Surging costs are hammering small businesses throughout the country as labour, food and transport expenses squeeze margins.
The spiralling cost of accommodation is one of the main reasons behind an inflation rate that is rising at its quickest pace in five years. Dubai’s annual inflation jumped to 4.2 per cent last month, up from August’s figure of 3.5 per cent. Countrywide, inflation rose to 2.9 per cent, while the Abu Dhabi figure was 3.7 per cent.
Mohamed El Kashashy, the founder of Think Food, a Dubai restaurant company with about 250 employees, said that his employees’ housing costs had increased by as much as 50 per cent in the past 12 months.
Think Food raised housing allowances in response, which cut its profit by between 15 and 20 per cent, Mr El Kashashy said.
“There’s a lot of pressures on your margins because of rising prices,” he said. “The biggest pressure comes from the rents. But you won’t get the right talent if you don’t keep housing allowances and benefits packages growing. Competition between retailers for staff is intense.”
He says the trend threatens to price essential workers out of the market.
“Once you price people out of clothes, food, and accommodation, you’ll end up with a city that’s just for the rich. Everyone in the food and beverage, retail, and hospitality industries is hiring, so people will go to whomever’s going to pay them and feed them the best,” he said.
The effect of higher housing costs is being felt even as the market experiences some relief from the sharp rent rises of recent years. Dubai house prices and rents weakened in the third quarter, according to Asteco. After ten quarters of increases, average apartment rents fell 2 per cent during the three months to the end of September, while average villa rents dipped 3 per cent. Abu Dhabi apartment and villa rents were largely unchanged during the past quarter.
“High housing costs are an obstacle to start-ups hiring new people,” said Sameer Sortur, the chief executive of SquareCircle Global, a tech consultancy. “Small and medium enterprises are unable to bring in fresh talent because of rising inflation in housing, food and basic amenities.
"Rents are nearly too high for any start-up or any SME owner to be able to afford any decent kind of lifestyle [in Dubai]. Either start-up founders rent an apartment together, or they will hire hotel apartments where long-term costs for a studio apartment are cheaper."
Analysts warn the trend could hit the country’s competitiveness as companies are forced to pay more than regional rivals for talent. The UAE economy is the highest-rated in the Arab world for competitiveness after it leapt seven places to 12th in a global index of 144 countries from the World Economic Forum.
“Higher house prices will boost labour costs. It’s definitely going to have an effect on competitiveness,” said Alp Eke, a senior economist at the National Bank of Abu Dhabi.
Costs are mounting even in Dubai’s labour camps, said experts at the real estate consultancy Cluttons.
Rental rates per labour camp bed have doubled from about Dh250 per person per month in 2009 to Dh500 per person per month.
At the same time, the capital value of a bed in a labour camp has jumped between 20 and 25 per cent to about Dh27,500 per bed.
Faisal Durrani, an international research manager at Cluttons, said that companies were moving to buy labour camps instead of renting them.
“Owner-occupiers are conscious of rising costs and the scarcity of worker accommodation. There’s low supply and very strong demand.”
Rising demand in the hospitality sector is also putting pressure on Dubai’s housing stock, Mr Durrani said.
Thousands of new hotel rooms are being developed across the country as international groups such as Starwood Hilton and Marriott add scores of new properties.
“If I had a concern about housing costs it would be to do with Abu Dhabi because housing costs are increasing in the capital quite significantly and it has been a challenge to find the right sort of accommodation at the right price,” said Darroch Crawford, the managing director for the Middle East & Africa Premier Inn International, the UK’s mid-range budget hotel brand.
More and more businesses are renting or buying up bulk accommodation in Sharjah and the Northern Emirates to cope with rising housing costs.
“Businesses are targeting Sharjah for bulk housing,” Mr Durrani said. “We saw that in the boom years leading up to the recession, when rents and house prices were already at an all-time high.
“When companies are looking at bulk housing deals, landlords are generally amenable to providing a bulk rate.
Some companies are unable or unwilling to raise housing allowances to keep step with rising accommodation costs.
Many companies have kept housing allowances constant since 2008, said Robert Richter, who runs a twice-yearly survey of companies’ benefits packages for the human resources consultancy Aon Hewitt.
This benefited employees at the bottom of the real estate crash but now means that they are feeling the pinch.
While big Dubai firms have not yet substantially increased housing allowances, there are some signs that they may do so in the future, Mr Richter said.
“Housing allowances have always been a hot issue, but right now they’re a hotter issue than before,” he said.
Only top executives have been entirely insulated from the effects of higher rents, analysts said.
“At the top end of the market, housing allowances are adjusted to match market conditions, as part of the executive’s compensation package,” Mr Durrani said. “But elsewhere, housing allowances get adjusted in line with the inflation rate, at best.”
abouyamourn@thenational.ae
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