Dubai will maintain a cap on rental increases to curb inflation in 2008 but will reduce it to five per cent from seven per cent, the Dubai Land Department said.
The new rate comes into effect on January 1 amid concerns that demand for property continues to outstrip supply, driving up rents in the booming Gulf trade and tourism hub.
Local media gave no reason for the reduced cap, but economists say soaring rents threaten to undermine Dubai's strategy of attracting investment and expatriates, as companies begin to consider less costly cities in the Gulf.
EFG-Hermes, Egypt's largest investment bank, predicted in a recent research report that residential property prices would begin to fall in 2009, a year later than initially expected because of a delay in the delivery of construction projects.
The delays will result in a continuing shortage of residential units and prices could rise 10-15 per cent this year and five-10 per cent in 2008, peaking in the second half, EFG-Hermes said. The report, released in September, had predicted the rent cap was likely to be reduced to five per cent for next year.
Abu Dhabi, the largest of the United Arab Emirates' seven members, Sharjah, home to many expatriates who work in Dubai, and smaller emirates have also set rent caps in recent years.
Dubai was the first UAE emirate to open its real estate market to foreign investment in 2002, triggering a boom that has driven both property prices and rents higher.
The Dubai government set a rent rise cap of seven percent for 2007 to help tackle inflation, which hit a 19-year high of 9.3 per cent in 2006.
The UAE Central Bank says rising rents are the primary driver of inflation in country, whose population is growing fast.
Dubai's population, which is more than 85 per cent comprised of foreigners, is growing at an average 7.9 per cent a year and may rise to 1.9 million by 2010 from 1.4 million now, EFG-Hermes said. (Reuters)