UAE expatriates and the bottom line A briefing paper by The Economist Intelligence Unit Sponsored by UAE expatriates and the bottom line Contents About this report Introduction Personal finance for professional expatriates Cost of living backdrop The savers © The Economist Intelligence Unit Limited 2014 UAE expatriates and the bottom line About this report U AE expatriates and the bottom line draws on The Economist Intelligence Unit’s Cost of Living annual survey data, which track over 50,000 key prices in over 130 cities around the world © The Economist Intelligence Unit Limited 2014 The report - sponsored by Friends Provident International - was written by Jon Copestake, The Economist Intelligence Unit's chief retail and consumer goods analyst and editor of the EIU Worldwide Cost of Living survey The report’s editor was Adam Green UAE expatriates and the bottom line Introduction T he case for living and working in the United Arab Emirates (UAE) is compelling Expatriates make up around 90% of the population and 95% of the workforce, suggesting that if 7.8m people have made the move, they must have done so with good reason Dubai and Abu Dhabi have long benefitted from a benign business environment, helped by the creation of nearly 40 business zones, which welcome foreign investment and cater to a range of industries Multinationals have put down roots, driving a diverse expatriate jobs market from the oil and gas refineries of Abu Dhabi to Dubai's International Finance Centre and Media City Western expatriates play a prominent role The UAE is home to around 250,000 British expatriates, the largest Western contingent The population of US workers is lower at an estimated 40,000 nationals, mainly in Dubai Australian numbers are lower still, with 7,000 expatriates divided equally between Abu Dhabi and Dubai This compares with an Indian population accounting for almost one-third of the UAE © The Economist Intelligence Unit Limited 2014 population and working in a range of jobs from the bottom to the top of the income scale It is not just the business environment that drives economic immigration The UAE is widely perceived to be a regional safe haven Laws and cultural restrictions are more liberal than other Gulf countries such as Saudi Arabia, and the UAE is sheltered from regional instability Dubai has an advanced retail tourism sector, with sunshine and shopping malls attracting millions of foreign visitors every year Factoring in a tax-free income and the worsening economic climate in the West, it is easy to see why the foreign-born population of the UAE has risen so quickly But it would be naïve to paint Abu Dhabi and Dubai as expatriate utopias There are pitfalls, and much will depend on where you are moving from, whether you are moving with your family and what type of job you hold Equally, a business-friendly environment does not necessarily equate to a benign framework for all employees Those working in Dubai may face hidden costs, high prices and a lack of personal rights UAE expatriates and the bottom line Personal finance for professional expatriates A tax-free income is the primary cost-of-living benefit in the UAE Expatriates working in Dubai or Abu Dhabi have zero levies against income An expatriate earning US$100 ,000 in the UAE realises the full amount Elsewhere the same salary would result in a take-home pay of just US$66,000 (in the US), US$70,000 (in the UK), US$72,000 (in India) and US$73,000 (in Australia) The relative gains in taxation slightly favour single people, since those with spouses and children tend to benefit from some tax allowances in their home countries A single person earning a gross salary of US$100,000 in New York can enjoy the same standard of living (and spending) on less than half that amount in UAE Nonetheless, as a whole, it is the tax-free environment that has proved a major draw for expatriates In addition to the tax benefits, the cost of some goods and services are lower than in Western countries Abu Dhabi and Dubai are 38% and 42% cheaper than Sydney, respectively, based on the basket of goods used by The Economist Intelligence Unit's Worldwide Cost of Living survey The gap is less pronounced but still significant for London (35% and 37%) and New York (27% and 30%) Of course, this is not true of India, a major source of UAE expatriates The same basket of goods in Dubai and Abu Dhabi are respectively 55% and 62% more expensive than New Delhi, and 70% and 75% more expensive than Mumbai The cost-of-living benefits, however, need to be balanced against a variety of challenges © The Economist Intelligence Unit Limited 2014 Property costs have a major impact on the personal finances of expatriates Spiralling rents have forced Dubai to issue rental caps on accommodation, while prices in Abu Dhabi remain unconstrained Rental practices are difficult to navigate and can require big initial outlays Landlords have traditionally asked tenants to pay for entire rental periods of six or 12 months in advance This is easing into the more accepted global etiquette of paying monthly, but rising rents have led to sharp practices from some landlords who attempt to evict tenants mid-period to secure higher rents Preventative legislation is in place, but enforcement is patchy and tenants may face rent rises with 90 days’ notice In absolute terms, rents in Dubai and Abu Dhabi for high-end accommodation compare favourably with those of London, New York and Sydney, but not New Delhi Mumbai rents are traditionally high, and for one-bedroom apartments closely match those of the UAE Also, residential compounds commonly include facilities such as gyms and pools, providing an added benefit But while expatriate-level rents in London and New York are higher, they sit atop a very different rental market with a wider range of options and prices available In the UAE, the situation is more polarised, and expatriates tend to have little choice but to rent high-end accommodation Clearly, these dynamics are advantageous to expatriates who own property in the UAE, but the majority prefer to rent because they rarely settle for the long UAE expatriates and the bottom line term In addition, many are uncomfortable with the legal environment or the “boom and bust” property trajectory in recent years Lastly, new regulations since the 2009 property crash mean expatriates need far higher initial down payments to buy property Schooling is a second challenging expenditure for expatriates Research by The National, an Abu Dhabi-based newspaper covering the UAE, puts average annual Indian school fees in the UAE at AED22,000 (US$5,995) while average British school fees in the UAE are more than double that, at over AED50,000 These averages mask big disparities, with some annual fees rising as high as AED 94,000 Fees are set to rise again, with schools expecting to increase fees by between 1.7% and 3.5% in the coming year, which will come as a shock to some expatriate families.1 The rising cost of education has made expatriates reconsider the length of their stay in the UAE Fees tend to ratchet up at secondary-school level, driven by the salaries needed to attract the quality of teachers required As a result, some http://www.thenational ae/business/personalfinance/help-is-here-foruae-expats-facing-risingprivate-school-fees © The Economist Intelligence Unit Limited 2014 expatriate families plan their stay to coincide with a move home when their children reach secondary-school age This allows them to set career goals in five or ten-year periods and provides an opportunity to re-evaluate when a natural break in their children's education occurs At the day-to-day level, professional Western expatriates also face some cost of living increases With no domestic agricultural sector, most food demand is fulfilled by costly imports Popular brands have a premium attached, and goods of assured quality may come with a disproportionately high price tag The term "hostage expatriate market" is commonly used for cities such as Luanda in Angola, where businesses impose extortionate prices in the knowledge that expatriates can afford to pay Dubai and Abu Dhabi not quite fall into this category, but price differences for expatriates in terms of the costs of common goods and durables are more extreme than in cities like London and New York, where such differences not exist UAE expatriates and the bottom line Cost of living backdrop B roader factors are also shaping expatriate personal finances Benefits such as pension schemes, a key component of salary packages in Europe, North America and Australia, are largely unsupported in the UAE, although this may be partly driven by a recognition that many expatriates will have moved on before they retire Those who benefit from the tax-free environment usually have no option but to make provision for their own retirement, although much will depend on the package negotiated with their employer Secondly, provisions for school fees, once a part of many expatriate packages, are starting to come out of the typical contract for professionals in the region as competition for jobs heats up Second, there is the consumerist environment, which challenges the financial discipline of some expatriates With shopping firmly ensconced as a leisure activity in UAE, especially in Dubai, Western expatriates often struggle to keep control of their purse strings, with some incurring high and occasionally ruinous debts Low long-term interest rates and easily obtainable credit have driven a debt-fuelled spending spree Others have engaged in risky investments that proved vulnerable to market shocks such as the 2008 global financial crisis or Dubai's near-default thereafter, when a number of foreign investors fled http://www thenational.ae/ thenationalconversation/ editorial/uae-credit-cardinterest-rates-are-too-high Part of the problem is the cost of consumer credit According to one study last year, the © The Economist Intelligence Unit Limited 2014 average annual percentage interest charged on credit cards issued in the UAE stood at 37.75%, compared with 17.5% in the UK.3 Another factor has been a hangover from the financial crisis, with job losses further undermining the ability of expatriates to service the debt that resulted from their pre-2008 excesses Faced with a personal credit bubble, the response from the UAE authorities has been mixed In 2011 the UAE Central Bank capped personal loans at 20 times the monthly salary of borrowers, but consumer credit has continued to rise Next year a national credit bureau should be fully operational to provide banks with credit data about consumers and thus enable lenders to make more informed choices about their customers However, it is not the first time such an institution has been announced, and the quality of credit data has been questioned in the past There are also tougher regulations in place since Dubai’s 2010 crisis Expatriate loan defaulters now face an enforced travel ban until their debts are cleared Indebted expatriates unable to find employment in Abu Dhabi and Dubai face the “Catch 22” of being unable to clear their debts by working elsewhere Jail terms for loan defaulters are not uncommon, offering a stark warning for expatriates to consider all the financial implications before making the jump into the UAE UAE expatriates and the bottom line The savers O f all the expatriate groups in the UAE, the Indian contingent is most famed for their frugal financial behaviour Indians form by far the largest foreign-born community in UAE, and while construction workers make up a large portion of the community, there are increasing numbers of professionals The Indian Embassy in Abu Dhabi lists over 40 major Indian companies with offices in UAE, with the majority operating in highly skilled technology or finance sectors From high to low incomes, the personal finance behaviour of the UAE’s non-resident Indians seems to be quite uniform: they are frugal and money-conscious, resisting many of the spending temptations that bedevil some Western expatriates, even when they have similar financial resources One 2013 survey showed that non-resident Indians put aside an average of 70% of their disposable income for investment and saving The UAE-India “remittance corridor" is also cheaper than from other locations Specialist money transfer firms such as UAE Exchange, Al Ansari, Emirates NBD and Western Union, charge fixed fees as low as AED15 on transfers to India and the Philippines For UK expatriates, the fee can be two or three times higher While there is some variation - fixed rates of up to AED80 can apply for express payments - the average cost of © The Economist Intelligence Unit Limited 2014 sending US$200 to India from the UAE is about US$5 Sending the same amount to India from Australia will cost three times as much Family support is a significant goal for remittances, with over 80% of Indian expatriates in the UAE having between two and five dependents to support, usually in the subcontinent India’s less developed pension system compared with Europe or North America drives expatriates towards supporting their parents and children rather than taking out pension schemes Some 90% invest heavily in their children's education in the expectation that, in turn, their children will be able to support them when they reach old age Many also receive advice from family members on where to save and invest back in India Earning in dirhams translates favourably into a comfortable retirement, especially given the current weakness of the Indian rupee For investment opportunities, India is also an attractive prospect for the savvy, better-off white-collar Indian investor– and remittance and investment flows from the UAE to India signal clear interest among wealthier non-resident Indians in investing back home and taking on more risk While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report Cover image - © Filipe Frazao/Shutterstock LONDON 20 Cabot Square London E14 4QW United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8500 E-mail: london@eiu.com NEW YORK 750 Third Avenue 5th Floor New York, NY 10017 United States Tel: (1.212) 554 0600 Fax: (1.212) 586 1181/2 E-mail: newyork@eiu.com HONG KONG 6001, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: hongkong@eiu.com GENEVA Rue de l’Athénée 32 1206 Geneva Switzerland Tel: (41) 22 566 2470 Fax: (41) 22 346 93 47 E-mail: geneva@eiu.com ... warning for expatriates to consider all the financial implications before making the jump into the UAE UAE expatriates and the bottom line The savers O f all the expatriate groups in the UAE, the Indian... in the UAE, but the majority prefer to rent because they rarely settle for the long UAE expatriates and the bottom line term In addition, many are uncomfortable with the legal environment or the. .. The Economist Intelligence Unit Limited 2014 UAE expatriates and the bottom line About this report U AE expatriates and the bottom line draws on The Economist Intelligence Unit’s Cost of Living