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There have been reports in recent weeks that the commercial real estate market is starting to make a comeback and that rents are likely to continue increasing. I have been asked if this is true. As with most other things, I think it really depends on the area where you want to invest.
Although rents have started to go up, landlords are cautious because the same laws apply in the commercial sector as they do in the residential sector. This means that rents for existing tenants can only be increased by a maximum of 20 per cent, and only if the rent increase calculator allows it. This has also eased concerns of tenants about landlords charging excessively high rents.
We have certainly seen rent increases in many parts of Dubai, particularly in the Business Bay area, which is becoming increasingly popular with investors, as well as Jumeirah Lakes Towers (JLT). Before rents started to rise, a shell-and-core office in Business Bay was priced around Dh50 per square foot. The same property is now being leased for Dh60-Dh80 per square foot. Offices with basic fitouts can go for up to Dh140 per square foot, depending on the property. We have seen similar increases at JLT.
A destination city
As to what caused rents to start increasing, Dubai's winning bid to host the World Expo 2020 is definitely a key contributing factor, as it helped create a positive market sentiment. The city was already known worldwide, but the Expo success helped further define Dubai as a place that people, especially investors, want to be part of.
The successful bid has led to new businesses being set up in Dubai, including large multinational organisations. This has resulted in an increased demand for commercial property, leading to rent increases in a healthy and organic way.
The logical question now is, should investors add commercial property to their portfolios? Commercial property should definitely be considered by all investors. However, the type and location of the property in question should be taken into account.
When rents are increasing, business owners are better off buying commercial property rather than paying rent. They are practically investing their capital in an asset that they can sell or lease should they no longer need the premises for their own business.
I usually find that investors of commercial property would rather continue to invest in more commercial properties, while those with a residential portfolio likewise continue to invest in residential property. If you do decide to invest in commercial property, it is important to speak to a realtor who specialises in the commercial sector, who can advise you on the areas that offer the most profitable returns.
As to what will happen in the future, it is impossible to say. Rents have increased, but I think these increases will slow down, partly because the market is much more regulated. The fact that the government has introduced restrictions should be good for both tenants and owners alike.
The government is focused on ensuring that real estate transactions are done in accordance with the law, to avoid artificial increases in rental rates or anything that will stifle growth.
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Source: Tessa Honorica Lowe, Special to Property Weekly
Tessa Honorica Lowe is a Senior Sales and Leasing Consultant at Better Homes. She specializes in commercial property in Dubai