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Residential properties in Dubai may be witnessing a softening of prices, but the commercial real estate market including the office segment is on a gradual growth path.. Buoyed by impressive returns, many investors are changing tracks from the residential market to focus on commercial properties.
Parham Shariat, director at Lemar Property, takes a closer look at this segment.
Supply versus demand
The current demand for commercial property is stable. There is a shortage of Class A offices; many master developers are adding retail to their portfolio as fast as possible.
The volatility in the number of visitors to Dubai due to recent events such as the Russian sanctions and the depreciation of the ruble has slowed the hype about hospitality real estate development. However, this is a short-term event. The many attractions in Dubai will soon bring back a flood of visitors here.
Many institutional investors are also attracted to other commercial sectors such as education and healthcare. Dubai is the preferred destination for many companies looking to make inroads into the MENA region. It is the most viable option to set up regional offices for those focusing on the African markets.
The availability of qualified employees, quality of life, safety, stable economy and access to international business gives Dubai a significant edge over other cities.
Therefore, the office, retail, industrial and other sectors under the commercial real estate category all have a bright future.
The matter of location
You can see growth in different sectors all over Dubai, so there is not a place one should focus. The free zone will dictate where many businesses can or cannot be set up, so depending on the type of business, options are limited.
For example, a financial institution will most likely set up in DIFC.
Converted residential villas in Jumeirah, which can be used as offices or restaurants, seem to be in de-mand. Everyone wants to be in Jumeirah and close to the most affluent neighbourhoods, which sometimes comes at a hefty cost.
Downtown Dubai is still the most sought-after location for office and retail.
Deira offers a great bang for the buck. If building owners refurbish their lobbies and redevelop their old properties, this area could provide good competition to the major commercial zones in the emirate.
Return on investment
The return on investment (ROI) on commercial properties has climbed in the last 12 months. We have seen triple net lease (NNN) deals in the market with ROI as high as 8.5 per cent and even 9 per cent. NNN is an arrangement where the tenant pays not only the rent but also all the other charges like maintenance, insurance and applicable taxes. The cost of renting, maintenance and vacancy periods between tenants can adversely affect the margins for investors; therefore, commercial properties tend to be a more attractive investment option for the savvy investor.
The road ahead
The authorities can boost the commercial real estate transactions further by providing concessions to investors. For example, if the transfer fee of 4 per cent is reduced to 2 per cent, provided the funds for the sale would be transferred towards the acquisition of another commercial property (of equal or greater value), it will go a long way in the growth of the commercial real estate market.
Separating the licenses given to commercial and residential real estate agents could also benefit the market. Enforcing exclusive listings for real estate agents will have a positive effect, which will show the real number of properties advertised.
Electricity load in some areas have had a negative effect on retail space. In Dubai Marina, some shops remain vacant with landlords not being able to increase the load. We encourage developers to get a commercial real estate agent involved at the design stage to allocate the proper space and calculate the necessary services needed before building. The space can be leased before it is even built, which has many advantages that outweigh the disadvantages of leasing early.
Where to set up shop
• Downtown Dubai remains the top destination for office and retail space
• Converted residential villas in Jumeirah, which can be utilised as offices and dining establishments, currently witness demand
• Renovated buildings in Deira with properly refurbished lobbies could provide good competition to the major but expensive commercial areas in the emirate
Source: S. Dhar, Special to Freehold