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In simple terms, Dubai's commercial market is healthy. Fundamentals are steady and it's safe to say the numbers indicated from the Knight Frank report suggest that we're in good shape. While reported annual growth figures look impressive (up to 35 per cent in Business Bay) there are two fundamental points to consider.
Firstly, following the infamous credit crunch years of 2009-12, landlords have been tempted to take advantage of stimulated tenant appetite, seeking to capitalise on a change of fortunes in the short term. This is achieved by offering tenants and prospective tenants attractive discounts to secure leases. Specifically true for vacant single landlord buildings and strata buildings with low vacancy, or those delivered to the market immediately prior to or during this period.
Indicatively, however, once a building becomes leased, there is a momentum shift from the tenant to landlord. Coming out of one of the worst and most volatile real estate recessions in 2012, Dubai's landlords were fiercely competitive. Our reported 35 per cent increase is, therefore, not overly surprising and reflects sharp improvement off a very low base.
As income streams become more satisfying, I would anticipate a more modest and less volatile reporting in next quarter's rental movement.
Secondly, supply of new office space over the past 24 months has been relatively limited. This is a result of either development finance not being available or market fundamentals halting projects at the feasibility stage. This has supported a natural market tightening, providing an uplift in rental pressures.
In particular, well thought-out single landlord schemes in desirable and established parts of town, e.g. Dubai International Financial Centre (DIFC), Dubai Media City, Dubai Internet City, Business Bay and Downtown Dubai, have been few and far between.
So much so that those that built well-specified schemes throughout the recession and delivered with well-planned and pre-emptive leasing strategies, are now seeing the rewards.
The underlying component driving a building's investment value is the tenant, with each specific tenant providing a source of sustenance to landlords and developers. One such measure of an economy's health is HSBC's Purchasing Manager's Index (PMI), which represents the level of expansion or contraction of the manufacturing sector. It has hovered in the high 50s for the past couple of months (anything above 50 is a sign of expansion and, therefore, a good thing).
The Knight Frank Q3 Dubai Offices Market Update forecasts approximately 7 million sq ft of office space arriving in the market by the end of next year, including single landlord schemes by Tecom in Dubai Internet City, Dubai Design District and the Dubai World Trade Centre's Dubai Trade Centre District on Shaikh Zayed Road. In addition, One JLT will provide Dubai Multi Commodities Centre-licensed companies with a single-landlord option further down the line.
In DIFC, while these are not strictly new developments (rather developments whose arrival to market is timed to ensure government rental caps are at the healthiest possible starting point), the emergence of Index Tower, Central Park Towers and Burj Daman all fighting to secure tenants within the free zone should help facilitate churn and movement among existing tenants. This will in turn present opportunities for new entrants into Dubai.
As the DIFC gears up to put its recent $700 million (Dh2.57 billion) capital raising to good use, I anticipate infrastructure and property developments to provide an injection into tenant interest within the free zone, with some exciting times ahead.
I feel it's important to caveat the statistics we present relating to prime vacancy. This really doesn't take into consideration the flagging secondary stock that lies dormant, but instead to the prime cut, the Wagyu rib-eye of property, and is a measure of those developers who have catered for their guests and is an indicator of the upper tier, and the considered corporate occupier.
Clearly, there is commercial property in Dubai that may be deemed outdated, and which remains a challenge to transact upon. This stock is dominated by an opaque and private strata owners market, and as such a challenge to track the occupational dynamic. However, this tranche of the market is not covered in our report.
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Source: Jon Mcgloin, Special to Property Weekly
The writer is Senior Surveyor—Commercial at Knight Frank's Dubai office. He has more than ten years of experience in the Middle Eastern and European commercial real estate market