Threatening the Dubai miracle
UAE, 24 May 2005
Miriam's landlord has given her an ultimatum - pay up or get out of your suburban Dubai villa. Miriam received an annual rent bill of 90,000 dirhams ($24,500), up almost 40 per cent from 65,000 dirhams her family has paid for the past seven years for the three-bedroom house. "We will manage to pay it, but a lot of our neighbours can't and are moving out," said Miriam, one of the hundreds of thousands of expatriates that account for 80 per cent of the population of the Gulf Arab emirate.
Her plight is mirrored across Dubai which lures large numbers of new expatriates to fuel its break-neck development, leaving everything from luxury beach villas to pokey downtown studios in short supply. "It is certainly an issue," said Elaine Jones, chief executive of real estate consultancy Asteco. She said the growth of Dubai's population exceeded even the most bullish expectations in 2004, after growing by seven per cent in 2003 to 1.2 million.
One Dubai-based firm said its office rent was up 40 per cent. Dubai is one of seven Emirates in the oil-rich United Arab Emirates. Dubai's ruling al-Maktoum family is spearheading an ambitious investment programme with real estate, trade and tourism the main drivers. Foreigners are lured by tax free and well-paid jobs in the bustling city known for its vibrant nightlife and relatively liberal atmosphere in a conservative Muslim region. Economists warn that rising inflation may dent Dubai's drive to diversify in order to compensate for dwindling oil reserves.
"The most fundamental question is could Dubai price itself out of being a business hub?" asked Daniel Hanna, an economist with Standard Chartered in Dubai. The bank put inflation at eight per cent in Dubai last year, with rent the main factor. Prices have also risen for basic goods and services including food, schooling and health care. The official inflation figure is around three per cent. UAE nationals benefit from subsidised housing, as well as free schooling and health care.
Recruitment consultancy GulfTalent said in a survey that rent in the UAE rose by 26 per cent in a year while the average salary increase was 1.5 per cent.
It predicted relocations from Dubai to cheaper emirates and "an increased turnover in the job market." Nine per cent of 500 people surveyed said they planned to leave the country due to the high cost of living, it added. Most of Dubai's consumer goods are imported, and a dirham weakened by its peg to the US dollar has driven up their cost.
"Prices of food and non-food items have risen, on average, ten to 15 per cent over the past two years," said Marwan Al Thani, manager of major retailer Union Coop. "It is hurting our customers on lower incomes." At the other end of the scale, fees at some luxury Dubai golf clubs are rising, as wealthy managers and entrepreneurs queue to join the most exclusive courses. In a bid to offset inflationary pressures, rulers of several emirates raised the salaries of state employees by 25 percent for UAE nationals and in some cases by 15 percent for expatriates.
After the hike, Economy and Planning Minister Sheikha Lubna al-Qassimi set up three committees to control commodity prices. Hanna fears this could stoke inflation even further. "The wage policy the government has set could lead to a second round of inflationary pressures," he warned.
The UAE cannot raise interest rates in a bid to curb demand in the economy, because domestic interest rates track those in the United States due to the dirham-dollar peg.
"I would certainly argue that US monetary policy is currently too loose for the Gulf," said Hanna, who has called for Gulf states to peg their currencies to a basket of international currencies over the medium term. Some experts say today's high rents may be short-lived. "What we are experiencing at the moment is temporary," said Asteco's Jones. "There is a tremendous amount of development going on behind the scenes."
Jones forecast that by 2006, rents would have returned to the levels seen two years ago, as tens of thousands of new homes currently under construction enter the market. Hanna also acknowledged that the inflationary spike could be temporary. "It could just pass through the system."
Indeed, inflation has not hurt all Dubai expatriates. Some bought homes after a 2002 ruling allowed foreigners to own land. Others have landlords who resisted the temptation to hike rents. "My landlord's been great," says Yousuf, a 29-year-old Palestinian management consultant. "He didn't increase the rent for five years, and this year it's gone up just 3,000 dirhams."