- Broker Directory
- My Tools
- News & Advice
- Market Trends
- Other GN Sites
The residential and hospitality sectors reported sluggish growth in the second quarter, but the office market has remained broadly stable in the first half of the year. A CBRE report notes that average residential sales prices fell by around 2 per cent quarter-on-quarter, while in May average daily rates (ADR) and occupancy levels dropped by 6.9 per cent and 1.5 percentage points respectively year-to-date, according to STR Global. Commercial real estate, meanwhile, has been upbeat as Dubai remains a safe and stable business haven due to its stability in a volatile region.
Major commercial hub
Strategically located at the crossroads between East and West, Dubai offers a number of incentives — including a tax-free business environment — that have convinced many global corporations to move their head offices in the emirate, further reinforcing its status as a premiere business and financial centre in the Middle East and North Africa (Mena).
''Over the past few years, Dubai has consolidated its position as the region's leading commercial hub. It leads air connectivity through Dubai International Airport, which last year overtook London as the world's busiest airport for international passengers,'' says Martin Cooper, Director of Real Estate at Deloitte, adding world-class public transport and road infrastructure among the emirate's major attractions.
Conducive for growth
The positive sentiment has been reflected in JLL's recent survey report, Occupier Sentiment Series, which notes that international conglomerates and local firms believe the UAE's macro environment is strong and conducive for growth and investment.
''The country's success at diversifying its economy, supported by a strong private sector, has acted as a buffer against recent falls in oil prices, and allowed Dubai to achieve stronger economic growth than the rest of the UAE in 2014-15,'' according to the report. It further states the emirate is expected to consolidate its position as Mena's favoured location for corporate occupiers over the next three years.
Craig Plumb, Head of Research at JLL Mena, who contributed to the report, adds, ''Investors are increasingly recognising the benefits of developing office buildings in Dubai in terms of long term stable cash flow. A good example would be Brookfields [an international developer from Canada], which has teamed up with Investment Corporation of Dubai to develop a new office tower in Dubai International Financial Centre [DIFC].''
DIFC has already announced an ambitious plan to position itself among the top ten financial centres globally by tripling its size by 2024.
In the next 10 years, it plans to increase the number of active financial firms from 362 last year to 1,000, employing a workforce of 50,000. Industry observers say this will further cement Dubai's position as a regional business hub, the effect of which would positively be felt on the office market's performance in the long term.
Dubai offers a good mix of supply to meet the growing demand for different types of office space, from small offices (500-1,000 sq ft) to much larger units (up to 100,000 sq ft) for big corporate houses.
''There is really a two tiered market, with high demand for good-quality, single-owned, efficient office accommodations for the global corporates in locations such as DIFC and the central business district [CBD] area, while many small and medium-size enterprises [SMEs] are attracted to the cheaper strata spaces in locations such as Jumeirah Lakes Towers [JLT] and Business Bay,'' says Mat Green, Head of Research and Consultancy UAE at CBRE Middle East.
Demand for offices
Green says demand is also segmented depending on company structure, with very strong preference for offices within the emirate's many free zones. ''This is reflected in the high occupancy rates within Tecom and DIFC managed portfolios, and underlined further by recent speculative office launches in both locations,'' he adds.
The key drivers of office demand in DIFC, where Cooper says rents average Dh250 per square foot per year, include the legal and regulatory environment, 100 per cent foreign ownership, international grade A office specification, connectivity to public transport and a range of retail and dining amenities.
In other locations, the average annual office rents are Dh175 per square foot in Shaikh Zayed Road, Dh175 in JLT, Dh175 in Dubai Internet City, Dh125 in Tecom and Dh110 in Business Bay.
Strata vs single owner
Office space demand tends to vary depending on the type, size and licensing of the company. For example, global corporates don't consider strata buildings as those have often been sold to multiple investors resulting in inefficient floor plates and challenges when trying to acquire large spaces over contiguous floors. There can also be issues arising with building management, including service charge collections, which can then negatively impact other tenants in the property.
''Hence, there is a trend to seek well-managed, efficient, grade A buildings in prime locations such as Downtown Dubai and in free zones such as DIFC and Tecom A and B,'' says Green, adding that there also tends to be location-specific nuances, with locations such as JLT popular with SMEs due to the availability of cheaper accommodation and flexible licensing within the free zone.
Generally, the majority of corporate occupiers prefer to lease from institutional landlords who are experienced in leasing and managing commercial property and who understand the needs of corporate occupiers. ''There are numerous examples of institutional landlords owning multiple units or floors in strata-owned developments, which have helped attract recognised brand names to these types of office buildings,'' says William Neill, Partner and Head of Commercial Leasing and Sales at Knight Frank.
He adds that the growth of small businesses has also helped absorb much of the supply of privately owned smaller office units over the past 24 months. ''However, there remains a great deal of vacant space within strata buildings. Owners have to offer competitive rents as well as fit out their offices to attract tenants,'' explains Neill.
On the other hand, there is demand from corporate occupiers for single owned property in Dubai. Cooper says the majority of office occupiers in Dubai require sizes ranging from 1,000-10,000 sq ft.
The next few years are likely to see more good-quality office space entering the market. The excess supply might exert some downward pressures on office rents, but industry experts say rents will remain stable in the short to medium term. Consequently, there could be an oversupply in peripheral locations, particularly for strata units, many of which might struggle to attract tenants.
''We are expecting the delivery of numerous grade A buildings over the next two to three years in prime locations, which is likely to create an initial period of oversupply,'' says Neill. ''However, it is also expected to absorb demand from companies that need to relocate from older buildings or need to consolidate offices to one single solution.''
According to the JLL's report on the second quarter, Dubai's office market saw the delivery of about 162,000 sq m of gross leasable area (GLA), increasing the total supply of office space to 7.8 million sq m. These completions include eight buildings in the Dubai Design District (D3), four buildings at Arenco Business Park in Dubai Investments Park, and The One Tower in Tecom. Average rent across the prime CBD was Dh1,860 per square metre, with a marginal decline in average vacancy rate, which stood at 23 per cent.
JLL estimates that an additional 704,000 sq m of office GLA will enter the market in the final half of the year. The majority of this supply is located in Business Bay and includes projects such as Westbury Square and The Binary.
''Significant levels of new supply are entering the market over the next two or three years,'' says Plumb. ''This will further encourage flight to quality as tenants will choose to upgrade to the best quality space and will increase vacancy levels in older, poorer quality space.''
Simon Gray, Managing Director of Chestertons Mena, believes there won't be an oversupply of office space in prime locations as the majority of current off plan developments are in the residential segment. ''Office demand at the moment is restricted to prime freehold areas and free zones. Office space in secondary locations still remains oversupplied mainly because these locations are still not well connected with main areas of the city and, therefore, making commuting difficult.''
Given the planned new office supply in Dubai, Cooper says there could be increasing polarization between office districts in the emirate. ''Demand is likely to centre on office schemes in Dubai that are delivered by developers with a strong track record and offer high-quality specification, access to public transport and a range of amenities,'' says Cooper.
From an investment point of view, although residential property remains the choice for investors, interest in high-quality office space and retail space is also catching up. ''With the recent spate of launches in the residential segment, investors foresee an oversupply and, therefore, have started considering commercial projects,'' says Gray.
The market is witnessing the emergence of preleased developments coming forward, specifically built for various corporate occupiers on institutional leases. This has helped increase investor awareness.
''The main issue remains the supply of prime grade A stock leased out to international occupiers on attractive lease terms, within areas where foreign investors can purchase,'' says Neill. ''We predict this market will be far more buoyant in three to five years' time once more development of prime grade A stock has taken place.''
Source: S. A. Kader, Special to Property Weekly