ABU DHABI: A RENTIER STATE IN MORE WAYS THAN ONE

C O N F I D E N T I A L ABU DHABI 002345 SIPDIS STATE FOR NEA/ARP, NEA/RA, EB, EB/CBA, EB/ESP, M/OBO/REPM/RPM, M/OBO/OPS/AM/NEA FOR DAN ROMANO AMEMBASSY TUNIS HOLD FOR FSI: OLIVER JOHN E.O. 12958: DECL: 5/12/13 TAGS: ECON EFIN EINV ETRD TC SUBJECT: ABU DHABI: A RENTIER STATE IN MORE WAYS THAN ONE ¶1. (U) Classified by Charge D'Affaires Richard A. Albright, for reasons 1.5 (B) and (D). ¶2. (U) Local press reported that commercial and residential rents in Abu Dhabi jumped between twenty and thirty percent in the last year as the UAE capital maintained its status as one of the world's most expensive real estate markets. Western property consultants confirmed that the increase encompassed the whole rental market and not just unit prices, and was primarily driven by a sharp rise in commercial real estate rates mandated by the government body which oversees building construction and rental in the capital. Last year real estate grossed approximately $5.53 billion -- a whopping nine percent of the UAE's total GDP, making it the third largest GDP component after oil and manufacturing. Return on investment in real estate ranged between 6-8 percent, considerably higher than the five percent on stocks or 1-2 percent on bank deposits. ¶3. (C) Rents in the capital are likely to increase further in the next two years as the Abu Dhabi municipality has temporarily decided to stop the common practice of demolishing old buildings and replacing them with new, larger structures. The average operational life of a building in the UAE is generally less than thirty years due to poor construction materials and techniques compounded by the excessively hot and humid weather which adversely impacts concrete and metal. Given the continued demand for commercial and residential space, the moratorium on building replacement suggests that the Khalifa Committee, chaired by Abu Dhabi Crown Prince Shaykh Khalifa bin Zayed, will likely raise the rental floor (i.e. the minimum amount for which a given type/size of property may be rented) even higher in the years to come. (Note: The Khalifa Committee is the giant, Abu Dhabi government-funded real estate cartel which controls residential and commercial construction and rental in the greater capital area. The primary mechanism for redistribution of oil wealth to the general citizenry, the Khalifa Committee funds real estate projects, supervises construction, arranges for the leasing of buildings, and apportions rent to the ostensible owners -- effectively mandating minimum rental prices for both commercial and residential real estate. Unrentable facilities are simply left vacant, at considerable cost to the government. End note.) ¶4. (C) Comment: Due to the lack of real estate options on the island of Abu Dhabi, landlords know tenants have few options when confronted with government mandated rent increases. The moratorium on destroying and replacing older properties in Abu Dhabi -- a decision made by the Khalifa Committee -- reflects a belt-tightening decision on the part of government officials. End comment. Wahba