Rising inflation threatens investment performance in the region

Meanwhile, GCC economies are growing rapidly, driven by booming oil and gas revenues, generating the world's highest growth rates in 2006 and 2007, averaging 6-7%, resulting in exceptional economic growth across the GCC region.

However, following the collective decline across GCC stock markets at the end of 2006, increased in inflation rates are expected for the GCC, with a minimum increase of 10 percent predicted between 2007 and 2008.

Skyrocketing rents and property prices, driven by spiraling building material prices, rising labour costs and soaring food prices have contributed to increased inflation rates across the GCC.

Property prices are due to severe shortages in affordable residential property and office space in the market, in the face of demand fuelled by fivefold increase in oil prices.

Rents and property prices in Qatar surged by 28.8% during the third quarter of 2007, resulting in a 13.73% inflation rate by end of September.

Bahrain and KSA have also faced increasing inflationary pressures due to soaring food and property prices.

Meanwhile, the Government of Dubai has decided to reduce the rent cap by two percentage points to five per cent per annum, in a bid to alleviate the pressure of high property prices on the public.

The rent cap in the region's business hub was 15% in 2006.

Commenting on the current economic trend in the region and its repercussions for the real estate market, Eng. Salwa Malhas, Senior Vice President of Business Development and Marketing at Al Mazaya Holding, said, "Rising inflation threatens investment performance in the region. However, this is not a regional phenomenon, as inflation and rising property prices are global trend and not limited to the GCC."

"Rising rents and property prices and soaring food prices are not the only causes for inflation. We have other contributory factors, such as the GCC currencies' peg to US dollar and the region's accelerated economic growth is fueled by the recycling of petrodollar surpluses against slow growth per sector. These factors are evident in the real estate sector. Other factors, such as wage and salary increases, performances on the stock markets and banks' surplus liquidity all impact considerably on the rising rates of inflation in the region," she added.

Malhas expressed the consideration that the economy is an integrated cycle; saying that inflation could not hit one sector without affecting others.

Similarly, the blame for inflation cannot be laid solely upon the shoulders of a single economic sector.

Using the real estate sector as an example, Malhas pointed out some markets that have been damaged by inflation, while other markets, such as Abu Dhabi and Qatar, reacted to inflationary pressures with further growth.

She added that the inflation crisis requires serious governmental intervention to protect the economy and the interests of investors, saying that such intervention will provide facilities for investors to inject their surplus liquidity into projects that are beneficial to the economy and the population alike, especially when catering to the rising needs of low and middle-income earners.

The solution, according to Malhas, is to develop a unified economic policy across the GCC, introduce a common currency and develop investor-friendly legal infrastructures.


These measures will create equal investment opportunities in the GCC, thus dividing investment and GCC capitals among the various GCC countries on the one hand, and attracting equal portions of direct foreign investment to each of these countries on the other.

There will be an even influx of human capital into Gulf countries as well as greater job opportunities for residents and expatriates.