Dubai's new 5% rent cap

I've rambled on in the past about some of the things jeopardising Dubai's future, which depends entirely on us being commercially successful.

Poor telecoms with Etisalat's lack of speed and bandwidth, the TRA's refusal to allow VoIP, the huge costs caused by the roads & parking problems, the high cost of commercial property and the all-encompassing problem of high inflation. They make doing business in and from Dubai more and more difficult and costly, and alternative cities become more attractive locations.

Dubai's future depends on solving these problems, and solving them quickly.

Recently the Central Bank Governor announced that the government was setting up an agency to monitor inflation, reflecting the growing concern. The official inflation figure is around 10% but I don't think there are many residents who believe it's that low. It's a problem on a personal level, but the bigger picture is that it's seriously damaging Dubai's future.

With the insistence on keeping the dirham pegged to the dollar the government has little room to manoeuvre to control inflation. We have the ridiculous situation where we follow US interest rate reductions even though our economies are going in opposite directions.

A band-aid answer being used is to stop or limit price rises - but that really is a very short-term and unsustainable option.

Scenario - world wheat prices are rising steadily but bakers are not allowed to put up the price of bread. How long can they stay in business if their selling price doesn't reflect their costs?

Rents have been one of the major problems and today we have an announcement that at least this aspect of inflation is being tackled with a 5% rent increase cap being set for 2008.

Rent increases over the past few years have caused huge problems for people. There are plenty of stories of families having to go back home while the husband stays on in shared bachelor accommodation. A ripple effect of high rents is that tens of thousands are adding to the traffic chaos because they've had to move out to Sharjah, Ajman & Umm Al Quwain where accommodation is relatively affordable.

Company costs have increased dramatically if they provide accommodation as part of staff packages or provide an accommodation allowance. An example of another ripple effect of the situation is given by a friend who owns a business and pays accommodation allowance for senior staff. Because of rising rents he's increased the amounts as much as he can, but there's a limit to how much the company can afford and he knows their rents have gone up more than the increase he's been able to give. He's lost some valuable senior staff as a result.

We've had rent caps in Dubai for the past two years, 15% in 2006, 7% this year. For 2008 it's been set at 5%. It applies to new tenants and to tenants whose rents did not increase in 2007. For tenants who did have a rent increase in 2007 there can be no increase in 2008.

It's certainly a move to battle one of the big inflationary factors.

The story in Gulf News is here.