Dubai’s Muted Inflation Masks Costs as Salaries Stall

Dubai’s inflation rate of less than 1 percent doesn’t capture the surging cost of living in the desert emirate, especially for the expatriates who make up most of its population.

The government reported inflation at 0.9 percent in April, while the housing index, which includes water and electricity and is the biggest component, rose 0.8 percent. By contrast, real-estate companies such as Jones Lang LaSalle Inc. and Cluttons LLC show annual increases in rents and home prices ranging from 10 percent to as much as 88 percent.

The divergence is part of a pattern that shelters Emiratis from inflation. They’re less likely to rent, have access to free government schools, and say they receive assistance with utility bills and are exempt from a housing tax. Foreigners, about 90 percent of the 2.2 million population, are exposed to higher costs in those areas, even as salaries are capped by growing demand for jobs in Dubai.

“Many expatriates feel the official CPI doesn’t reflect their reality,” said Khatija Haque, senior economist at Dubai-based lender Emirates NBD PJSC. “Dubai is probably more difficult to measure CPI than other cities because there’s such a transient population, and a huge mix of households, and everyone has different spending patterns.”

Easily Replaced

After a debt crisis in 2009, when the emirate struggled to meet payments on the more than $100 billion it borrowed to build a tourism and commercial hub, Dubai is rebounding. Its economy will grow 4 percent this year, according to the International Monetary Fund. The Dubai Financial Market General Index has risen 45 percent so far in 2013. Emaar Properties PJSC, which has the biggest weighting on the index, gained 50 percent.

“If you don’t like your package, tough, companies can replace you in no time,” said Samer Mardini, 34, a Syrian who is vice president of fixed income at SJS Markets Ltd. He said his own rent jumped 30 percent in the last year, while his salary was unchanged and will probably stay that way in 2013. “You just have to hope that prices don’t rise too fast to make it unaffordable to live here.”

Recruitment company’s annual salary survey in the United Arab Emirates found 44 percent of respondents said they didn’t receive a raise in 2012, according to Chief Marketing Officer Lama Ataya.

Mid-range villa prices in Dubai climbed 46 percent in May from a year ago, to the highest since November 2008, according to Cluttons LLC data compiled by Bloomberg. Overall rents rose 10 percent in the first quarter from a year earlier, according to Jones Lang LaSalle Inc.

2007 Index

Expatriates also pay 5 percent of their rent as a housing fee, which nationals don’t, according to Waseem Hassan, 31, an Emirati who has seen a “slight” increase in his salary. Still, his rent has risen about 20 percent since 2010, he said.

One reason why housing costs don’t show up in the consumer price index may be the choice of homes surveyed.

The Dubai Statistics Center measures prices “across different areas of Dubai, different types of properties and different renewal dates,” said Maryam Ahmad Mohammed Al-Mulla, its director of prices and foreign trade. She said rentals are “one of the most controversial items in the CPI,” and the homes are chosen based on the 2007 Household Income and Expenditure Survey.

Housing accounts for 44 percent of Dubai’s CPI. Al-Mulla declined to provide details of the properties surveyed.

Not Built Yet

Most properties in areas popular with foreigners and where residents complain of soaring rents, such as Dubai Marina, Downtown Dubai and Business Bay, were under construction in 2007, according to Naveed Mirza, a 35-year-old Pakistani working at Black Arrow Real Estate. “At that time, there were few finished properties in those places,” Mirza said. “Now those areas are very popular, and prices are going up.”

In a bid to stop rents for existing tenants from skyrocketing, Dubai introduced a rent index in 2011 and its rent calculator caps increases. Tenants and landlords can ask the Dubai municipality to settle disputes.

Rent isn’t the only cost rising. Jawad Ali, a Dubai-based managing partner at King & Spalding in the Middle East, said school fees and restaurant bills are increasing.

“I feel that Dubai has become very expensive, specifically restaurants since I go out frequently socially and to entertain clients,” Ali said. “It’s getting out of control.”

The CPI’s hotels and restaurants sub-index rose 1.1 percent in April from a year ago.

The Knowledge and Human Development Authority, which regulates tuition, approved requests from 17 schools to raise fees, Chief of Regulations and Compliance Commission Mohammad Darwish last month told XPRESS, a U.A.E. weekly. Some tuition pressure is already being reflected in inflation, as the education sub-index is up 4.9 percent from a year ago.

‘Flat for Emiratis’

“Inflation may be flat for Emiratis, for example, who use government schools and don’t deal with rising rents,” said Simon Williams, chief Middle East and North Africa economist at HSBC Holdings Plc in Dubai. State schools, which only admit Emiratis, are free.

Dubai’s transportation sub-index, which rose 0.8 percent in April from a year ago, may rise for expatriates and Emiratis alike after the government introduced two more toll gates in April, bringing the total to seven.

While the central bank will be comfortable with the inflation rate, it’s “likely to be watching the pick-up in asset prices with greater concern,” especially credit growth, Williams said.

Central Bank Vigilance

“The central bank’s ability and readiness to manage the pace at which lending expands will be the real test of their monetary policy stance and will give us a clear idea of how effective they will be in avoiding a repeat of the 2003-2008 boom and bust cycle,” Williams said.

The central bank, which hasn’t changed its repurchase rate in more than four years, typically follows the Federal Reserve because the nation’s currency, the dirham, is pegged to the U.S. dollar.

Loans and advances in the U.A.E. climbed 27 percent in the first quarter, the most since Bloomberg began tracking the data in 2010, compared with 39 percent in 2008. Real estate values rose to a record in 2008, about 30 percent higher than today’s prices, Cluttons data show.

Inflation may quicken later this year, said Raza Agha, chief Middle East and Africa economist at VTB Capital in London.

“As residents start to look at less prestigious addresses to cope with higher rents, price pressures will become broader,” he said. “With office space and retail space costs also rising, real estate looks set to become a major contributor to inflation once again.”

King & Spalding’s Ali said it reminds him of the boom in Dubai before the global financial crisis.

“It’s almost like there’s this 2007 feeling,” Ali said. “A light has been switched on, and we’re in full growth mode, and it’s natural that with growth there’s inflation.”

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