Standard Chartered forecasts 36.6% Abu Dhabi rent hike

Clearly one man’s loss is another man’s gain. In this case, the losers are the expatriates who face big rent hikes out of scale with any salary increases. The winners are the national landlords and the one-year old property development sector.

The forecast, which will be published in the ‘SCB Economic Update’ column on AME Info, says: ‘We have also increased our UAE inflation forecast for 2006 and are forecasting inflation will further accelerate to 13.8%. This is a result of rents increasing in Abu Dhabi and Sharjah.

‘Abu Dhabi is going through a similar trend as Dubai earlier, with higher investment and spending levels. Our survey indicates that rents will increase by 36.6% this year in Abu Dhabi. This is below the 50% increase in rents indicated by the Abu Dhabi Chamber of Commerce and Industry for 2006, but rent increases will still contribute 7.3 percentage points, or over 50%, to overall inflation to the UAE.’

Negative real interest rates

High inflation and negative real interest rates are the friends of the property developer and music to the ears of would-be investors. Let us elaborate on why.

Buying a property means making a commitment to pay a fixed sum at a particular time for a particular property. High inflation will most obviously tend to take the capital value of what you have bought higher, and the higher the inflation, the higher the increase.

There is also an effect on rent and rental yield. Rent increases are both a cause and consequence of inflation in the case of the UAE. So a landlord buying today can look forward both to a capital gain and higher rents in the future and a higher return or rental yield on the original capital investment.

This is certainly what happened to early buyers in Dubai. Some villas have trebled in value and the rents have doubled, and apartments have done even better on early developments.

Acute supply problem

Abu Dhabi also faces the same dilemma as Dubai in terms of supply, only more so. The most urgent requirement in Abu Dhabi is for existing property to live in now, not for off-plan property for investors.

Yet that is all that is available at present, and it is going to take perhaps two years longer than Dubai to get the supply flowing, simply because Abu Dhabi is so far behind Dubai in developing its mega projects which have only got underway in the past year.

So will early buyers in Abu Dhabi do as well as in Dubai? The signs are certainly very good, and much will depend on how quickly Abu Dhabi can mobilize its mega projects to deliver property. Delays will push values higher but hold up rental incomes, but either way it is hard to see investors losing.