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There has been a lot of positive sentiment about the commercial property market in Dubai recently. Figures that point to solid economic fundamentals timed their arrival to coincide with the feel-good news of Dubai's successful bid to host the World Expo 2020, and property owners now have more reason to smile, or at least stop grimacing.
The shift in outlook kicked off towards the end of last year and has been highlighted by figures from the first quarter of this year. The encouraging statistics include the reported 12 per cent rise in the number of business licences issued in the fourth quarter to 4,706, rising further in the first quarter of this year to 5,590.
GDP growth last year was also a boon to the real estate industry, hitting 4.9 per cent.
These figures point to a rise in commercial activity in the emirate, which is expected to continue to grow at a similar pace throughout the year. While there's no doubt Dubai winning the rights to host the Expo 2020 delivered a confidence boost, the real and significant economic impact of the event will not be truly felt at least for a few years.
However, that doesn't mean the market hasn't enjoyed or made good use of the mood swing. More important, though, is the fact that the positive changes find their roots from strong economic fundamentals, a factor that has played out over the past 18 months to create the positive sentiment being seen today.
"Early last year the Dubai real estate market was in the recovery stage of the market cycle," says Dana Williamson. Head of Agency – Middle East and North Africa at JLL. "Positive performance remained largely concentrated on the best-quality projects in prime locations, with secondary locations and poor-quality projects continuing to experience high vacancy rates and stable or even falling rental values. The positive trend continued last year within selective developments in prime areas, with the large level of supply and high overall vacancy rates depressing rental pressure elsewhere.
"However, this year commenced with optimism, driven by last year's strong performance and positive sentiment from the Expo 2020. A broader recovery in the commercial market started to take place towards the end of the first quarter, with more landlords of prime products in favourable areas, such as central Dubai locations and free zones, having increased their rates by 10-25 percent."
Some analysts have been quick to credit the Expo effect for the market upswing, but Williamson says there are other more fundamental elements in play.
"The first-quarter performance has been strong, but it is hard to say whether this was an immediate effect of the Expo 2020 announcement," she says. "High activity levels in commercial real estate are due to forecasted company growth and flight-to-quality in combination with continued optimism."
Prevailing conditions continue to drive the positive market performance, including the expected recruitment drive of businesses. The Department of Economic Development has reported that 39 per cent of businesses were planning to increase their headcount in the first quarter. Add the large number of newly licensed businesses to this mix and the emirate could continue to see a major influx of people.
Williamson sees this as having an impact across all sectors, with a particular influence in health care, finance, hospitality, technology and IT.
"Current headcount growth projections sit between 15 per cent and 30 per cent over the short to medium term." she says. “As companies seek to grow, a review of their portfolio for potential consolidation or upgrade of premises results in increased interest for relocation. However, this desire to relocate has not always translated into actual relocations due to the limited supply of suitable office stock in the popular areas."
This is a view shared by other market analysts. In its recent Dubai Commercial Market Outlook Spring 2014 report, Cluttons noted that demand for Grade A space was strengthening.
"Occupier demand continues to reflect the confidence injected into the market through the Expo 2020 win and overall increase in economic activity,'' the report states. "Linked to this has been a steady rise in the level of demand for prime Grade A space in particular. As a result of the strengthening demand, rents continued to climb. Last year, prime office rents rose by 8 per cent, with a further 10 per cent increase being recorded in the first quarter this year, pushing average Grade A rents to Dh220 per square foot."
According to figures from Cluttons, Dubai International Financial Centre (DIFC) continues to lead the pack in the upper rental limit for office space, with Downtown Dubai and Tecom second and third respectively. Jumeirah Lakes 1bwers and Shaikh Zayed Road locations are hot on Tecom's tail.
Buildings in centrally located areas, free zones and those under single ownership continue to witness the highest level of demand.
"Locations with high demand include areas in Shaikh Zayed Road, especially those close to a Metro station. Dubai Internet City, Dubai Media City, single-owned buildings in Business Bay and DIFC," says Williamson.
Free zones are continuing to perform well too, with the most popular reporting occupancy rates of between 80 per cent and 90 per cent, according to Williamson.
"Dubai Internet City, Dubai Media City, DIFC, Dubai Airport Free Zone, Jebel Ali and Dubai Silicon Oasis are above the average Dubai-wide take-up of onshore buildings," she says. "Rental rates in popular free zones are now in line with or above prime rents in non-free zone areas."
However, Williamson offers a word of caution, noting that not all free zones are the same and that those located in the peripheral areas of Dubai are still seeing vacancies of around 40-60 per cent.
Despite a demand-driven strengthening of Grade A office space, one expert sees the commercial office market as still being comparatively cheap.
Matthew Green, Head of Research and Consultancy - UAE at CBRE Middle East, explains that Dubai stands better in terms of peak rates when compared to other global financial centres. "However, with demand levels increasing steadily, the office market is set for a period of steady rental growth.
"While the recovery is exhibiting more universal signs of improvement, we can still expect that strata properties will continue to struggle in building their occupancy rates, particularly as fractional spaces will dominate the development pipeline over the next four years."
In other commercial sectors, demand for retail space in areas with high footfall and visibility, such as malls, continues to perform well Developers have responded to this demand, with projects such as Citywalk and The Beach from Meraas.
Ambitious projects such as the Dubai Canal and the recently announced Mall of the World are other initiatives likely to attract significant attention from investors and further consolidate Dubai's position as a regional commercial and tourism hub.
“Dubai continues to see very strong investment appetite, driven by the quality of its infrastructure, the country's stable political environment, economic growth and a real estate market that is maturing and offering investors significant capital returns," says Green. "This has resulted in Dubai attracting significant investment from across the region, at a time when other regional markets lack stability.
"The emirate's residential sector has benefitted the most from this, seeing the majority of inward capital flow" ...
The hospitality sector continues to make a contribution as well, with more than 4,000 new hotel keys set to be delivered this year, taking total room inventory to around 67,000 by the end of the year.
"In addition, there is also a further 2,000 hotel apartments set to be delivered during the course of the year,” says Green. "The focus of new supply is largely business orientated, with the majority of new rooms being delivered in the Business Bay and Shaikh Zayed Road sub-markets. With a lesser supply of leisure-focused resort property in locations such as Dubai Marina, Jumeirah Beach Residence and Palm Jumeirah."
With the commercial property market in Dubai driven by the success of companies operating in, the outlook for the next two years appears positive. If the growth trend of companies continues as expected, it will likely result in a steady improvement in the commercial market over the short-to-medium term.
The biggest threat to this may be the landlords themselves, who, experts point out, must be careful not to be increase their rates to unsustainable levels.
Source: Stuart Matthews, Special to Property Weekly