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Wed 2 Jan 2008 04:00 AM

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The road ahead

The talking point of 2007 was how expensive life in Dubai had become. Will 2008 be the same? Our team of financial experts have the answers.

If only it were possible to look into a crystal ball and predict what the future held for your finances. You could find out whether 2008 was the year when you would make that elusive million or end up with less money in the bank than you started with, whether you'd acquire a home or splash the deposit money on the stock market instead. While it may be impossible to make accurate predictions experts can, based on the previous year's trends, give some indication of what the next 12 months hold for the country's economy and how this will affect your bank balance. We gathered together a team of experts, including a professor of economics, HR professionals and property and financial gurus, and asked them to give us their predictions for 2008.And the results may surprise you.

Mike Hynes is managing partner of UK based recruitment agency Kershaw Leonard which recruits candidates in several sectors including construction, finance and banking, human resources and training, legal, logistics and supply chain management. His company publishes the annual Cost of Living Dubai Report covering everything from school fees and medical costs to the price of Friday brunch.

How different do you think the 2008 to 2009 Cost of Living Dubai Report will be compared to this year's report?

In the 2007 report there were three main drivers of rising costs - housing, education and healthcare.

And I don't think those drivers of rising costs are actually going to change. There is no sign of school fees suddenly dropping down and everything we read in the papers indicates that at least for the next couple of years the pressure is on for rents to increase significantly as they have done in the past. Maybe 2008 will just be more of the same and it will be 2009 when we start to see changes - particularly when demand starts to be satisfied in the housing market.

Do you think Dubai's rent and property prices will continue to rise?

As far as I'm aware the rules for rent increases in 2008 are not out yet and if the cap, which has been imposed is removed this could have a significant impact on inflation.

There was some talk in the papers about just going back to a complete free market depending on what part of the city properties are located in. If they go with that we could see some enormous rent increases.

I think there will still be pressure on house prices to rise and there will not be enough accommodation for people that need it.

One impact of the rising rental and property costs could be that more and more people move out to other parts of the UAE. And as soon as rumours of a metro link between the emirates and maybe even a full blown railway system come to fruition, we'll see the other emirates increasing in prosperity as more and more people choose to live there.

School fees were identified as a major driver of inflation in your 2007 report. Do you think parents will face further hikes in the cost of education this year?

There is a cap on local schools increasing their fees over 16% and international schools increasing them over 20%. But what's happening is that new schools are coming in and new schools are not subject to the cap. So there are some enormous fees. One new school I know of is charging AED80,000 a year.

Existing schools, to get around the rules, are doing things like increasing the cost of transportation for children and charging more for books and entrance fees.

Will medical costs rise with the influx of new healthcare providers into Healthcare City?

I heard that there are 26,000 new people a month coming into Dubai and if all those people need to be given private healthcare then clearly the demand is enormous. It's a very buoyant market and prices seldom drop in such a buoyant market.
Given the rising cost of living in Dubai do you believe employers will increase salaries and benefits packages for their staff in line with inflation?

Our survey in 2007 claimed that the real inflation rate in Dubai is around 20%. So just to keep pace with that the private sector would have to increase their overall packages by 20%. I don't think there are many private sector companies that can offer 20% pay increases. There is generally a focus on trying to retain staff, not just by increasing their salaries but by improving the quality of the work environment, building teams and providing more performance based incentives.

Do you think that as a result of the rising cost of living and the inability of some employers to accommodate for this, that more expatriates will leave Dubai in 2008?

There's a real danger that Dubai is already being seen by a lot of people as an expensive place to live. Three years ago most people had the ability to save. Whereas these days a large group of people are actually spending more than they are earning. Any more price increases could be the straw that breaks the camel's back for some people and they could leave as a result.

Philipp Haenle is a property broker and property portfolio manager with Sherwoods Independent Property Consultants, a property consultancy with offices in the UK, Dubai, Abu Dhabi and Bahrain.

Do you think there will be a correction in property prices in Dubai in 2008?

I don't think there will be a significant price correction in Dubai. One reason for that is that the master developers keep on increasing their prices and successfully selling their products. There is also a very active resale market for high quality units in prime developments in Dubai. If you look at a developments like Business Bay for example, commercial properties there were being sold at Cityscape for up toAED2,800 per square foot.

But now on the resale market they are being sold for up to AED3,400 per square foot.

Demand for property is still very high and many developments are being sold out before they even reach the public launch stage.

In well known developments and good quality, well planned master developments I believe that prices will in fact continue to rise.

Which developments do you think will see the most demand from buyers?

Dubai Waterfront as an overall master development will be very popular and I predict that we will see more and more people moving towards Jumeirah Lake Towers.

I predict there will be high demand for properties in Downtown Jebel Ali once the properties there are launched. That I can guarantee will attract a high volume of interest. Jebel Ali will soon have a fully functional airport and that will make it a very attractive place for both residents and businesses.

Which types of properties will be most in demand in 2008?

For families, probably villas - particularly those with their own gardens.

The villas within master developments are always going to be in high demand because of their strong appeal to a certain clientele.

For single expatriates staying in Dubai for the short to medium term, one-bedroom flats will be in high demand.

Who will be buying property in Dubai in 2008 - UAE residents or foreign investors?

I think that many of the expatriate population living in the emirate that have not yet invested in property in Dubai will do so in 2008. But Dubai is also attracting a lot of capital from international investors. It attracts capital from all over the place. The number of overseas investors significantly outstrips the numbers of residents buying property in Dubai.

Do you think the mortgage market in Dubai will expand in 2008?

The market will expand because more and more people will enter the property market. Only a minority can afford to buy these properties in cash so I think that definitely the mortgage market will expand to accommodate this and the offers being made by the banks will become more attractive to fuel this growth.

At the moment mortgage interest rates range from between 7.75% to 9.25%. I don't think this will change in 2008.
Do you believe the government will introduce further legislation to protect home buyers in Dubai in 2008?

Yes I do. The government has a genuine interest in setting up a legal framework to continue to attract investors. One of the main drivers for growth in the real estate sector is a reliable legal system.

Escrow laws already protect the money of those buying off-plan property. What I do think is necessary is to create regulation to get a closer grip on completion and handover dates. Developers need to be made more aware of the impact on buyers of a non timely delivery. They should be more closely monitored to stick to their completion date.

Marios Maratheftis is regional head of research for Standard Chartered Bank for the Middle East, North Africa and Pakistan.

Do you think that the UAE will remove the dollar peg in 2008?

I think there is a very good argument against maintaining it. But the authorities seem to be reluctant to move away from it. I think if there's any change it will be revaluation rather than the dollar peg being removed. We've seen indications that this is being discussed.

We think that if revaluation takes place rather than the removal of the peg then the revaluation will be substantial and at least 10% because if it's small it will not achieve anything.

The dollar lost almost 40% of its value over the past five years. So the currencies in the region have lost the same amount as well. There's a lot of room for these adjustments to take effect.

Do you think inflation and the cost of living will continue to rise in Dubai?

In the near term the cost of living will continue to go higher because of the presence of the dollar peg. The authorities should move towards revaluation to slow down inflation. But in the absence of any revaluation, inflation will continue.

There is a lot of liquidity in the market and this is pushing up inflation.

There is too much money in the system and when you have too much money chasing too few goods that causes inflation.

The authorities should be more concerned with this liquidity. Some of this money should be put into deposits.

Do you think interest rates will rise or fall in Dubai in 2008?

Because of the dollar peg Dubai will continue to import interest rates from the US and we believe the outlook is that rates will continue to fall in the US which will affect interest in the UAE.

This could feed through to affect the interest rates on loans in the UAE if the interest rates keep going down.

Then you could see this feeding through to the consumer as well.

Interest rates have fallen already and I believe they will continue to fall even further.

Do you think that employers in Dubai will push up salaries in 2008 in order to meet the rising inflation?

There is pressure on salaries throughout the region. And I would expect this to pressure to continue.

Billy Rautenbach is director of operations for Better Homes, a Gulf based real estate agency which was set up in 1986 and employs 300 staff across the region.
Do you think residential property prices will rise in Dubai in 2008?

Depending on the location of the property, the completion date, the developer and the finance options, I think that there is a possibility that prices will continue to increase.

What types of properties do you think will become the most expensive?

The completed properties in established communities will continue to show the better returns and will continue to be in demand. On a UAE basis we are seeing a lot of interest in Abu Dhabi properties.

Do you think rents will continue to rise in 2008?

Rents will continue to rise in areas that have high demand and low supply. With the delivery of more inventory there will be pressure on rentals.

What types of rental properties will become the most expensive and which will in the highest demand?

The same as properties in the sales market as the two are very closely linked. High demand areas such as Jumeirah and Umm Sequim are still in the high-end price range and in high demand for rentals.

Do you think demand for housing will continue to be greater than supply in 2008 or will the situation be reversed?

We don't think the supply has caught up with demand yet and the trend will continue through 2008.

What projects will be the most popular among buyers when they are completed in 2008?

Villa communities and waterfront properties remain popular and we expect to see this trend continuing in 2008.

Do you think that the Dubai government will introduce further legislation to protect tenants and homeowners in the coming year?

We understand that the government is closely monitoring the real estate market and will constantly assess what needs to be addressed. changes legislation.

Ajit Karnik is professor of economics at the University of Wollongong in Dubai.

How far do you think inflation will rise in 2008?

Before you answer that question you have to ask how much it has already risen. There is some debate about that. Last year there was talk of whether it had hit 10% or not. I think it has hit 10%. I think it will rise. I think it will go up by another 10% and there is nothing I can see which will push it down.

It certainly won't fall. There have been some predictions that it will fall based on the property prices becoming slightly more stable but I don't think that will happen in a hurry.

What will start to happen is there will be all kinds of calls for putting price controls of various kinds in place.

What will be the main drivers of inflation in Dubai this year?

It's the property market that's driving it and that will continue to drive it in 2008. The other thing that is going to happen is there is going to be an announced 70% increase in salaries for government employees. It's still not clear whether this will be in one big lump sum but that will put a lot of income in the hands of people and it will push prices up.
The dirham and its connection to the dollar is not helping much. That depreciation of the dollar means the dirham is lower value than the euro. As around 60% of UAE imports come from non-dollar countries that will feed into the country's inflation. Groceries will continue to be more expensive because most groceries and food stuffs in the UAE are imported into the country so that will continue to rise.

Do you think that interest rates will increase in Dubai in 2008?

Because of the dollar currency peg the UAE matches any custom interest rates that the US enforces.

The US is reducing interest rates in order to boost the economy. But because the dirham is pegged to the dollar this monetary policy gets implemented in the UAE.

So if there is a cut in interest rates in the US we might get one here.

If the US cuts it by 0.5%, the UAE might cut it by 0.25%.

What this does is it makes borrowing cheaper so more people are willing to take loans to buy property and the demand for property will continue to spiral.

If they delink the dirham from the dollar and have an independent monetary policy they will not need to reduce interest rates.

In your opinion is it likely that the dirham will be unpegged from the dollar in the next 12 months?

There has been talk about revaluing the currency but it's nothing that is about to happen.

All one is expecting is re-valuation. But not a depegging. The dirham has gone down against the euro by 20% so something like 20% is what is required in terms of revaluation. But whether that will go through in one big revaluation or in installments remains to be seen.

Do you think house prices and rental costs will continue to rise in 2008?

They will continue to rise. Supplies are not coming into line with demand and the cost of borrowing is not going up. That is the only way to control demand.

Rent prices at least will not stay within the stipulated 7.5%. While there is a cap on rent increases this does not apply to new tenants - only to renewal of existing rental contracts. With new tenants there are no limits.

Most people are expecting property prices to go up. A dramatic fall would mean people would lose a lot of investment so there will be resistance to a drop in property prices on those grounds.

Do you think people's working conditions - in particular salaries or benefits packages will get better in 2008 to match the rate of inflation?

Private sector companies may not be able to keep up with inflation as they will not have the resources to do that. But oil prices are high and there is no shortage of revenue so the public sector can fund these higher salaries. The situation will put pressure on private sector employees who may be unable to save money on existing salaries so they might pack up and go away.

A recent survey I read said that 40% of people in Dubai are not able to save on their current salary.

So any further increases in prices will mean people will really find it difficult to save.

Lama Ataya is head of research for Bayt.com, a recruitment firm with offices in Abu Dhabi, Kuwait, Jordan, Qatar and Saudi Arabia, which published the 2007 GCC Human Resource Overview Study.
Do you expect the cost of living to continue to increase for employees in the Gulf region in 2008?

With the regional growth story expected to continue unabated next year, inflationary pressures will still be felt, however it is expected that the inflationary momentum has leveled off somewhat and living costs will witness less of an upward spiral than we have seen in the past two years. Based on our last quarterly Consumer Confidence Index Survey, the overwhelming expectation is that financial positions in the region will change for the better in a year's time, with 63%, 57%, 52% and 52% of respondents in Kuwait, Qatar, KSA and UAE expecting a positive change in their financial positions in a year's time in comparison to 6%, 10%, 8% and 10% in these countries expecting their financial positions to be worse. The sentiment is overwhelmingly positive for the year ahead and optimism in the ability of regional economies to sustain growth at the existing breakneck pace is strong.

Do you expect that employers will increase employees' salaries to match this?

Employers have been increasing salaries to compensate for increases in the cost of living and will continue to do so as issues of staff sourcing and retention remain key boardroom challenges in 2008 and pan-regional, pan-industrial labour mobility realities continue to exert upward pressures on salaries. The latest Bayt.com quarterly Consumer Confidence Index Survey released in November reveals however that the overwhelming majority of GCC respondents believe their salaries have not kept pace with increases in the cost of living this year with 57%, 60%, 61% and 66% of total survey respondents in Kuwait, Qatar, KSA and UAE respectively indicating their salaries had not kept pace with increases in the cost of living.

On the upside however the survey indicates that Qatar, KSA, Kuwait and the UAE feel business conditions will improve next year and there will be more jobs available, with 61% of respondents in Qatar asserting their belief that there will be more jobs available in their country next year versus 49% in the UAE and 47% in the KSA. Employers across the region are vying for talent in a very competitive marketplace and today's packages are increasingly shifting to reflect this.

Do you anticipate that Gulf employers will create additional incentives for staff - such as benefits packages, increased living allowances and promotion and training opportunities?

Repeated polls run on the Bayt.com website reveal that ‘opportunities for training and development' are more important for today's professionals in selecting a new job and leaving an existing job than immediate short-term salary considerations.

Increasingly employers are investing significantly in staff training and development and in ensuring that the professional growth trajectories of their key personnel are well managed and safeguarded.

Today's regional HR departments are employing sophisticated and creative best-of-breed strategies to not only ensure the best sourcing and screening of candidates but to also ensure that top talent once hired is optimally trained, challenged, motivated and developed.

Will staff retention for Gulf companies continue to be a challenge?

The regional growth story shows no sign of marked slow down and with burgeoning expatriate populations and the correspondingly higher potential for cross-border labour mobility, competition between economies in the region for top talent will be fierce. Competition will also be fierce for top talent across industries as our survey indicated that professionals are very willing to consider switching to a higher paying industry to compensate for cost of living increases and to take advantage of increased opportunities for growth and development. The construction and traditional oil and gas industries which are booming across the region continue to compete for talent across geographic boundaries and several key emerging economic hubs are also competing for top talent across borders including finance, healthcare and IT.

Do you predict that the UAE will continue to be a highly attractive place for expatriates to live and work in?

Yes very much so. At Bayt.com we have seen no signs of the interest in moving to the UAE abating amongst expatriate professionals from across the region and all corners of the globe.I

f anything we are seeing more and more highly skilled professionals with advanced degrees, impeccable educational qualifications and highly impressive track records scouting the local employment markets for opportunities that befit their interests and qualifications.

The legendary prowess of the UAE in carving an economic miracle for itself and the unparalleled business and growth momentum in the UAE today coupled with the world-class infrastructure, leisure facilities and quality of life will continue to make the UAE a work destination of choice for competitive, top-calibre, career-minded individuals from all over the world.

A poll run on bayt.com confirmed that despite the escalating costs of living and salaries that have often not kept pace, Dubai remains overwhelmingly the work destination of choice in the region.

An overwhelming 49% of respondents indicated they would prefer to work in Dubai than in any other country in the GCC.

And an overwhelming 40% of polled respondents saw themselves working in Dubai for the indefinite future rather than leaving in the foreseeable short or intermediate term.

Asked why they prefer Dubai most respondents (43%) indicated opportunities for long term career progression as the main reason by far outstripping compensation levels (13%) as the main attraction to live and work in Dubai.

Clearly, a sense of long term career stability and the prospect of advancing careers with established blue chip players in a world class business environment over the long term holds precedence over short term compensation levels for today's jobseeker.

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