interest and investment. In a market like Dubai, where the barrier to home ownership has always been high due to the high down payment requirement for purchase and difficulty in accessing credit for mortgages, has led to a situation in which 70% of Dubai residents rent rather than own a home. However, this does not mean that home ownership is unwanted. A recent HSBC study found that 80% of millennials around the world hoped to buy property in the next five years, indicating a strong desire for home ownership.
The issue, particularly in Dubai, is affordability.
In recent times, property developers such as Danube Properties have been tapping into this desire for home ownership with their new projects, offering low prices and flexible payment plans. However, with the majority of expats in Dubai not intending to settle down initially and looming uncertainty about employment, purchasing a property is still a risky proposition, so how can we tap into this need to buy while overcoming the reluctance to commit to a major investment?
Rent-to-own is not a new concept in the Dubai market, but it is an underutilized one. Under this scheme, the prospective buyer commits to a rental contract as normal for a certain amount of time, with an option to buy the property at the end of the contract. At that point, the rent paid is considered as equity towards the purchase price of the property. If the buyer for any reason does not want to purchase the property, they are free to walk away with no penalty, or renew the contract as a tenant once more.
This system has quite a few advantages over a traditional payment structure. Firstly, it offers a way for developers to utilize existing stock rather than have them sit on the market. Secondly, it is flexible and more attractive to a customer as the agreement allows the rent to be put towards the down payment. Lastly, it allows the tenant to ‘try before they buy’, and get a feel for the area, the community and gives them a sense of attachment which can be the difference between renting and buying.
Rent to own schemes for housing were popular back in the 90’s in the US but eventually faded from view as access to credit became easier and more people qualified for mortgages. After the financial crash of 2008 and a more risk-averse banking environment, rent to own schemes have started to make a comeback, offering a way for people with no access to mortgages to have a chance to buy a home while putting together money for a down payment and fixing their credit scores to qualify for a mortgage.
One important thing to keep in mind however is that Rent-to-own plans are marketing schemes, and will require clearance from the Dubai Land Department and the Real Estate Regulatory Agency (RERA) before they can be offered to the public. Pricing is also important, and rent-to-own schemes should not be overpriced which would nullify the key advantage of having them in the first place. In a soft property market, the above scheme is definitely a useful tool for developers, and could make all the difference when it comes to attracting buyers.
If you want to know more about rent-to-own schemes; just reach to the Land Sterling property management team at firstname.lastname@example.org or call us on +971 43 808 707.