Rent-to-own schemes are back in Dubai’s property market
As more new homes get ready, developers offer low down payments and monthly installments
Dubai: ‘Buy a new home in Dubai for AED 2,500 a month…’ – these marketing messages or versions of it are once again appearing in messages and emails of residents and investors.
And there’s one common link to all such reach outs – go for rent-to-own schemes. Developers in Dubai, and there are more of them thinking on these lines, with projects near completion are going all out to push these options to prospective buyers.
“Anything that’s nearing completion between now and March next year is fair game for rent-to-own,” said an estate agent. “The strategy is straight-forward – keep the monthly installment as low as possible and that’s the key.”
But it’s not just that – for the project being offered at Dh2,500 a month, the offer is for a buyer to pay 15 per cent upfront and the rest over seven years. The target completion date for the project, located at Al Barsha South, is set for December. Prices start at Dh485,000.
Why push now?
Local developers were banking on a demand surge in the second-half of the year, timed to coincide with the original schedule of the Dubai Expo 2020 (which will now be held next year). A lot of the upcoming completions were set with the mega-event opening this year. But the pandemic changed all that, and developers are now making alterations in their selling ways.
This is where rent-to-own can come in handy. The belief is that more residents would consider switching to property ownership if they feel paying landlords don’t make financial sense any longer.
So, the best alternative would be to convince these potential buyers with rent-to-own.
This was the same playbook a few developers used in 2010-11, when the property market was still feeling the effects of the 2009 downturn. But these schemes didn’t catch on as expected and was placed in storage… until now.
This time, the sentiments are that such schemes are here to stay.
“They are becoming increasingly popular for residents wanting to convert their rent installments (or some portion of it) towards a purchase,” said Sameer Lakhani, Managing Director at Global Capital Partners. “This augments cashflows for developers as well as allows tenants to have greater flexibility without having the need to put in significant down payment.
“But the devil is always in the details – individuals will have to read the contents of the contract clearly as there is some latitude [on how developers interpret it]. They should seek guidance that is readily available from RERA to avoid any disputes that may arise down the line.”
Market primed for ready
Around 6,000 new homes were delivered in the first six months, and most industry sources suggest another 6,000-8,000 units would be ready in the second-half, with November and December likely to see a rush of completions.
So, rent-to-own schemes will be around for a while. And those developers that aren’t offering one are still having plans that drastically reduce the upfront payments expected of the buyer.
There are now ready homes being advertised with 10- or 15 per cent down payment and with the rest of it to be paid off in eight or 10 years. (Discounts on Land Department fees and other mandatory payments are also part of the package.)
A WIN-WIN?* During the rental period, the buyer can save money to pay the balance of the purchase price or to arrange a mortgage. He does not have to pay the seller an initial large upfront deposit, as is the case in most deferred sales arrangements/post-handover payment plans.
* The buyer will also have the benefit of the protections afforded to tenants under law just as in a normal tenancy agreement, according to an Afridi & Angell update.
Those wanting to go the rent-to-own way do have ample safeguards offered to them by the Dubai Land Department. These transactions have to be registered with the government agency, according to a recent update from Afridi & Angell, the law firm.
“The Land Department maintains the registration system for such rent-to-own arrangements, and it requires fees to be paid by the seller and the purchaser before registration will be accepted,” the report notes.
For the buyer
On a rent-to-own deal, the buyer will need to pay:
* 2 per cent of the sale value and 0.25 per cent of the rental value;
* Dh250 title deed issuance fee;
* Dh100 fee for issuance of land map (Dh250 if it is a villa or apartment);
* Dh40 knowledge fee at the rate of Dh10 per fee;
* Dh40 innovation fee at the rate of Dh10 per fee.
For the seller
The seller in such transactions will have to shell out (unless the sale deed suggests otherwise):
* 2 per cent of the sale value;
* Dh10 knowledge fees; and
* Dh10 innovation fees.
For the registration, these fees will need to be paid:
If the sale value exceeds or is equal to Dh500,000, then Dh4,000 is payable; and
* If the sale value is less than Dh500,000, then Dh2,000 is payable.
“The COVID-19 pandemic has resulted in continued uncertainty in the real estate market,” the Afridi & Angell report states. “As a result, we expect that developers will continue to offer rent-to-own schemes in order to provide an affordable alternative to purchasing.”OPTING OUT OF A RENT-TO-OWN SCHEME* The buyer is permitted to occupy the property under a tenancy agreement with an option to purchase at the end of the term. If the purchaser chooses not to purchase the property, then the contract terminates at the end of the term just as a normal tenancy agreement would, according to the Afridi & Angell update.
* But this is subject to the buyer forfeiting a prescribed amount (known as the option fee) and the rent paid. Given the risk of forfeiture, the purchaser should ensure that it carefully negotiates these amounts in the tenancy agreement.