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Volatility in the property market continues to influence sale and rental rates in Dubai's office segment, according to a new research. Supply in Dubai's office market reached an estimated 8.4 million sq m last year, of which 28 per cent or approximately 2.4 million sq m is located in the prime areas of Dubai International Financial Centre (DIFC), Downtown Dubai, the stretch from Dubai World Trade Centre to the First Interchange on Shaikh Zayed Road, Dubai Internet City and Dubai Media City, according to the Q1 2016 Dubai Office Report by property consultancy Core Savills. Around 51 per cent of total supply comprising 4.2 million sq m of office space is in secondary office locations such as Business Bay, Deira, Bur Dubai, Dubai Health Care City, Tecom C and Jumeirah Lakes Towers (JLT).
''Despite the global economic downturn, prime and secondary stock growth was extremely rapid in the five years until 2011, but moderated to 7 per cent, 3 per cent and 5 per cent in 2012, 2013 and 2014 respectively,'' according to the report, which was released last month.
Prime and secondary supply growth fell further last year to around 5 per cent, with additions in Deira, DIFC and Tecom, although Business Bay saw the bulk of secondary office space completions, with approximately 318,000 sqm of new stock. The development pipeline in Dubai indicates a further 7 per cent growth this year in the prime and secondary sectors, primarily in Business Bay. In areas of lower cost and older stock such as Bur Dubai, enquiries for space last year were steady, with rents remaining around Dh100-Dh110 per square foot.
''Landlords were flexible during negotiations, but price-sensitive prospective tenants appeared reluctant to move when this represented just a marginal change in rental costs,'' the report says. ''As a consequence, most tenant enquiries resulted in no movement. Despite this the occupancy levels in these traditional areas remain high due to the captive nature of this micro market and limited supply. Similarly, occupancies are especially high in Deira, which has seen marginal increases in rental values since demand is high for the few available units.''
In Dubai Healthcare City, average rents have remained stable at around Dh120-Dh125 per square foot. In Tecom C, rents remained steady last year, with marginal increases noted close to the Metro station. Rental rate movements in prime locations were varied last year despite landlord flexibility, with rents declining in Shaikh Zayed Road due to the rise in supply. In Downtown Dubai, rental rates remained broadly static with Emaar-owned properties particularly continuing to command strong levels of demand and rates.
The strongest-performing prime location was DIFC, where rents rose by around 7 per cent. Emirates REIT, which owns 18 of the 25 floors in Index Tower, is successfully leasing smaller units at premium rates, while landlords in strata-owned properties in DIFC are achieving rapid absorption rates and rental rate premiums by offering fit-outs and other incentives. While demand is expected to continue to be strong in DIFC this year, some downward pressure is expected in future due to competition from the Trade Center Free Zone.
Sales market declines
The office sales market witnessed a drop in prices across all locations with secondary districts such as Busi ness Bay, Tecom C and JLT seeing a higher year-on-year decline at 9 per cent, 13 per cent and 17 per cent respectively. The report showed that Downtown (4 per cent decline year-on-year) and DIFC (3 per cent) outperformed secondary locations, indicating strong investor demand for quality grade A commercial products.
The secondary locations also saw marginally higher rents even though sale prices continue to decline, indicating a rising yield and declining investor interest in favour of more established locations. However, investors in secondary locations may find long term opportunity in fundamentally superior properties such as Almas Tower in JLT, according to the report.
Attractive to investors
Despite the global market volatility, a new report by property consultancy Cluttons says the office sector continues to be attractive for high-net-worth investors.
According to Cluttons, while residential property remains the most attractive investment asset for the UAE's high-net-worth individuals, interest in commercial property continues to remain strong with 22 per cent of UAE HNWIs surveyed indicating a preference for offices as an investment class.
Furthermore, while London remains the location of choice, recent changes in the market indicate that Dubai is fast catching up. ''Despite tightening yields in London's office sector, which currently stand at 4.8 per cent in Central London, when compared with office yields of 7-10 per cent in Dubai, contract strengths play a significant role in driving inward investment into London's office market,'' says Faisal Durrani, Head of Research at Cluttons.
Dubai is also now seeing more longer leases on offer. ''While lease terms in Dubai are typically between one to five years, lease lengths for London offices generally start at five years and often continue up to 15 years, offering the security of a longer tenure,'' says Durrani.
''Moreover, the availability of investment-grade stock is far more abundant in London than it is in Dubai. However, this appears to be changing slowly, with the sale of the Standard Chartered building in Downtown Dubai as a recent example.''
According to Cluttons, UAE HNWI respondents also reported that locations within the Middle East are among their top three investment targets over the next 12 months, with Dubai and Abu Dhabi being the most popular locations in the region for investment.
''Thirty per cent of UAE HNWI investors name Dubai in their top three most preferred cities, followed by Abu Dhabi at 23 per cent,'' says Durrani says. ''Dubai is both the leading target investment location as the most preferred city, as well as the most commonly mentioned city in investors' top three preferred locations in the Middle East.''
Source: Shalini Seth, Special to Property Weekly