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The commercial office market in Dubai has had an adventurous ride for the past few years, with more supply coming into the market and the current inventory taking its time to turn around as an income-bearing asset for an investor.
Is office space still a viable investment? Today’s market trends are giving more hope on this sector. The demand for offices started from 2006 onwards when there was a huge shortage of office units. The developers realised the opportunity and set the trend for a series of projects across various master developments. As the development margins were quite attractive, them being built on shell and core basis and the construction costs were much lower yet commanded a good premium on their stock, these saw their profits double.
Post-2009, there was an influx of inventory, supply poured in, but the demand faded out. In 2011-2012, some developments were either put on hold or converted into mixed-use or residential projects with revised planning permissions. So, most of the initial stock that was projected to hit the market did not actually come, yet more supply was expected, leading to stable rental and sale rates with increased activity.
Activity in the Dubai office market today is mainly concentrated in Jumeirah Lakes Towers (JLT) for free zone businesses, and Business Bay and TECOM for mainland ventures. Premiere locations like Dubai International Financial Centre have their own clientele.
A majority of companies feel that buying a commercial asset remains very attractive in this market. Office buyers today can find easy mortgage solutions as opposed to the previous years. Moreover, in the run-up to the Expo 2020, the SME sector is poised for more growth and activity, which would have a positive impact on the office market.
JLT and Business Bay have been hotspots. Lease rates for shell and core offices in these areas are between Dh70 and Dh90 per square foot, fitted offices at Dh90 to Dh125 per square foot. The sales rates are at an average of Dh900 to Dh1,250 per square foot. A “Grade A” office space in these two communities can command a sales rate of Dh1,250 to Dh1,600 per square foot and lease rates of Dh100 to Dh140 per square foot. The rates depend on location, building quality, space and access to public transport.
Most of the offices are completed as shell and core, but fitted offices have witnessed better demand.
For an investor who holds a space for sale or rent which is not moving, rather than leave it as a dead asset with no revenue, it is better to invest a bit more into it with a fit-out allowance and turn the property around. For this, he can command a premium. There is a cushion of Dh30 to Dh40 per square foot per annum in premium between shell and core, and fitted offices.
SMEs, especially start-ups that generally look for a 1,000 to 1,500-square-foot space to lease have to pool at least Dh150,000 to Dh250,000 in fit-out costs. This is a burden which leads them to look for fitted space even if these are low grade.
Moreover, the fit-out period can vary from two to four months, considering the approvals required and the “fixture” time. As a full fit-out faces the risk of not suiting the new tenant’s business, it would be better to carry out basic fit-outs such as flooring and ceiling which are the most time-consuming and costly affair.
The landlord can have the lease signed for a longer period with an added premium or share with the tenant in his fit-out expenses. There is a common trend to provide rent-free periods of two to three months in the contract as a fit-out period, but it is losing its sheen in the marketplace.
There is now a need to attract tenants to the space with more allowances.
Source: Parvees A. Gafur, Special to Freehold
CEO, Propsquare Real Estate