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On the back of strong economic growth and improved business confidence, office rents in Dubai are rising in some segments, with prime-location buildings that have good-quality amenities and higher occupancy rates driving the growth.
''Rents are generally rising in Dubai's prime office buildings that offer grade A office specification, as well as quality amenities, although it should be noted that in the majority of cases they are still below their pre-crisis peak,'' says Robin Williamson, Managing Director—Middle East Real Estate at Deloitte.
Williamson says there have been instances of rental growth of up to 20 per cent per year in areas such as Business Bay and Jumeirah Lakes Towers (JLT). However, this must be considered in context as these rents are rising from a very low base.
There are inconsistencies in the figures released by various property agencies, but most of them agree that Dubai's rental market is strengthening, with vacancy rates falling due to growing occupier demand, particularly from international businesses.
''The strong occupier demand over the past 18 months from international corporates is attracting new overseas investors looking for high-quality and relatively secure office investment stock,'' says Nick Maclean, Managing Director of CBRE Middle East.
''Overall, though, the rate at which office rents are increasing is determined, as in all other markets around the world, by location, quality, legal title and, increasingly, the landlord's reputation.''
According to a CBRE report, office rents in Dubai are still rising, with average prime central business district (CBD) rents up 3 per cent quarter-on-quarter and 25 per cent year-on-year, based on figures from the second quarter of this year. The average annual prime rental rate is now around Dh1,884 per square metre and this is expected to increase further within the short term, amid strong economic growth and rising business confidence.
The International Monetary Fund recently upgraded its UAE growth forecast for 2014-19 to an average of 5.5 per cent and 8 per cent in 2020, the year when Dubai will host the World Expo. Without the Expo, growth is expected to be about 5 per cent during the same period.
The emirate's growing business optimism is also evident in the first quarter Business Confidence Index released by the Dubai Department of Economic Development. The index has recorded an almost 20 per cent increase over the same period last year, indicating business expectations are positive.
Many global companies that already have a footprint in Dubai are upbeat about the growth potential in the region and are looking to upgrade or relocate to more spacious and better offices.
''The Dubai office market is very popular now and it has gained a lot of attention for its strategic location as a link between Europe and Asia,'' says Ahmad Khalaf Al Marri, General Manager of Union Properties. ''Since Dubai has become a global city and a business and cultural hub of the Middle East, many people come here to establish offices and take advantage of the city's unparalleled connectivity.''
Convenience over cost
He also points out that major infrastructure projects that are expected to come up in Dubai over the next few years will have an impact on price.
''It's not the costliest, but the most convenient for a business,'' says Al Marri. ''It also offers the advantage of growing tourist traffic and potential customers.''
However, the rental growth is not happening across the board as there has been significant new supply alongside existing vacant offices. These factors have mitigated exorbitant rental hikes. Moreover, according to JLL, there was no major change in rents in the second quarter over the first three months of the year.
''There has definitely been an increase in asking rents in some of the prime buildings within the CBDs in established locations such as Dubai International Financial Centre [DIFC] and Downtown Dubai, and also in Tecom,'' says Toby Hall, Head of Office Leasing — Dubai at JLL.
''This is, however, by no means a general increase across all buildings, as others have not experienced any increase, and due to the large oversupply of office space in most areas of Dubai, the rental increases are only marginal.''
He says while rents have grown year-on-year, this growth has only been in the order of 8 per cent and not in double figures.
Industry experts also caution to be careful when analyzing the historical growth of commercial rents in Dubai, as market offerings have changed substantially over the years from mainly shell-and-core units to fitted offices.
''With the entry of a larger amount of fitted offices into the market [which are leased at higher rates compared to shell-and-core offices], measuring growth on a general market level could be misleading, as the fitted office segment skews the results upward,'' says John Davis, CEO — Middle East at Colliers International.
In the short term, he says, good-quality buildings with efficient floor plates will experience an upward pressure on rents. For example, U-Bora Tower in Business Bay is now more than 70 per cent occupied and is likely to attract new tenants with a gradual increase in the asking rent throughout the year.
''We expect rentals to remain flat for some of the newer buildings whereby there is a large amount of supply that will take time to be absorbed,'' says Davis, citing Burj Al Salam and Conrad Hotel Offices on Shaikh Zayed Road and the expansive Bay Square development in Business Bay as examples.
There is currently around 7.4 million sqm of office space in Dubai, including Grade A, B and C offices. With more than 1.8 million sq m set to be delivered by the end of 2017, Dubai's office stock is expected to see significant growth across these segments.
According to JLL, around 100,000 sq m has been completed so far this year, with a further 500,000 sq m scheduled to be completed later this year and around 700,000 sq m next year. However, not all of these are Grade A quality.
''Most of the new supply is primarily focused on the Business Bay area, with 12 commercial office projects currently under construction,'' says Davis. ''Other new projects are scattered throughout the city, with developments under way in Dubai Internet City, primarily to accommodate future growth as it has more than 95 per cent occupancy, JLT, Tecom and the fast-developing Dubai World Central.''
Interestingly, Dubai's office market stands out because it will be seeing a significant growth in supply while at the same time continuing to have significant vacant spaces.
''There remains a large amount of supply and vacant space in the market, with average vacancies of 25 per cent,'' says Hall. ''This figure is, however, misleading as it includes both prime and secondary space. In reality, many of the most popular buildings [such as Emaar Square and the Gate Building in DIFC] have much lower vacancies. This situation can best be described as one of selective shortage within a generally oversupplied market.''
The current rental rates are expected to remain stable until a noticeable drop in vacancy rates is observed. There could be selective but marginal increases in prime locations as demand for space in these areas is strong. Market data shows that several established single-owned buildings are now experiencing close to full occupancy, primarily within prime locations such as Shaikh Zayed Road, Downtown Dubai and Dubai Internet City.
''We expect rentals to remain steady in the medium term, particularly with the large volume of new supply that has recently entered the market and further building completions expected in the second half of this year,'' says Davis.
The prevailing market sentiment is that there won't be any major correction since rentals are still somewhat below the highs achieved prior to 2008-09. ''No major increase in rentals is likely to be seen over the rest of the year, but the market has now progressed past the bottom of its cycle and rents should therefore be stable or increase slightly,'' says Hall.
Meanwhile, Williamson believes rental growth can in certain cases be considered healthy as it can stimulate developer and investor activity.
''Particularly in the case of investors, rental growth is appealing as it can act as a hedge to inflation, as well as help generate positive returns going forward,'' he explains.
The degree of growth will also be partially driven by Dubai's economic performance and other relevant factors. However, Dubai still lags behind other mature markets.
According to CBRE's semi-annual Global Prime Office Occupancy Costs survey, Dubai leads the office space market in the Middle East but only ranks 23rd globally.
Is the strata law a deterrent to growth?
The core principle of the strata law is to divide property into privately owned units and jointly owned common areas, and create a framework for the management and administration of common areas.
The strata title largely came to Dubai's office market when developers in the boom times were looking to make bigger returns by selling large areas of their buildings off-plan and at the same time reducing their liability relatively quickly.
Historically, the strata title was an important component of funding for the Dubai property market. However, there are unattractive elements associated with this type of ownership. For instance, big corporate office occupiers generally try to avoid property owned under strata titles because of the complexities associated with multiple landlords.
''Office buildings with a significant number of strata title investors are proving unattractive to occupiers that need large space,'' says Nick Maclean, Managing Director of CBRE Middle East. ''This has led to a total vacancy rate approximately 16 per cent higher than the rest of the market. As more strata title property is delivered to the market, that vacancy rate is likely to increase over the next three years.''
Incidentally, the projected new supply of 1.8 million sq m slated to be delivered in Dubai in the next three years will consist of around 50-60 per cent strata titles.
The purpose of the strata law, which was borrowed from established markets such as Australia, New Zealand and the UK, was to ensure buildings are adequately maintained and each owner proportionally contributes to the service charges.
''But one of the primary issues with the strata law in Dubai is the collection of service charges,'' says John Davis, CEO — Middle East at Colliers International.
''The law states that if an owner is overdue by more than three months, the owners' association [OA] may sell the unit to recover the overdue amount. However, as OAs are not yet able to be registered as a formal entity in Dubai, this prevents them from implementing this recovery method.''
Davis adds: ''There is still demand for jointly owned property, particularly from owner-occupiers that require smaller space.''
Find out why you should think commercial in Dubai
Source: Syed Ameen Kader, Special to Property Weekly