Recent reports suggest the cost of living in the UAE, particularly in Dubai and Abu Dhabi, is getting out of hand, and affecting consumer and investor confidence. With rents threatening to go over the roof, small businesses are in danger of tipping over, as their employees are forced to move into more remote areas that involve longer and more challenging travel times.

This clearly has a bearing on productivity levels at work. But these small establishments risk their survival should they opt to raise salaries to match the rents so that they can have their employees stay closer to the workplace.

The latest Neilsen consumer confidence index shows that UAE consumers are spending less as they fear rising rents and cost of living will soon go beyond their means, with the result that overall consumer confidence has dropped by five points over the previous quarter this year alone.

Neilsen said a decline in sentiment indicated a gloomy view on the state of the economy, particularly on household incomes and job prospects, prompting people to spend less.

The problem has assumed such serious proportions that Dubai’s safe haven status is under pressure as debt investors lose confidence faster than any other place in the Middle East, except Iraq, according to the latest CMA credit swap rates. Increased regional turmoil has also played a key part in this.

The UAE follows open market policies and as such does not believe in controlling the market arbitrarily. The country has pursued a proactive policy in its approach towards market forces, which allows effective intervention without appearing to control the market. This is particularly true in the case of Dubai, where the authorities have intervened from time to time to effectively regulate the market.

This was done not by issuing an edict, but by influencing market forces in a way that help keep rates under check.

The first such initiative was launched by the then Ruler Shaikh Rashid Bin Saeed Al Maktoum, the Father of modern Dubai, in the mid-70s, when the Dubai population suddenly began to swell and rents almost doubled in six months.

Shaikh Rashid launched a unique project for the construction of low-cost houses. These houses were rented out at much lower rates than prevailing rents, which had a sobering effect on the market. Under the plan, about 1,000 new houses were released to the market every year and it continued for nearly a decade. During this period, Dubai rents remained affordable to every section of the population.

A watered down version of the scheme is still in operation, but the addition of new dwelling units under the plan can hardly be expected to impact the market. Over time, the ability of government agencies to influence the market has significantly reduced.

Although the system of rental caps had in the past helped to keep rents under check, this is no longer the case. The Dubai Land Department in recent years enforced a 5 per cent annual cap on incremental rent, but with the advent of the freehold market, and the need to safeguard the interests of owner-investors, there has been a major transformation.

The new rental index is actually skewed in favour of the landlords, with the supposed cap serving as a floor price rather than as an upper ceiling. The computation of the index is also not scientific.

For instance, the rental index makes no distinction between low- and high-quality units or between modern buildings and old apartments. The same rate is applied for a 30-year old property in a dilapidated complex and a house with all modern amenities. This is a major shortcoming and by logical argument, if any one aspect has not been considered properly, there is no guarantee that all others have been adequately addressed.