By Stanley Carvalho and Praveen Menon
ABU DHABI/DUBAI (Reuters) - When American Stephen Perry lost his job at a bank in Dubai following the emirate's debt crisis in 2009, he was lucky to be hired by one of neighbouring Abu Dhabi's government firms.
He didn't move house, so it didn't disrupt his wife's job or the kids' schooling, despite the daily 130-kilometre (80 mile) commute each way. That was still better than the nearly 200 kms he used to put up with in the United States, and he considered it a price worth paying to keep the liberal, cosmopolitan lifestyle in Dubai.
But now Perry is in a dilemma and might not be able to manage the commute after all.
Last September, Abu Dhabi, the capital of the United Arab Emirates, a federation of seven Gulf emirates, told state employees that if they lived outside its city limits they would not be eligible for housing allowance, which accounts for about a third of their salaries.
The government has said the new rule was aimed at cutting traffic and road accidents, a nod to the risk of commuting on the busy desert highway between Abu Dhabi and Dubai.
But analysts and industry experts say the policy is designed to help absorb a glut of new high-end homes in Abu Dhabi and revive state developers such as bailed-out Aldar .
"Many new units have come up in Abu Dhabi, reaching the peak of its development cycle. The move is to create new demand and make sure the vacancy rates don't reach high levels," said Matthew Green, research head at property consultancy C.B. Richard Ellis in Dubai.
The Abu Dhabi government declined to comment on the rulings implications for the property market.
About 10,000 new houses are expected to hit the market by the end of the year, with a further 43,000 by the end of 2015.
With Dubai's property market still yet to fully recover from the crisis, Abu Dhabi's attempt to boost its own struggling real estate sector once again highlights the competition and shifting dynamics between the two tiny sheikhdoms.
Oil-rich Abu Dhabi is keen to keep more of the wealth it generates, rather than having to support its flashy neighbour. Dubai's passion for tall towers and fancy hotels landed the emirate with massive debts, forcing Abu Dhabi to step in with a $20 billion bailout.
Home to the world's largest shopping mall, the tallest building and a palm-shaped artificial island, Dubai, the Middle East's party capital, has a 90-percent expatriate population.
"Dubai has something for everyone, and for an expatriate like me it is home; I don't feel out of place. I think I am echoing the sentiments of many expatriates," said Sandra Haddad, a Lebanese national who works in Abu Dhabi's aviation sector.
AN EMOTIONAL ISSUE
While Abu Dhabi is trying to shake off its more staid image by hosting an annual Formula One race and developing branches of the Louvre and Guggenheim museums, Dubai remains a bigger draw for shoppers and tourists.
Dubai's restaurants, hotels and nightclubs have helped it stage a gradual recovery, in contrast to Abu Dhabi, which is still struggling to emerge from the crisis.
Lower rents, better schools and hospitals make Dubai more expat-friendly, and thousands commute from there to Abu Dhabi for work.
Precise figures for the number of Abu Dhabi government employees living outside the emirate have not been released, but analysts have estimated it at roughly 15,000-20,000. Including family members, that would mean around 50,000 people could be affected by the change of rules on housing allowance.
With the rule set to be implemented at the end of this month, people are fearful they will have to move if it is strictly enforced. Some have asked their employers for exemptions.
"The commuting and accidents argument is convenient. It was never about roads," said one western executive working for an Abu Dhabi government department.
"A home is an emotional issue. You can't tell someone where to live. There ought to be some give and take."
The Abu Dhabi government said some exceptions could be made, but declined to elaborate.
"The circular is binding on all Abu Dhabi government employees. Nonetheless, special cases that require exception will be considered and assessed. Appropriate decisions will be made to each case separately," it said in a statement.
In the meantime, employees' attempts to work around the rule are fuelling a recovery in Abu Dhabi's rental market, with people taking out leases on studios and one-bedroom apartments to prove residency on paper while continuing to live in Dubai.
"My spouse has a job in Dubai, our kids are at a crucial stage of high school. I've taken up a studio in Abu Dhabi that swallows up half my rental allowance," said one government employee.
Rents for studios and one-bedroom apartments have jumped by 25 percent in areas such as Khalifa city on the outskirts of Abu Dhabi, according to Mahmoud Hussain, a manager with property consultants Cluttons.
Dubai, on the other hand, will lose out if its current residents move or spend less time in the emirate, analysts said.
Overall, prime residential rents in Abu Dhabi grew 8 percent in the first quarter this year and remained stable in the second.
"This can partly be attributed to the government regulations to reduce the level of commuting from Dubai," said David Dudley, regional director of Jones Lang LaSalle, adding other factors such as government spending may have also contributed.
But some are sceptical that the new rule will have much impact.
"Not everyone is going to make the move, so rush hour traffic won't decrease, nor will we see a surge in demand for homes in Abu Dhabi, at least in the short term," said an executive of an Abu Dhabi government-owned entity, who declined to be named.
"We have to be civilised and make exceptions based on the merits of the case," he said.
(Editing by Carmel Crimmins and Will Waterman)