Rent-To-Own Scheme: Is This What The UAE Tenants Need?

Date Posted: 03 Apr, 2019 By: Admin

What is a Rent-To-Own Scheme?

Rent-to-own is a conditional agreement for a property. It has two parts, a rental agreement and a future sale agreement at a predetermined price and time frame. Richard Paul, head of professional services and consultancy Middle East at Savills Dubai says, “In most cases, as part of the agreement, a certain percentage of the rent is apportioned towards the down payment of the property. After the predefined time frame, the buyer has the option to either buy the property or exit the agreement.

”RTO schemes were first introduced in Dubai in the early 2000s and became most popular in 2010-11. As inventories across the property market rise, developers are considering the rent-to-own (RTO) model as one of the options to improve the off-take.

“We have already witnessed several developers offering RTO schemes and I would anticipate that this trend will become more popular with developers while the market is in a softened state,” says Sean McCauley, CEO of DevMark.

He goes on to add, “Currently, only a handful of developers offer RTO schemes in Dubai, however, there are schemes being advertised in areas such as Dubailand, Motor City, and Jumeirah Village Circle for periods of up to 20 years,”

RTO has begun to re-emerge as a viable option for both buyers and sellers after the Dubai Land Department (DLD) launched the rent-to-own (Ijarah) service last year, allowing for such deeds to be registered.

John Stevens, managing director of Asteco Property Management says, “The processes laid out by the Land Department will hopefully provide a clear legal structure to address many of the legal issues raised by RTO.”

RTO allows developers to tap into a whole new buyers segment, the potential end users, besides their traditional investor base. With inventory steadily increasing in Dubai, it is essential that developers remain competitive.

In a typical scenario, the down payment for a property in the UAE is 30%. This consists of 25% deposit (mandated by the UAE Central Bank), a 4% DLD registration and a 1% commission. This translates to the fact that the maximum loan available for a property is 75%.

Most expats can manage to service the 75% loan but don’t have the 30% required for the down payment.

With rental expenses accounting for a significant chunk of the cost of living, Farhad Azizi, CEO of Azizi Developments, says RTO is an ideal fit for long-term residents and investors in Dubai. He adds, “The current market conditions are conducive to drive rent-to-own initiatives as these offer customers various options to buy a house in a financially feasible manner through affordable and convenient financial plans.”

Will RTO Make Tenants Homeowners?

McCauley says, “Conceptually yes, tenants would become homeowners upon expiration of the RTO contract, provided they have fulfilled all of their obligations under the agreement.” He adds, “the best candidates would be aspiring homeowners who earn good salaries but don’t have the adequate savings and cash reserves.”

A premium for RTO properties in Dubai is high. This can be a barrier for prospective buyers. “Normally in other places, we have a rent plus a 5-10 percent premium,” says Mahmoud Alburai, vice-president of the International Real Estate Federation of Arab Countries and a senior adviser with the Government of Dubai. “But in Dubai, the premium is almost 40 percent. To attract local demand, that premium needs to be brought down.”

What Happens If a Tenant Defaults?

The terms of the agreement determine the liabilities at the end of the agreement period. Paul says, “In some cases, the seller will have to reach out to other potential buyers if the option to purchase is not exercised.”

Stevens points out that the legal and regulatory structure surrounding RTO schemes needs to be created and released, “to protect the rights of the purchaser [tenant] and seller [developer]”.

He says purchasers need to be certain that the premium they are paying is being held, probably in an escrow account, and being used for the intended purpose with their interests in the property as the “owner”, subject to conditions, no matter what the status of the developer may be in the future.

“Similarly, the developer needs to know that should the prospective purchasers default on their payments, they have the ability and right to take possession of the unit,” explains Stevens.

The DLD has issued necessary guidelines and associated fees related to the registration, cancellation, financing, and transfer of RTO contracts. But the schemes that have been available till date have been developed individually.