Industry expert defines some of the investment options available in the market

Investment OptionsJohn Stevens, Managing Director, Asteco

Question of the Week

What is your advice to office property investors?

As the commercial market matures and landlords become more competitive and/or businesses trade up for larger spaces, fitted spaces will become increasingly available.

It is currently our recommendation to our landlord clients to provide their buildings with fitted office options in favor of shell and core units.

We have observed that not only are the former preferred by tenants who approach us to lease space, but these also enable the landlord to achieve higher rentals, enabling them to recoup their investment over the life of the property.

There are several other critical considerations to take into account:

• Parking availability for staff and visitors, which is often overlooked and quite a rare commodity not only in Dubai but also in the whole country. This should be included or mentioned in the tenancy agreement.

• Access to public transport like buses, the tram or the Metro is also a growing requirement. As an example, in our office, 60% of the employees use the Metro daily, increasing to over 70% for those using it more than once a week.

Is an office space an ideal and sought-after investor product? What makes it a lucrative investment?

Essentially, yes, although investing in office space is not common compared to residential property investment.

Most individual private investors prefer investing in residential real estate as they are more familiar with that asset class.

Office leases are for longer periods of time as opposed to residential leases as they can range anywhere between three and 10 years. In most cases, it requires less maintenance (they do not have four water heaters as a villa would have as an example and they are typically only occupied from 9am to 6pm, Sunday to Thursday).

Anyone planning on investing in an office space need not worry as there are several options available in the UAE. Popular locations include Dubai Marina, Business Bay, Jumeirah Lakes Towers, Al Reem Island and Al Maryah Island.

What is the return on investment (ROI) pattern for office space and the approximate percentage ROI?

The pattern generally depends on the state of the economy. Between 2004 and 2008, office rentals rose dramatically, with Dubai becoming the world’s fifth most expensive location with office rental rates on Shaikh Zayed Road averaging Dh450 per square foot per annum. This demand then led to the construction of more offices and even to the conversion of some residential buildings into commercial units, which resulted in oversupply by 2014. For both smaller investors in strata units and larger investors in complete floors or entire towers, if they are willing to take a medium to long-term view, the commercial office sector would be a wise investment channel as there are few major commercial developments planned at present which could result in shortage in the years to come. It will certainly redress the supply-demand dynamics.

Is there a growing demand for office properties? If yes, what factors have led to the sector’s growth? What is the forecast?

There has been an increase in activity in the office strata market, particularly for properties in Business Bay as well as Jumeirah Lakes Towers, which have enjoyed significant growth in sales rates due to low sales prices during the economic downturn.

The Business Bay area has grown as new projects have completed, and the area is becoming a more established commercial district. JLT has also witnessed an increase in demand.

With still significant amounts of supply of small to medium-sized office units available, we anticipate continued sales rate growth, albeit at a slower rate than residential sales. We are of the opinion that office rental rates have, overall, bottomed out and we expect to see some growth over the short to medium term, particularly for single-owned and managed buildings where supply is limited.

What are the challenges in investing in office units compared to other types of property investments?

The first challenge is to identify whether the free zone office space that the investor has purchased would require tenants within that free zone to hold a Dubai Economic Department (DED) license, or alternatively a trade license regulated by the free zone authority. When operating onshore in Dubai, you are regulated by DED and will be required to have a local partner that owns 51% of the company. While operating within a free zone, you retain 100% ownership with the free zone authority essentially becoming your local partner. An example of an area that would require a DED license is Business Bay and one that would require a free zone license is JLT. Tenants, therefore, select a free zone that best serves their industry and business activity, which would in turn affect the demand for certain areas over others. The lack of availability of mortgage finance for commercial properties is another challenge that individual buyers face.

Agent: John Stevens, Managing Director, Asteco

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