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24 April 2024

Rising costs to keep housing rents high

By Nadim Kawach



Housing rents in the UAE are expected to remain high as landlords seek better prices to offset a decline in profits because of a hike in construction costs, according to bankers.

Contractors are reeling under the pressure of a surge in construction material, fuel prices and shipping costs, while some of them could suffer losses from unfinished contracts they signed a few years ago.

“Rents in the UAE have surged due to several factors, mainly the high construction and shipping costs, the surge in oil and diesel prices, and an influx of expatriate workers brought by contractors and other companies for their new projects,” an Abu Dhabi-based bank manager said, speaking on condition of anonymity.

“I am not convinced of the supply-demand factor… I don’t see a big gap between supply and demand because if you look at the number of buildings that have been added over the past 10 years you will see that they far outnumber growth in the country’s population. High costs of construction and other expenses are a crucial factor and I think rents will remain high because of this.”

Official figures showed the number of buildings in the UAE jumped by 84 per cent to around 335,000 at the end of 2006 from nearly 181,000 in 1995.

The increase outnumbered the rise in the population, which grew by around 75 per cent to 4.22 million from 2.41 million during the same period. Between 2005 and 2006, the population grew by nearly 2.9 per cent while growth in the number of buildings was as high as 41 per cent, according to the figures from the Ministry of Economy, which did not give data for last year.

By the end of 2006, housing units had totalled around 722,000, sheltering in excess of 660,000 families, the figures showed.
A breakdown showed Abu Dhabi had around 117,000 buildings at the end of 2005, while there were nearly 78,000 buildings in Dubai and 57,000 in Sharjah. Ras Al Khaimah was the fourth largest, with more than 40,000 buildings.

Officials and property developers have spoken of massive investments in the construction sector in the next five years and more than 200,000 houses could be added. According to estimates by Abu Dhabi Chamber of Commerce and Industry, more than Dh850 billion could be pumped into such projects.

“I don’t think these investments will tackle the problem of soaring rents as strong demand for housing is not the real problem,” another banker said.

“What we have here is the soaring costs of building materials, shipping and transport… the problem is underscored in buildings under construction or those to be constructed. While the contractors seek to offset their narrowing profit margin, landlords will do the same… these landlords are pumping billions into the real estate sector and you don’t expect them to accept a low return on their investments. The main victim is, of course, the end user.”

Figures by the Central Bank showed surging rents have been among the main factors for the double-digit inflation rate that has hit the UAE over the past two years.

In 2006 alone, housing prices increased by 15.3 per cent and bankers expect they recorded a similar increase last year.

Between 2003 and 2006, rents shot up by an annual average of nearly 11 per cent, the highest price growth in the components of the consumer price index, which rose by 9.2 per cent in 2006 and around seven per cent during 2003 and 2006.
According to a study released recently by Abu Dhabi Chamber of Commerce and Industry, the costs of building materials has increased sharply over the past few years because of higher global prices and a surge in domestic demand.

It attributed the strong demand to an economic upsurge, the country’s decision to ease curbs on foreign ownership of property and a high growth in liquidity as many local businessmen have brought back part of their overseas assets to invest in the real estate sector for quick and high profits.

“Another factor is the increase in petrol and diesel prices since fuel plays a key role in the construction process. This situation was further complicated by the increase in shipping costs because of higher insurance,” the study said.

Another reason is the fact that some producers and suppliers of building materials are trying to monopolise the market while some  panicking consumers are buying quantities that exceed their needs.



The Numbers


84%: The increase in the number of buildings from 1995 to 2006


78,000: The number of buildings in Dubai at the end of 2006


11%: The average annual increase in rents