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Mon 4 Feb 2008 12:35 PM

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Abu Dhabi to slash inflation, ramp housing supply

Emirate hopes to control record inflation in next three to five years, senior official says.

Abu Dhabi hopes to slash inflation in the next three to five years through increasing housing supply and strictly enforcing its rent cap, a senior official said on Monday.

Inflation in the UAE soared to 9.3% in 2006, the last official figure, and is predicted to hit a 20-year high of 12% this year due to housing supply shortages and the dirham's peg to the weak US dollar.

Falah Al Ahbabi, director of Abu Dhabi's Urban Planning Council, said 50% of inflation is caused by a shortage of housing supply.

"We have a shortage of residential and office space in Abu Dhabi which drives up inflation," Al Ahbabi said, speaking at the Abu Dhabi Economic Forum.

"The government is making every possible effort to supply the market with the appropriate amount of residential and office units in Abu Dhabi.

"In three to five years we hope to solve and control this problem."

Rents and property prices in Abu Dhabi surged 22% and 18% respectively in the second half of 2007, according to HSBC, while office rents have grown around 40% over the last two years, according to property consultancy Colliers.

Some estimates put the shortage of houses in the emirate as high as 50,000 for 2008.

In an effort to control rents and inflation, Abu Dhabi last month followed Dubai's lead and lowered its rent cap from 7% to 5%.

However, analysts have questioned whether the lowering the cap will make any difference to inflation, stating that only increased housing supply will solved the problem.

Al Ahbabi said he expects the reduction in the rent cap to play a key role in controlling rents and inflation.

"We do not want arbitrary increases [in rents]," he said.

Although the dirham's peg to the dollar is often blamed for the soaring inflation rates, most economists agree that the key driver is the supply and demand mismatch in the real estate sector.

However, the dollar peg has been blamed for driving up the cost of raw materials from areas such as Europe due to the dollar's plummeting value against major global currencies.

Al Ahbabi said the increase in the prices in housing also reflects a rise in the cost of raw materials and commodities.

Two of Abu Dhabi's largest real estate firms Al Qudra Real Estate and Aldar Properties said at the forum they are looking at forming joint ventures with or becoming part owners of suppliers in order to drive down the cost of raw materials.