The UAE has become a more affordable country now for expats as the cost of living has declined despite the introduction of value-added tax (VAT) earlier this year. This can be attributed to a consistent fall in rents, a strong local currency and lower oil prices last year.
According to Mercer's annual cost of living survey, Dubai and Abu Dhabi fell out of the world's top 25 most expensive cities. Dubai dropped from 19 to 26 while the UAE's capital city was rated 40 as compared to 22 in the previous year's ranking of the world's 209 most expensive cities.
Market analysts attributed this to the decline in rents, strengthening of the dollar-pegged dirham against other currencies and lower oil prices. They believe that, going forward, VAT will not have a big impact on the UAE's cost of living because the recent measures announced by the UAE government such as freezing and reducing certain fees across different sectors of the economy will have a much bigger and positive effect on the finances of UAE residents.
Anita Yadav, head of fixed income research at Emirates NBD Research, cited the decline in property rents as the biggest reason for a drop in the UAE's cost of living. Other factors were low oil prices last year and strengthening of the US dollar-pegged UAE dirham, which resulted in cheaper imports of food and other items into the UAE.
"Last year, oil prices stayed low and falling rents helped lower the cost of living. Rents, which are the biggest burden on UAE residents, fell 10 to 15 per cent last year and this year they are down by 5 to 10 per cent," she said, adding that "a strengthening dirham means the cost of food imports declines, which has an effect on the cost of living in the UAE."
Yadav said the UAE "government is committed to make sure that cost of living for its citizens has gone down as we have seen with the recent announcement of reforms and regulations by the authorities".
Rajiv Kumar, senior executive offer, Phillip Capital, also cited the rental decline as one of the biggest factors that made the UAE more affordable.
"Rental constitutes a big chunk of everyone's budget. We have seen rents come down. Even if they didn't come down, they didn't increase either," Kumar said, adding that for the past three quarters, property prices have been decreasing due to oversupply.
He also welcomed the government's recent steps to either freeze or lower fees across different sectors.
"A lot of federal taxes are not going to be increased and certain fees have been reduced or frozen; all these measures will lower the cost of living and ease of doing business, improve competitiveness and boost the overall economy," he said.
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Commenting on VAT's impact on cost of living in the UAE, Kumar said the levy is not a big amount when compared globally. "Going forward, the cost of living will go down despite the introduction of VAT because the government's recent initiatives will have a far-reaching effect."
Nimish Makvana, senior partner at Crowe, said rents had dipped in Dubai and Abu Dhabi because more projects were delivered and many more are in the pipeline to be handed over.
"Due to reduction in commercial rents, the UAE becomes more affordable and competitive for retailers, who pass on these benefits to consumers and end-users," Makvana said, adding that when the market becomes competitive, consumers benefit by availing of various offers and promotions.
According to Mercer, the two UAE cities are still the most expensive in the Gulf. Globally, six out of the top 10 most expensive cities are in Asia, with Hong Kong topping followed by Tokyo, Zurich, Singapore, Seoul, Luanda, Shanghai, Ndjamena, Beijing and Bern rounding off the top 10 cities. Tashkent, Tunis, Bishkek, Banjul and Karachi are the top five least expensive cities.
"On the whole, most Middle Eastern cities have dropped in the ranking due to decreases in rental accommodation costs throughout the region," said Yvonne Traber, global mobility product solutions leader at Mercer.
By Waheed Abbas
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