Soaring rents in Abu Dhabi-attributions and remedial measures

posted on 04/05/2008: 59 views

As Abu Dhabi is undertaking a massive drive to invest windfall oil revenues in economic and infrastructure developments, the spiralling increase in commodity and services prices has created major challenges in both local and external fronts. Such challenges require holistic and collective solutions, based on accurate up to date statistics and indicators. In the competitive markets, inflation is caused either by increase in the cost of production factors on in the levels of demand on commodities and services. For Abu Dhabi, both reasons relatively apply.

According to the weekly report released by the Department of Planning and Economy in Abu Dhabi, the problems of inflation in Abu Dhabi have been exacerbated by both domestic and external factors, including the increase in rents and fuel prices, as well as liquidity in the local market. Externally, the declining value of the dollar and its impact on the value of the dirham against other currencies led to the increase in the price of goods imported from countries outside the dollar zone. Those countries also witness inflation pressure due to the surge in the oil prices.

It added that for more than one reason, the department has been taking the inflation issue very seriously. Along with other stakeholders, the department is seeking to come up with suitable and practical solutions to address the phenomenon.

The report noted that amid lack of accurate economic statistics and huge contrast in expectations and assessment of inflation size, as well as weakness in counting consumptive prices' indicator, the department strives to set a basket for commodities and services that can avail assessment of accurate consumptive prices' indicator. This move is deemed as a step towards effective management of the inflation and challenges attached to it in next period. "The department is also set to develop accurate methodology to count all official indicators related to soaring prices in the emirate of Abu Dhabi. Accurate and comprehensive understanding of inflation is a sound approach for taking decisions and measures to curb this phenomenon," it revealed.

All the statistics show that the soaring rents were mainly caused by the current inflation. According to the recent studies conducted by the department, the residence and related expenditures devour 45 per cent of total expenditures of a consumer in Abu Dhabi emirate.

As per a survey conducted by the department, the low and middle income classes were the hardest hit by the soaring rents, as they spend over 50 per cent of salary on accommodation. Meanwhile, the high income class were less hit, as they spend 23 per cent of their salary on accommodation. This is so close with advanced countries in which the high income class spend 19 per cent of their monthly income on accommodation, according to the statistical report issued by OECD.

The main culprit for the soaring prices is attributed in the first place to shortage in residential and commercial units to meet the rising demand, particularly from low and middle income classes. In the first quarter this year, the rents increased by 17 per cent compared to corresponding period last year. Other factors which keep rents soaring unabated in Abu Dhabi, is the growth in number of commercial units. The commercial units cut continuously the number of residential units. As rent of three bedroom residential units is too expensive to afford, landlords of these units opt to rent them out as commercial units. This reveals that the supply of commercial units expands at expense of the residential units, leading to exacerbation of problem.

Another survey in Abu Dhabi emirate in 2005 found out that more than 10, 000 residential units were used for commercial purposes. Some of residential units were turned into hotel apartments. The hotel sector in the country generally registered the highest occupancy compared to other hotels in the Middle East in 2006, surging at average of 85 per cent. The performance of Abu Dhabi hotels were the best and fastest in regard to revenues and room prices in the region.

Despite the fact that the land and building material prices soared by 100 per cent over the last four years and contributed to the soaring prices, but the main factor of this phenomenon, is concentration of new property development in luxurious property development through major projects, which target higher classes in the UAE and abroad. Nonetheless, demand for rent is growing among the middle and low classes, who represent 85 per cent of workforce in private and public sectors in the UAE.

Variations in rent demand pose risk to future of property development in the UAE when supply of luxurious residential units reaches saturation point. This can affect most sectors of national economy as property development plays a major role in the economy- a situation that requires comprehensive technical review of property market. It also requires property developers to play positive role in reduction of rents through allocation of some percentage of their projects to middle and low income classes.

There should be plans and governmental initiatives to encourage private sector and different funding corporations to pay attention to economic accommodation through setting up residential units for the middle and unlimited classes. Companies should also be encouraged to invest to provide accommodation for their employees. If the soaring rents are allowed to continue for long, it will constitute a genuine crisis that can affect product cost in different sectors inside the country.

The long term solution for the problem of residential units in the emirate of Abu Dhabi and the UAE requires re-activation of property market based on movement of new investments in the light of actual demand. This could lead to balanced between supply and demand in all residential units to ensure long term investment revenues, as redundant residential units supply will be avoided. This can be attained through provision of data to property development investors.

The continuous rising of rents despite huge growth in property development in the recent years, is a harbinger of some defect, which resulted in different expectations and views about future of rents. It even affected the assessment of international economic corporations about directions of real estate sector in the emirate of Abu Dhabi in particular and the UAE in general.

International Monetary Fund expressed potential fears three year ago about future of property development in the UAE amid strong expectations that the property development may sharply drop similar to shares market. Yet these fears and pessimistic expectations lost authenticity as the property and rent prices keep growing. The report recommended a set of short and long-term remedial measures.

On short term, the report called for a rent-ceiling in Abu Dhabi city, whereby maximum and minimum ceiling on rents should be clearly spelt out, depending on the area category, location, and life-span of the buildings.

A decision should be imposed, making it illegal for landlords to increase rents before the expiry of the 3-year period stated in the tenancy contract. Rental ceiling for new residential units due for let must also be set.

The report called for the formation of a committee comprising legal and technical experts from various departments of Abu Dhabi to handle complaints brought forward by tenants or landlords.

The report urged the government to seriously consider the possibility of freely allotting plots of land in the outlying areas of Abu Dhabi for property developers who are ready to build and offer rents for 50%.

Basic services such as water, electricity, and telephones lines should be provided at subsidized rates. The occupants of these residential complexes should be middle or low-income earners. By embarking on such projects, said the report, the governments will have achieved two objectives, namely, reducing prices' rents and developing outlying areas of Abu Dhabi..

The activities of real-estate offices should be reviewed in terms of their relevance to Abu Dhabi's economy. These offices are widely seen as playing a negative role in pushing up rent prices in the emirate. They are also seen as assuming the status of illegal financial entities. A law to regulate the activities of these offices should be enacted.

On the long-term remedial measures, the report recommended a systematic but radical restructuring of the real-estate market as per the requirements of supply and demand. In this context, emphasis should be on high-value property projects.

Developers who have shown willingness to offer flats to low-income earners should be given incentives. However, technical specifications of such flats should be verified.

The government, suggested the report, should have its own shopping centres in different residential areas as a way of reducing pressure on existing facilities. In Abu Dhabi, there are more than 10,000 residential units which are not used for residency but rather used for commercial purposes.

The report called for a strong partnership between the private and public sector with the aimed of stabilizing the real-estate market. Developers should be encouraged to build low-cost housing units in government owned plots. This approach has proved to be effective in many parts of the world. Both parties tend to benefit from such partnership.

The construction of residential units in the outlying parts of Abu Dhabi is seen by the report as a viable answer to the issue of soaring rent prices, especially if such areas are connected to the capital with a public transport system. – Emirates News Agency, WAM

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