Launch of the GCC common market will boost inflation rate

(CRAIG SCARR)   

Although the launch of the Gulf Co-operation Council (GCC) common market is likely to fuel growth in construction projects, real estate boom is contributing to an increase in inflation, developers said.

“The real estate boom has contributed to the current inflation, as we witnessed a period of unprecedented investment in this sector, increase in government fees and the escalating operational costs. All of these factors have reduced the returns for most investors,” said Dr Abdulraman Al Tassan, Chief Executive Officer, Rakaa Properties.

The impact of inflation is not limited to the UAE alone, but all the GCC countries.

The long-awaited decision on whether to de-peg the GCC currencies from the dollar is one possible effective solution. However, it will lead to other complications in trade exchange, customs fees and the uniform regulations of GCC trade sector, he added.

“Rising inflation is the biggest challenge and should be addressed by initiatives and strategies to contain it and offset its pressures. Persistent inflation will certainly result in fluctuations in economic activities and an inevitable slowdown.”

Inflation in Saudi Arabia, the world’s biggest oil exporter, accelerated to a record seven per cent in January as the cost of rents and food soared. Inflation in the UAE touched 9.3 per cent in 2006, as rent and cost of house items soared.

National Bank of Abu Dhabi estimates inflation to reach 10.9 per cent in 2007.

Double-digit inflation rates in most Gulf economies have eroded the financial incentives for many workers from India, Pakistan and Bangladesh, who have either demanded higher pay, or are returning to their home countries, where booming economies are starting to provide similar remuneration, Moody’s said in a new industry outlook.

Kuwait-based Al Mazaya Holding believes the launch of the GCC common market is leading to an increase in investments in the real estate sector.

“The common market will offer equal opportunities for all GCC citizens, including the right to work in all government and private institutions in member states, buy and sell real estate and make other investments move freely between the countries and encourage pan-GCC investment.

These will be reflected positively on the real estate market, which will see more investment,” Salwa Malhas, Senior Vice-President – Business and Projects Development, Al Mazaya Holding, said.

Currently, GCC nationals prefer investment in the local markets for reasons such as attractive return, wealth of untapped opportunities and the infrastructure.

“The launch of a common market is expected to draw more foreign investment to the region, provide attractive opportunities for local capital and boost its competitiveness especially in the construction and real estate sectors, which are now the most vibrant and dynamic industries,” she said.

However, real estate analysts fear that an increase in number of realty projects will lead to an increase in the cost of raw materials and a tussle between firms to retain and attract manpower.

Emirates Business reported last week that retaining trained and skilled manpower was becoming a difficult task for developers, which was leading to salary increases of more than 100 per cent.

“It is difficult to get good and skilled people and then retaining them is more difficult than that. We have raised their salaries by more than 100 per cent and in some cases by 200 per cent,” a senior executive of Dubai-based realty company said.

Moreover, construction costs in the Gulf have risen by around 30 per cent in the past 12 months and new companies are entering regional markets.