Dubai Realty: Two-speed market

Dubai office marketDemand for properties is strongest in free-zone locations such as DIFC I Shutterstock

The Dubai office space market looks to be stabilising after a period of strong activity. According to a report by real estate consultancy Cluttons, office rents flatlined in the first three quarters last year, with prime, secondary and tertiary office rents standing at Dh250, Dh130 and Dh70 per square foot respectively. Cluttons’ Winter 2015-16 Dubai Commercial Market Outlook, however, notes that micro markets, including some buildings, have bucked the trend, including Emirates Towers (Dh310 per square foot) or The Gate District (Dh225).

“Occupier activity is down, however, a positive sign remains in the diversity of the market, which is reflective of the overall economic activity,” says Steven Morgan, CEO of Cluttons Middle East. “Banks, financial institutions, law firms, construction companies and technology-media-telecoms firms round off the list of the most active occupier groups, with the city’s free zones remaining the primary target.”

There is currently around 8.2 million sq m of modern office space in Dubai, with another 300,000 sq m expected to be added in each of the next two years. According to Craig Plumb, Head of Research at JLL, there is excess supply in the market. “Around 22 per cent of all the space in the central business district is currently vacant and the vacancy rate is higher in many outlining districts. This is high by international standards, where vacancies of 5-10 per cent are considered a sign of a balanced market.”

Demand-supply scenario

While the market has stagnated overall, some submarkets have performed above par. “Demand is currently strongest for properties in free-zone locations such as Dubai International Financial Centre [DIFC] and Tecom, where vacancy rates are low,” says Plumb. “This is encouraging a number of developers to consider new projects within these areas, the largest of which is ICD Brookfield Place in DIFC, which will release 96,000 sq m of grade A space in 2018.”

Given that the market is expected to remain oversupplied, the bargaining power remains with the tenants. Many landlords have responded by fitting out previously shell-and-core office space to attract tenants at relatively higher rental rates.

“This practice will [lead to an increase in] average rental rates across Dubai, but this is reflective of the fit-out costs incorporated into the rentals, as opposed to an increased demand,” says Mansoor Ahmed, Director at Colliers International.

Free zones across the city continue to review their expansion plans to cater to the diverse requirements, according to Faisal Durrani, Head of Research at Cluttons, with schemes such as the Innovation Hub at Dubai Internet City expected to further exert downward pressure on rents once completed in the fourth quarter of 2017. “New free zones are also seeing increased interest and activity, highlighting their important role,” says Durrani. “EnPark, for instance, has emerged as Dubai’s latest success story and US-based occupiers in the energy sector appear to be showing high levels of interest in securing space at Tecom Investments’ specialist Dubai Biotechnology and Research Park free zone cluster, as they home in on the growing green tech and energy sector in the region.”

Serviced office space

There remains an active market for serviced offices in Dubai as this provides a good entry point for start-up companies and new entrants that do not wish to commit to long-term leases. In addition to international serviced office providers such as Regus and Servcorp, a number of free zones, such as Tecom, Dubai Multi Commodities Centre and Dubai Silicon Oasis, also offer serviced offices. “The government is seeking to encourage new start-ups and a number of incubator centres have been proposed to cater for the needs of newly formed companies,” says Plumb.

Although space requirements from the domestic occupier segment have dropped, the limited number of new stock deliveries in some of Old Dubai’s office submarkets, coupled with a steady rate of requirements, is putting upward pressure on rents in some key locations and buildings. “This is driving some migration to submarkets such as Business Bay, where average rents range from Dh70-Dh120 per square foot are perceived to offer better value for money compared with Deira or Bur Dubai, with the added advantage of being more centrally located, as the city’s centre of gravity continues to drift further south,” says Morgan.

The biggest gains were recorded in Al Garhoud, where upper-limit rents rose to Dh110 per square foot, from Dh95 a year earlier, or a 16 per cent increase. This was closely followed by Bur Dubai, where lower-limit rents increased by 20 per cent to Dh60 per square foot.

Elsewhere, rents continued to soften at Jumeirah Lakes Towers (JLT), where average rents were around Dh70-Dh180 per square foot in the third quarter, from Dh80-Dh200 at the start of 2015. The delivery of space at Mazaya Business Avenue’s three 45-storey towers, which offer office space for Dh65-Dh70 per square foot, has contributed to the slowdown.

Market outlook

Growth in the office space market is expected to remain flat, with diverse occupier activity expected across the city. According to Cluttons, the free zones still tend to be dominated by multinational organisations, with take-up activity intrinsically linked to business performance in their home markets. Cluttons also underlines moves by hydrocarbon-based occupiers to consolidate office space as global headcounts are adjusted downwards, although this is not considered to be a major occupier group in Dubai compared with other regional markets. Despite this, Cluttons remains cautious on the short-term outlook of the commercial market.

“With the outlook for global growth faltering, we expect occupier activity will continue to slow, with office space requirements shrinking during next 12 months,” says Durrani. “This comes at a time when land values in submarkets such as Business Bay are cooling and, therefore, improving the financial viability of some previously stalled projects, which are now seeing a resumption in construction. The ability of the market to absorb this new space is likely to dampen the speed at which the office market sees a resumption in rental value growth, as there is a risk of supply inching ahead of demand, although a lot of this is likely to be in the grade B category.”

Even against this backdrop, activity linked to the lifting of trade sanctions on Iran may have a positive impact on the market. The Cluttons report highlighted instances of Iranian businesses speculatively looking to expand their office, retail and industrial footprints in anticipation of increased business activity in Dubai. However, this is expected to be a slow, drawn-out process.

Source: Manika Dama, Special to Property WeeklyPW


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