Signs of recovery: Inflation has been increasing alongside renewed activity in the real estate sector

Although inflation had been a growing issue prior to the 2008-09 global economic crisis, these concerns have since been receding. In December 2008, the inflation rate hit an all-time high of 12.3% – a level high enough to present a significant challenge for the Central Bank of the UAE (CBU). Finding its ability to respond to the trend through standard monetary policies limited by the dirham’s formal link with the US dollar, the CBU faced calls to do away with currency peg altogether – a route which had been taken by Kuwait in its attempts to tamp down inflation a year previously. This public debate was brought to an abrupt halt by a worldwide credit crunch that even the robust local economy was not fully immune to. As the inflation rate fell to low single-digit figures, the attention of the CBU shifted from inflation management to the new priorities of a much-altered economic landscape – namely liquidity boosting measures and the protection of the banking sector.

Housing Costs

While inflation remains at a low level, 2013 has seen some upward pressure driven by a number of economic sectors that have experienced rising prices. By November 2013, headline inflation for the UAE had reached 1.4%, the highest rate since June 2011, according to data from the National Bureau of Statistics, driven largely by food prices and housing. The latter is of particular relevance, as housing and utility costs account for almost 38% of the consumer price index basket according to the Statistics Centre - Abu Dhabi, and therefore any movement of the housing market is likely to have a major effect on inflation trends. Recent developments in the segment have the potential to nudge the index upwards over the coming year.

Boosting Activity

In January 2014, the Abu Dhabi Municipality announced that foreigners would henceforth be permitted to own property in designated investment zones on a freehold basis, taking possession of property deeds in the same manner as nationals. A number of such investment zones exist in Abu Dhabi, many of which are being developed by state-owned Aldar Properties, and the new ownership regulation that is being applied to them marks a significant shift from the previous regime, which generally limited foreigners to leasehold arrangements with 99-year leases.

The announcement has added to a growing interest in Abu Dhabi’s residential property market. The sector was hit hard during the global economic crisis, and the rate of residential handovers, in particular, was significantly reduced. Since then, the local government has worked hard to boost activity in the sector, and its most significant move, prior to January’s announcement regarding foreign ownership, came in November 2013 with the lifting of a 5% cap on annual rent increases which had been put in place during the boom years prior to the global economic downturn. Added to these efforts to stimulate the market was a government ruling in September 2013 that requires state employees to live within the city limits of Abu Dhabi if they wish to remain eligible for their housing allowance, which accounts for around a third of their salaries. This change resulted in an influx of renters from neighbouring areas, as state employees relocated to Abu Dhabi City.

Achieving Balance

However, while an increasingly buoyant residential property market has made the prospect of rising inflation a possibility, most observes see little cause for concern. Local demand for real estate is rising, but so too is the rate of handovers: Aldar, for example, began the phased handover of 3500 units at its Gate Towers development in late 2013, and has a total of 7000 units in the delivery pipeline in Abu Dhabi’s freehold areas, while local press reports suggest that around 43,000 new residential units will be made available to the market by the end of 2015.

Looking at the wider picture, inflation is likely to be driven higher by stronger domestic demand caused by increased investment activity and robust private consumption, with the IMF projecting that the average rate for 2014 will reach 2.5%. However, despite these upward pressures, the relatively strong US dollar and declining global food and commodity prices should help keep inflation rates from increasing too rapidly.