Abu Dhabi: The municipality fee on tenants in Abu Dhabi that is being collected starting this month will create the perfect storm in raising the cost of living in the emirate following hikes in water and electricity tariffs as well as fuel subsidy cuts.

Analysts say that the fee, amounting to 3 per cent of a tenant’s annual rent, is likely to push down consumer spending in Abu Dhabi, especially amid a backdrop of uncertainty in the economic environment and job cuts across many industries.

Just recently Abu Dhabi had reinstituted a 5 per cent rental cap, which would ease some of the tenants’ cost of living. “This [the municipality fee] will have an impact on people’s spending levels, and for some, it just might be the thing that sets them over the edge in considering whether they can actually afford to be here or not. It’s only 3 per cent of your rent, but it will certainly get people’s back up.

“We have a similar system [municipal fee] in Dubai, and I don’t think it’s off-putting for the market … so I’m not sure if it’s sufficient to have a particularly negative impact on the property market,” said Matt Green, head of research and consulting at CBRE Middle East.

He pointed that Dubai has a similar municipality fee on tenants, albeit slightly higher at 5 per cent, and that has not been detrimental for investors or tenants.

Edward Carnegy, director and head of consultancy Cluttons Abu Dhabi, agreed with that view, adding that the fee was a necessity for the government in order to increase and diversify its revenue sources.

He said, however, that the main challenge with the fee is that it is backdated to February 2016, meaning tenants will have to pay a lump sum this month.

A statement on Thursday by the municipality said the calculation of the fee will apply — not from January 2017 — but from the February 2016, which is the date of issuing Resolution No 13 for 2016 by the Executive Council on tenant contracts.

“Fees accumulated since the Resolution had been taken are being added to Abu Dhabi Water and Electricity Authority (Adwea) bills as a lump sum. Applicable fees in the future shall be added to Adwea monthly bills starting from January 2017,” according to the statement.

The municipality fee is being collected starting this month by Adwea, and is applicable to tenancy contracts in the emirate including in Al Ain and in the Western Region. Property owners, however, do not have to pay the fee.

The municipal fee in Abu Dhabi mirrors the 5 per cent municipality charge collected in Dubai by the Dubai Electricity and Water Authority, and the 2.5 per cent fee collected in Sharjah at the time of rental contract renewal.

The introduction of the fee is the latest in measures by Abu Dhabi and the broader UAE to increase government revenues amid a decline in oil prices, which have fallen from mid-2014 highs of over $100 a barrel to lows below $30 last year.

In January 2016, Abu Dhabi hiked water and electricity tariffs, with the country now also in the process of introducing Value-Added Tax (VAT), which is set for implementation starting 2018. In its first year of implementation, VAT is expected to generate Dh12 billion, while VAT revenues will rise to between Dh18 billion and Dh20 billion in the second year.