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Soaring rents and inflation dent business morale

Huge rent increases of up to 50 per cent a year are becoming the norm and feeding into other costs of living such as schooling, food, utilities, leisure and salaries.

Most worrying, many foreign company executives say, is the lack of a UAE regulatory environment and the rule of law.

Landlords and real estate owners can impose whatever level of increase on commercial and residential property they choose. And as things stand there is no legal recourse, they add.

“Today the most discussed topic among employees is the out- of-control inflation,” said Joseph Hanania, Managing-Director for Hewlett-Packard which provides housing for its 300 UAE-based employees.

“The increase in rent is becoming a key concern for us and unfortunately it is impacting employees of mid-level and below extensively. It’s not just rent, everything has gone up by significant amount,” he told Reuters. “It is becoming extremely difficult for us. We don’t know where the solution will come from. The increase in costs is eating up many of the operational advantages.”

High oil prices in recent years have fuelled an economic boom in the UAE, an Opec member that has almost 10 per cent of the world’s oil reserves. This has caused an influx of expatriate workers, from labourers to professionals, driving up demand for housing.

In its latest research, the National Bank of Dubai said UAE consumer price inflation (CPI) could reach between 15 and 20 per cent in 2005, driven by higher rents, which form the single largest constituent of the CPI at 36.1 per cent, and fuel prices. It said rents in Dubai, the UAE’s trade hub, increased by an average 40 per cent in the first half of 2005. In September, the federal UAE government increased petrol prices by 31.5 per cent.

The bank called for UAE authorities to consider introducing inflation targeting measures including price controls. “Lack of regulation is allowing landlords to ask for any increase they want on short notice. You either pay the ridiculous increase or you leave,” said one executive of an international company whose office rent rose by 44 per cent a year and housing rent by 43 per cent. “We have a real problem, this is not sustainable,” he said.

Outsourcing out of Dubai?

Companies which moved their regional offices to the UAE, lured by zero-tax, reasonable cost of living and freewheeling, fast-growth business environment, are thinking again.

Some managers, complaining they can no longer forecast their next year’s costs, are even contemplating outsourcing or relocating part of their business functions to other centres. Hanania said: “We’re looking at alternatives that may provide more cost-effective options. If there are certain functions that can be done in other areas ... provided no degradation in services, we will outsource them.” Multinational companies point out that a tax-free environment was of no benefit to them as corporations because they pay tax back home.

“Businessmen will have to consider their options ... Our main problem is lack of visibility. Managers want to have long-term visibility on cost and we don’t have that now. You don’t even know when this will end,” added the executive.

Analysts said many CEOs in Dubai were afraid to complain about rising costs for fear of offending government officials and losing lucrative public sector contracts. One said he was reluctant because his firm was considering an IPO.

Hassan Tavakoli, Vice President of Motorola Middle East and Africa, said the cost of doing business and living in Dubai has been rising but not to a level forcing the company to relocate.

“The costs have definitely gone up faster than the rate of inflation prevalent in most modern countries. We’re seeing a rise in cost structure, in employees’ packages but it’s not alarmingly high to take a decision to relocate. This has not become a serious issue as yet,” he said. “We’re looking to create a dialogue with the UAE authorities to jointly tackle this issue.” Some UAE officials, when challenged on the ballooning cost of doing business, say they are still low in comparison to established business centres such as New York, London and Paris. Some foreign executives used the same reasoning.

Others said their businesses were profiting from Dubai’s boom and could afford to cope with the effects of inflation.

“There are some challenges in controlling costs but our business is increasing and when business is increasing we can afford to take some of the additional costs” said Husam Dajani, Vice President Oracle Middle East and Africa.