Rent surge is ‘normal’ for capital says report

(SAEED DAHLAH)   

 
Rapid population growth will ally with high construction costs and low supply to further drive up rents in Abu Dhabi – but the surge is normal given the capital’s vast wealth, a Western report said on Friday.
Rents shot up by nearly 22 per cent in the second half of 2007 and are expected to soar by 25 per cent this year, despite a government decision to enforce a five per cent cap on housing price increases, Oxford Business Group (OBG) said.

Property dealers confirmed rents have sharply exceeded the official cap and expected them to surge in the few months on the grounds demand is largely outpacing supply and some landlords are not complying with the cap.

“Rents of some apartments increased by between 20 and 30 per cent over the past six months and we expect similar increases in other houses,” said Ahmed Milad, an Egyptian real estate dealer in Abu Dhabi.

“The problem is that demand keeps growing fast while some landlords are demanding much higher increases than the cap announced by the government. I don’t see a let up in the near future because supply is at its lowest level and more and more people are looking for apartments.”

In its report, sent to Emirates Business, OBG cited similar reasons for the rise in Abu Dhabi’s rents plus what it called an influx of expatriates needed for mushrooming projects because of the ongoing economic boom.

Internally, a rapid growth in the local population is putting further pressure on the housing sector as a large proportion of nationals are young and will soon be seeking housing of their own, according to the report.

“However, to some extent galloping property prices represent a natural positive correction in the market, as for many years they have remained relatively low compared to other affluent cities. In terms of GDP per capita, Abu Dhabi is one of the richest cities in the world, and prices are rising to reflect this fact,” it said.

“Controlling property costs is difficult with the relative absence of monetary policy levers and an understandable reluctance to impose tighter fiscal policy, given the emirate’s reputation as an income tax-free haven and the need for large investments in health, education and infrastructure.”

The report warned that the five-per cent cap on rents could backfire as it could discourage investment in the real estate sector because of high inflation rates in the emirate, exceeding 10 per cent last year.

“Perhaps more serious over the medium to long term, some analysts have suggested that setting rent caps below inflation could disincentivise property ownership, therefore weakening the market for the new buildings that are needed to accommodate Abu Dhabi’s growing population and ease inflationary pressures.
 
Until more housing comes onto the market, commuting from Dubai may become a more common phenomenon. This is a short-term solution however, as the shortage of property currently extends to office and hotel space, affecting businesses as well as home renters.”
 
While massive property projects under construction in Abu Dhabi could narrow the gap between supply and demand, this will need time and rent will continue to increase, the report said.

Citing a recent report by HSBC Bank, OBG said higher commodity and labour costs, coupled with the falling dirham and interest rate cuts, will drive up property prices in the emirate by 25 per cent this year.

According to the bank, year-on-year property price inflation hit 30 per cent in January. In the second half of last year, average rent increased 22 per cent, while residential property prices rose by 18 per cent.

“High steel and cement prices are contributing to the upward pressure on property costs and inflation, and costs for both are expected to rise by nearly 20 per cent this year on the back of China’s continued construction boom and high transport fees,” the report said.


“Meanwhile, currency depreciation and higher food prices caused by global factors have put upward pressure on salaries, leading to increasing construction overheads… the dirham’s peg to the dollar is contributing to both supply shock and demand pull.”

 
 
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