Property Weekly: Another day at the office?

Business Bay Property WeeklyBusiness Bay could account for 40 per cent of office supply over the next three years l Image Credit: Supplied

A decline in office unit sales at the start of the year notwithstanding, analysts believe grade A office spaces continue to perform well on the back of corporate demand. Dubai’s office market witnessed a drop in sales ranging from 3-17 per cent depending on the location in the first quarter this year, according to the Q1 2016 Dubai Office Report by property consultancy Core Savills. The report says that many commercial occupiers are not content with what’s already available in the market and are instead looking for built-to-suit office spaces. In areas where properties are being built without this option, occupier demand is still influencing the dynamics.

“The fact that Downtown Dubai [which had a 4 per cent decline year-on-year] and Dubai International Financial Centre [DIFC], which saw a 3 per cent decline in the same period] are outperforming the secondary locations indicates that strong investor demand exists for quality grade A commercial products that are well managed and have sufficient parking and lifts, large floor plates and high-profile tenants,” the report states.

Single owner or strata?

One of the by-products of an occupier-led market is an increase in single-owner property. “Over the last few years many large multinational companies [MNCs] have been setting up or relocating their regional headquarters to Dubai,” David Godchaux, CEO of Core Savills, says. “These companies have large office space requirements and their specifications with regards to security, eco-friendliness and maintenance are sometimes very stringent. The demand for single-owner property with large floor plates across consequent floors is high from this segment.

“Dubai has a relatively small stock of grade A offices that would satisfy these requirements, and thus some large companies, especially in the financial sector, prefer to build their own property.”

Office occupiers looking at large office spaces spanning an entire floor or building are understandably reluctant to deal with multiple owners in a strata office property. The Core Savills report says that key issues for large-scale international tenants are property management and the ability to expand or contract across multiple floors — requirements that are difficult to satisfy in buildings sold on a strata title basis.

“Single-owned properties are typically in demand from MNCs,” Godchaux tells PW. “International companies have large space requirements and they are generally unwilling to interact with multiple landlords.

“Distinct lease terms and rental rates with different landlords make operating the office a major task, which is a headache these companies can do without.”

Furthermore, in many cases strata offices are simply not built for single ownership. “In addition, large companies cannot risk non-payment of service charges by landlords, since this jeopardises building security, hygiene, cleanliness and maintenance of the premises,” says Godchaux. “With single landlords, the likelihood of early contract termination is also reduced, which is attractive to MNCs who have probably invested substantially in the office fit-out.”

Craig Plumb, Head of Research — Middle East and North Africa at JLL, says build-to-suit commercial spaces have traditionally been used by government agencies in the UAE, but are now becoming popular among tenants in the private sector. “As Dubai matures as an office location, more tenants are taking whole floors rather than just small office suites. The move towards single-ownership buildings is also a welcome trend as most tenants would prefer this option,” he says.

Plumb predicts that single ownership will be the norm rather than the exception. “Around 40 per cent of office space in Dubai is strata titled and 60 per cent is in single ownership,” says Plumb. “We expect the market to move towards single ownership as strata title only really works for residential projects and not commercial premises.”

The current pipeline still consists of the supply overhang of strata spaces. In the current scenario, the lowest-performing spaces belong to this category. “We still have a large component of strata offices, which are going to be delivered in the next three years,” says Mat Green, Head of Research and Consultancy —UAE at CBRE Middle East. “Within Business Bay, which is probably responsible for 40 per cent of supply over the next three years, the majority is actually strata space. These projects have been launched in 2006-08, which have been delayed or have gone through a change of use. Now they are coming to the market between 2015 and 2018.

"When you look at Business Bay, Dubai Silicon Oasis or other areas where you have lot of strata, that is where most of the vacancy is. You have multiple individual investors [in a building], some of which are not occupying the space themselves and not selling it.”

Two-tier market

According to the Core Savills report, this issue has resulted in a two-tier market, with single-owner buildings commanding higher rents and faster absorption rates than buildings with multiple owners. Having seen the variation in performance, Green says newer launches in the office segment are no longer designed for multiple owners. “No one is really building new strata offices,” he says. “Single-owned buildings have a far better occupancy performance [whether they’re] in Business Bay, Silicon Oasis or Jumeirah Lakes Towers.”

Occupiers are also preleasing newer projects that are under way. Plumb says this is a new phenomenon for Dubai. “The pre-lease market is growing and is likely to do so as the market matures,” says Plumb. “To date, very few tenants have been willing to pre-commit in the Dubai market.”

Some examples of preleased properties are CityEdge in Tecom, which is being pre-leased by Oracle, C1 in Trade Centre and Dubai Design District (d3).

     See related story: Dubai's office rentals see sharp variations

“It is a win-win situation,” says Godchaux. “The developer is assured of a revenue stream immediately on completion of the project, and thus the risk factor is greatly reduced. The occupier gets a chance to select the best offices and influence the design and fit-out. As such, preleasing shares some common characteristics with build-to-suit, where some aspects of the office space may be designed to suit the tenant.”

Another reason for the increase in pre-leasing activity has to do with the current economic churn. “Most interest is in leasing rather than ownership as most corporates are seeking to free up capital from their real estate to invest in their core business,” says Plumb.

One of the by-products of this trend is the duration of office leases, which in the UAE typically ranges from five to seven years. This is short compared with other countries, but Plumb says the trend is moving towards longer leases of 10-15 years. “This is generally a good thing as it provides more investment-grade stock that may attract institutional investors,” he says.

The future

Going forward, Green expects more speculative office developments that are focused on good quality, efficient floor plates in the region of 20,000 sq ft and have limited amount of columns, good access and good lifts. “That is what corporate [clients] want to see,” he says.

Market consolidation is also up ahead. “We’ve been in a market where consolidations would’ve happened years ago had there been supply,” says Green. “But you have a situation where you have many big corporates with multiple offices around the block, multiple licensing, looking for one property where they can fit everyone preferably with dual licensing. There are not many of those in Dubai. That is why you are seeing an increase in pre-leasing and in speculative development as well.”

Godchaux says demand is multilayered and the market can absorb the varied offerings from developers. “Some start-ups in several free zones are looking for 500-sqft offices, while some large MNCs may require up to 50,000 sq ft,” he says, emphasising that location is often key. “The location’s dynamics also matters. For example, Downtown has many properties with large floor plates, which cannot be subdivided into too many small offices. There is a definite demand for this category, however, there also exists a demand for small offices who would like to be in Downtown.

“As such, it is difficult to make a blanket statement that single-floor occupancy is the way forward. Each needs to be evaluated for its distinct pros and cons.”

What is undoubtedly true is that there will be many more developments in this space before it plateaus. “With World Expo 2020-related businesses increasingly seeking office space and supply growth in Dubai moderating, it is likely that the market’s internal dynamics will drive stabilisation through 2016 and a bounce in oil prices, when it comes, will support further growth thereafter,” says Godchaux.

Source: Shalini Seth, Special to Property WeeklyPW


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