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From the perspective of a chartered surveyor who has worked in the Middle East before the credit crunch, it's safe to say that I have since experienced first-hand the turning of one of the more volatile commercial real estate life cycles.
As the occupational market has moved from what I describe as an extended period of stabilisation and into recovery and growth, now is a good time to ask, ''What is the commercial real estate life cycle and how is this ultimately determined?''
Typically and historically, the commercial real estate market's life cycle offers an eagle eye of the market in its entirety and provides an indication of the performance and future prospects of assets. Performance is typically directly linked to the transaction price of an asset and its forecast returns, both by way of rental receipts and capital growth.
A market with a healthy outlook tends to be described as having strong fundamentals, with falling vacancy rates, steady rental growth and opportunities for new development.
While crystal-gazing is not within the scope of our services, surveyors will determine an asset's prospects, whether for end user occupation or for investment, high-lighting any risks involved. However, when we talk about fundamentals, we look at products both currently in the market and those that will be available in the future, the suitability to serve existing and future occupiers and the product pipeline.
All of these will have a direct impact on the positioning of that market and its place within the commercial real estate life cycle.
Supply and demand
Dubai's property market is exposed to a range of macroeconomic and microeconomic forces, from the macroeconomic performance of the global financial markets and foreign direct investment, to Dubai's safe haven status, the regional political stability, idiosyncrasies of individual assets and the strength of the balance sheet of occupants. All of these contribute to the movement away from the point of equilibrium (i.e. growth or decline) and all of these can be attributed to supply and demand.
In broad terms, when demand is greater than supply, we see an upward shift in rents and an increase in values in a landlord-driven market, as landlords have greater control of rents.
When supply exceeds demand, we see a downward movement in rental levels. Tenants have more choices and landlords are forced to offer terms favourable to tenants. It is a tenant-driven market dynamic, as end users now have greater control of their incentives.
From the demand side, we can view the market's immediate and longer-term outlook by analysing a number of facts and published data, i.e. the number of new businesses that entered the market last year, which was around 18,000 according to figures from the Dubai Department of Economic Development.
In addition, GDP performance will allow us to understand the general growth trend and the likelihood of companies needing future expansion. Dubai's GDP grew 4.6 per cent last year according to the Dubai Statistics Centre.
Furthermore, Dubai's successful bid to host the World Expo 2020 and other significant announcements are expected to add buoyancy to the emirate's demand side dynamic.
From a supply perspective, while certain underequipped and poorly designed buildings will remain largely vacant simply because the product does not meet market expectations, developers in Dubai are gradually being rewarded for aligning their architectural designs with international standards.
The recent introduction of the Middle Eastern Council of Offices' specification guide will also help further satisfy demand for quality stock. As an emerging economy with investment fundamentals pegged less to income and more to prevailing market sentiment, this has a more direct impact on an asset's life cycle.
A combination of investor speculation and regional capital movement linked to Dubai's safe haven status, both in and out of the investment market, could deliver increased returns in the short term, but it will create additional risk and volatility for the life cycle.
This is not always reflected in local market pricing, however, and certainly not when compared to pricing methods of established occupier markets such as London, where values are directly linked to the quality of the underlying income streams being generated within.
For example, an FTSE 100 company tied into a ten-year lease, with a transparent window into its financial solvency and rated by a specialist firm such as Fitch Ratings or Standard and Poors, will be valued at a premium as opposed to a similar property occupied by a start-up on a rolling year-on-year lease.
This is due to the inferred decrease in exposure to market movements and increased security and longevity of income.
The Dubai market, however, is less advanced in this regard, with assets typically underpinned by no more than a three-year lease, which has a subsequent impact on the asset's exposure to market sentiment and the short-term peaks and troughs.
As the market grows and develops, with occupiers and landlords building and occupying for the long term, I expect to see an interesting expanding movement in the market cycle, as market risk is diluted with that of occupational balance sheets from established tenants committing to the region, seeking to build an established home for the future.
Get some investment advice on commercial property in Dubai
Source: Jon Mcgloin, Special to Property Weekly
Jon Mcgloin is Senior Surveyor—Commercial at the Dubai office of Knight Frank. He has more than ten years of experience in the Middle Eastern and European commercial real estate market