By Andrew Mernin
Ongoing price-hike in the region’s thriving trade centre could spark a shift in the distribution of foreign cash across the UAE and beyond
|~||~||~|If the latest figures are anything to go by, the days of international companies flocking to Dubai in search of cheap start-up costs could be numbered. Year-on-year rental price hikes coupled with a sharp spike in construction costs are threatening to hinder the reputation of the booming emirate as a destination for foreign businesses.
But while this could be bad news for the UAE’s second city, lesser-developed trade centres across the region could benefit as chief executives seek out more cost-effective locations to call home.
According to a recent study by CB Richard Ellis, one of the world’s largest commercial real estate companies, office space in Dubai is now more expensive than in more established business locations including New York, Munich, Zurich and Milan.
The global study sandwiched Dubai between Paris and Dublin as the ninth most expensive city in terms of office rental costs in the world, with Abu Dhabi – ranked 50th – the only other Middle Eastern area in the top 50.
In Dubai office space is valued at US $87.67 (AED 322) per square foot per annum, compared to US $55.15 in Manhattan, New York, $60.25 in Zurich and US $41.53 in Singapore. “Dubai has to be careful that it doesn’t price itself out of the market and become uncompetitive,” warns Peter Riddoch, CEO of Damac Properties, one of the largest private property developers in Dubai.
“I know that some smaller businesses that have been looking to set up, for example, in Media City (a Dubai free zone) have complained that start-up costs are now becoming prohibitive and they are looking at some of the other emirates,” he adds.
If the UAE’s rate of inflation, predicted to fall to around 4% by the end of 2006, according to the Central Bank of the UAE, is high, then the rate at which domestic rent in Dubai has increased recently is staggering.
According to a survey carried out by local recruitment specialists Gulf Talent, last year’s Dubai rental prices increased at an average rate of 27% on 2004, although rental price rises have now been capped at 15% by the Dubai government until the end of 2006 – not the most generous measure, however, as prices will be allowed to rise further once that time period elapses.
Within the region’s free zones, start-up costs are believed to be up to four times higher in Dubai than those in Sharjah and Ras Al Khaimah, with more and more businesses taking advantage of Dubai’s less expensive neighbours.
The number of businesses based in the Sharjah Airport International Free Zone (SAIF), for example, has doubled in the last three years, currently standing at over 2200, while the Ras Al Khaimah Free Trade Zone (RAKFTZ) experienced a 70% increase in the number of registered companies in 2005, achieving a capital investment value of US $204 million (AED 750 million).
As well as rent, spiralling construction outlays could also play their part in deterring foreign investors from entering Dubai and the overall UAE market in the future. “Building costs over the last few years have gone up substantially, probably about 35% in the last three years and a good 10 to 12% in the last 12 months”, says Riddoch.
The impending increase in the price of cement in the UAE could also take its toll in the near future. In recent months cement manufacturers and suppliers have been in negotiations with the UAE government’s ministry of economy in a bid to up their prices by US $2.70 (AED 10) a tonne to US $87 (AED 319).
Predicting that the current rate of Dubai’s expansion will continue for the next five to ten years, Riddoch insists that, while many smaller companies may be tempted to relocate to other parts of the UAE, Dubai still remains the premier location for foreign businesses. “If you go to Sharjah, there is actually nothing to do there. You’ve got one shopping centre in Ajman, and perhaps one in Ras Al Khaimah — where are the restaurants, the quality schools, the clubs and art centres that people want?”
Admitting that Dubai may be too expensive for labour-intensive small to medium sized enterprises, Essa Kazim, director general of the Dubai Financial Market (DFM), remains optimistic that the Dubai boom can survive rising prices: “The great thing about Dubai is that market forces dominate everything, if rents go up, developers make even bigger investments, so market forces play a major role” he adds.
As well as market forces playing their part, the situation has been worsened with the cost of living in Dubai greatly affected by the fact that the dirham is pegged to the weak US dollar. In turn, this is creating an upward pressure on salaries, raising the value of consumer goods and services.
But despite widespread inflation across all sectors, many would argue that the extra cost of doing business in Dubai — a playground for multinational giants with a far more liberal climate than most areas of the GCC — is equal to the benefits your business can potentially receive.
“The expense of Dubai is relative to the rewards.
“It is always relative if you want to earn and Dubai is one of the most important financial centres in the world, so the rewards are worth it”, says Hamad Al-Kawari of Salam International Investment Company, that recently became the first Qatari company to list on the DFM.
With US $19 billion of foreign investment being pumped into the Emirates in 2005, representing 14.2% of GDP, the UAE has been one of most attractive destinations for foreign cash in the Middle East over the last few years.
While this shows no sign of changing in the short-term, if chief executives continue to seek more economic locations in the face of the Dubai price-hike, then the geographic distribution of this foreign wealth could change significantly in the years to come.