Falling rents a worry for landlords in Oman

12 Jul 2017
POSTED BY Alvin Thomas

The significant drop in oil prices, the controversy surrounding the NOC rule, and the consequent shrinking of the expatriate population has attributed to a sharp drop in residential rents in Oman, reports Alvin Thomas.

This year has been an important one for Shimon Mohandas.

He has just tied the knot and has moved out of his parents’ home in Ruwi.

When looking for an apartment for his bride and himself, he was expecting a frustrating search, as any house-hunter would appreciate.

But the newlyweds have found a beautiful, fully-furnished one-bedroom apartment with A/C, and their good fortune is down to one thing: a drop in the residential rental market across the country. 

A recent survey by a top Muscat estate agent has revealed that would-be tenants are now paying less rent for their homes.

And that has been attributed to a drop in oil prices, the controversy over the NOC issue for expats, and the consequent shrinking of the population.   

Shimon and his wife began their search for a one-bedroom apartment between Al Hamriyah and Darsait, and within a monthly rental of RO200 and RO250.

They were not expecting to find good flats at that price and had been willing to compromise.

But to their surprise, not only could they find an apartment for that price, they were also inundated with calls from landlords offering two-bedroomed flats for what they had expected to pay for just one.

Shimon, a manager in an engineering firm, says: “We went through nearly 50 apartments before finally making a decision. We had that many options to go through.

“I remember that even last year, when I first dipped my feet into the property market, I could not find even old one-bedroom apartments for below RO250.

“This time around not only did we have the upper hand with landlords, we could choose between numerous houses before we made up our minds. Heck, we also do not have to pay the maintenance fees to our apartment. This is how desperate landlords have become to get tenants.”

Maintenance fees are costs incurred for various tasks that are carried out across the property i.e. cleaning the halls, servicing equipment, electricity charges for lifts, escalators and lights or any other added costs. In a normal apartment, this is known to amount to 10 per cent of the monthly rent of the house.

In reality, Shimon and his wife are just two of many tenants overjoyed by a recent drop in rent rates across the Sultanate.

According to the recently-published Cluttons Muscat Spring 2017 Property Market Outlook report, by international real estate consultants Cluttons, tenants are paying less in rents for residential properties.

According to the report, average rents across Muscat receded by 10.1 per cent in 2016.

However, during the final quarter (Q4) alone of last year, rents fell by 4.2 per cent, leaving average monthly rents around Oman at just below RO700.

Shimon then adds that he is currently paying a rent of RO475 for his parents’ villa, in Ruwi.

“Up until 2013, the rent stood at RO550, before dropping to RO500, in 2016, and RO475, recently. This is what we used to pay as rent 10 years ago,” he exclaims.

As far as the state of the property market goes, Faisal Durrani, the head of research at Cluttons, says: “For the past many months, we have been reporting big corrections taking place in the market, and to an extent, there are some initial signs to suggest that in some locations both residential and commercial sectors may be starting to bottom out.

“It is too early to fully call it but there are signs indicating that.”

But, many experts say that the falling rents across the market are symptomatic of a “rapid deterioration in tenant requirement levels over the last few years” due to the sharp drop in oil prices in 2016, which caused job uncertainty among expats and citizens alike.

A recent study carried out by the Oxford Economics finds that Oman’s hydrocarbon receipts have fallen while the government deficit has widened, and stood at 21 per cent of the country’s GDP, to the end of November 2016.

While it highlights some positive steps taken by the government to manage the evolving conditions, overall spending has continued to recede, falling by 7.5 per cent last year.

And reports that Oman’s population reportedly shrank by 1.2 per cent in June (from May) have also surfaced.

It is also worth noting that nearly 6000 expatriates were known to have left the country in a period of 30 days.

These statistics were revealed earlier this month by the National Centre for Statistics and Information (NCSI).

So, is the falling number of expatriates affecting the property sector, here?

“Yes,” says Fahad al Kharusi, a landlord of two apartment complexes in Azaiba.“My buildings are running at less than 55 per cent occupancy, and I have been reducing the rent for the past year-and-a-half.

“I even make sure my agency takes special care to maintain the flats free of cost. My tenants must not feel like I am ripping them off,” he says.

“But, I have witnessed numerous families take off after losing their jobs or simply moving to newer and cheaper apartments.”

Faisal isn’t alone, either.

“All our neighbouring flats have been running at less than 60 per cent occupancy for the past two years,” he says.

And little wonder, as the Cluttons report highlights that tenants are “aware of the market conditions and are very much in the driving seat”.

One tenant (who wishes to remain anonymous) asks: “Why should we pay hundreds of Riyals and stay at a place where we are treated like nobodies?”

“If I pay RO500 for a flat or villa, I expect to get the maximum value for it or I will make myself and my family scarce. We can always find a new house, given the current market.”

He then goes on to explain that one residential complex (owned by a reputable property company) in which he had been living had a faulty plumbing system.

“One of the flats I stayed in had very bad plumbing, which meant there was no pressure in the pipes. We couldn’t even take a shower, and the tub in my washing machine would never fill up with water. “So, we had to fill buckets to shower and rely on dry-cleaners to get our clothes cleaned,” he says

When asked why he didn’t shift out immediately, he says: “I was made to sign a year-long contract, and had to pay six months of my rent upfront.

“By the second month we were tired of living there, and we asked if we could move out of our apartment. But the management wouldn’t allow us to do that, and threatened that they would not reimburse me with the six-months rent that I had paid up front.

“I had to stay there for one whole year. And you know what, I’m sure they still haven’t fixed the plumbing there.”

Several reputable real-estate companies have come under fire from tenants for making them sign bonds and complete contract periods or face strict fines.

Shane Benz, an American expatriate, told Y: “I moved into a pent-house in Ruwi in December 2016. However, I soon lost my job.

“The day I lost my job, I alerted my landlord that I would be moving. But instead of simply fining me for breaching the contract, he asked me to pay 11 months’ rent prior to leaving.

“I was shocked. Alongside that, I was also asked to pay a municipality tax, and also cover painting charges for the house,” he exclaims.

In retaliation, Shane had threatened to file a case with the Public Authority of Consumer Protection (PACP), after which his landlord backed off. He was then made to pay only one month’s rent, as stated in a standard “occupancy contract”.

However, despite the issues faced by tenants with real-estate companies, Cluttons points out that it is these complexes that continue to maintain high occupancy levels.

Their report highlights that residential and commercial complexes such as Al Assalah Towers, Hatat Complex, The Greens have “greater than 95 per cent” occupancy rates, in Muscat.

Meanwhile, Meydan Al Azaiba, is reported to have 80 to 85 per cent occupancy.

“They (the tenants) are gravitating towards larger, well-managed residential schemes with facilities that are considered to offer both a desirable lifestyle and good value for money,” says the report.

However, an investigation into the rents reveal up to a 40 per cent drop in rents in several of these apartment complexes.

But we understand that the price drop comes at a price.

The operations manager of one of Oman’s leading residential and commercial property firms, on condition of anonymity, tells Y: “For months now, we have been cutting down on costs, as we have dropped the rents by up to RO200 in certain locations.

“We cannot afford to let our flats go empty. That’s just a waste of space. In return, however, we have been made to compromise on maintenance equipment.

“For instance, the recent order we placed for a set of taps, tubelights and A/C refrigerant which were of lower quality than what we usually provide. It’s just a decision that came from higher up the management chain.”

However, he remains tight-lipped when asked about whether his company skimps on any other equipment (i.e. lift maintenance, cleaning, pest control, painting, etc.), ducks the question, and ends the interview.

Despite this, tenants are still overjoyed over the dropping rents. And things can only get better as the short-term prospects for the market mean rent corrections on average of 10 to 15 per cent this year.

But their optimism may be short-lived, as the real-estate sector may bounce back for landlords.

H.E. Mohammed al-Busaidi, the chairman of Oman Real Estate Association (OREA), is confident that it will.

“There has been a general slow-down in the number of residential properties that are being developed in the area, because of the abundance in supply and lack of demand for properties,” he says.

“This can be attributed to many factors and the lack of new job opportunities is one of them.

“But I cannot say that there has been a “drastic” drop in rents. Yes, there is a drop. But I feel it is only marginal.

“The real estate market is a cycle – prices will drop down and then come back up again. All of this depends on the various factors and living conditions prevalent in the region.

“I believe that the market will be stabilised soon. More Omanis are graduating and moving on to work with companies within Oman. “This means more of these youngsters will move away from their homes and rent out apartments in the city.

“This will surely help to bring back the demand and supply ratio back up,” he adds.

Meanwhile, Durrani confirms that 2017 has begun on a more stable start, with rents during the three months to the end of March only declining on average, by 0.6 per cent – a blessing for many landlords across the Sultanate.

“We track 12 locations in Muscat, four of them have no change this quarter,” confirms Durrani.

“People are still nervous about job security; tenants are still shopping around for what they perceive as the best deal for them. We are seeing some changes in the behaviour of landlords; you still get some landlords who are stubborn to react to market conditions.

“We are aware of some cases, where the vacancy rate in the building is as high as 25 per cent,” he tells.

While tenants across the Sultanate have welcomed the rent drop with open arms, how much will this affect the landlords, and more so, how will this have an impact on the economy?

And with GDP growth forecast to slow to 0.4 per cent this year, from 1.5 per cent, in 2016; the prospects for a sudden surge in job creation rates and a subsequent increase in the level of requirements for rented accommodation remain low.

As the Cluttons report says: “It is perhaps too early to call the current conditions entirely stable as the weak signs of stability may be quickly upset by any shocks to the global economy, or indeed the local economy.”

Know Your Rights!

The landlord is responsible for registering the lease agreement with the local Municipality (where the leased premises are located) within one month of entering into the lease agreement in order to render the agreement valid and binding.

The landlord is required to bear all costs associated with registering the lease and if the parties fail to register the lease within one month, the landlord shall be responsible for paying three times the registration cost for registering the lease. The tenant may also register the lease and deduct the costs from the rental payment owed to the landlord.

The rent for leased premises cannot be increased for a period of three years from the date of commencement of the lease term.

The landlord and tenant are required to give notice to each other three months in advance of the expiry of the lease term in case they wish to terminate the lease agreement. However, the landlord is prevented from terminating the lease agreement for three years for residential leases and five years for commercial leases, during which time the lease term will be renewed automatically unless the tenant gives three months’ notice before expiry of the relevant year during the lease term.

The landlord may evict the tenant earlier than the aforesaid periods in case of non-payment of rent or misuse of the property by the tenant, or if the tenant sublets the premises without the landlord’s approval. Moreover, the landlord may evict the tenant if he requires the premises for residential use for himself or his first or second-degree relatives.

If the landlord does not hand over the premises in a good condition to the tenant, or does not hand over the premises at all, then the tenant may approach the court to terminate the lease agreement and refund any rent paid to the landlord.

If there is a new owner of the leased premises, the landlord is required to notify the tenant and the tenant is required to pay rent to the new owner with effect from the date that the new title deed was registered with the Secretariat of the Land Registry at the Ministry of Housing.

Hasnain Bokhari is a lawyer specialising in commercial real estate, tourism and infrastructure at law firm Al Busaidy Mansoor Jamal & Co

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