Dubai office rents: Landlords offer great incentives in slow market

Following the subdued results at the start of the year, Dubai’s office sector continued to display little momentum in the second quarter, in the midst of bearish market sentiment, low oil prices and regional uncertainties.

“Although quoted rental rates were broadly unchanged over the last quarter, transaction evidence indicated marginal declines of 2 per cent, while landlords continued to show increased flexibility during negotiations to secure new tenants and retain existing ones,” says John Stevens, managing director of Asteco.

In the first half, there was very little change in demand and activity from occupiers compared with the second half last year, but the market still witnessed a high level of activity from occupiers reviewing options, considering relocations or reducing their footprint by increasing efficiencies. “More recently, there has been an increased flow of transactions with occupiers prepared to commit to new offices,” says Dana Williamson, head of agency and occupier services at JLL Middle East and North Africa (Mena).

Industry experts tracking the sector say they observed an increasing number of enquiries as occupiers witnessed greater market certainty. Although there was a drop in enquiries during Ramadan, Knight Frank says it has since seen a pick-up — a positive sign for the traditionally quite summer months.

“Landlords were still heavily pressured to keep rents low to combat greater market competition and, therefore, we witnessed no change,” says Matthew Reason, senior surveyor, commercial leasing at Knight Frank.

Reason says landlords offered greater incentives in the form of rent-free periods and fit-out contributions as bargaining chips to incentivise tenants.

However, the market continues to face added pressure due to oversupply. Around 4 million sq ft was completed last year, with a further 200,000 sq ft in the first half this year. A total of 2.5 million sq ft is expected to be delivered this year. “With the current oversupply, increased pressure has been placed on annual sales and rentals, resulting in rates to soften by 6 per cent and 3 per cent respectively,” says Stevens.

While enquiries in the second quarter were predominantly for smaller-sized units, Stevens says tenants were increasingly looking for grade A office space from single-building owners rather than leasing strata title property.

Top locations

From a location perspective, grade A projects under single ownership on Shaikh Zayed Road and in the Dubai International Financial Centre (DIFC) area performed well. “Rental rates for offices in Dubai Investments Park and Dubai Silicon Oasis remained flat both year-on-year and quarter-on-quarter, mainly due to limited activity in these locations,” says Stevens. “There was a quarterly drop of 3 per cent on Shaikh Zayed Road, which translated to an annual rental decrease of 6 per cent. While Barsha Heights, Bur Dubai and Business Bay all witnessed a 5 per cent fall in rents.”

Asteco also reports that sales prices in Barsha Heights, Dubai Silicon Oasis and Jumeirah Lakes Towers (JLT) showed no quarterly change, compared to an 8 per cent drop in prices in DIFC and 5 per cent in Business Bay.

Preleasing of commercial offices continues to be subdued, but Reason says companies are still looking at the long term when investing in real estate in Dubai, noting that grade A fitted office spaces have performed significantly better than shell and core, as occupiers are still constrained on their ability to expend capex.

According to JLL, office buildings in onshore areas and free zones with direct access to Metro stations, ample parking and amenities and large floor plates remain in high demand. “Furthermore, dual-licensed buildings offering both offshore and onshore licensing options continue to gain traction,” says Dana. “Challenges, however, continued for office product on the periphery of the city, in older areas and in strata-titled buildings for which there is less demand.”

Chestertons, meanwhile, reports that office sales in areas it monitors decreased by an average of 5 per cent during the second quarter, with the highest decline recorded in JLT at 15 per cent. “Despite the growth of sales values, rents were still under pressure and dropped by 3 per cent on average,” says Ivana Gazivoda Vucinic, head of advisory and research at Chestertons Mena.

Compared to the previous quarter, Vucinic says that office sales declined by 7 per cent on average in terms of volume and 17 per cent in value, which she says is a sign of a correction.

Key sectors

Outside of DIFC, Knight Frank points to pharmaceutical and health care organisations as key drivers of demand in the first half, with engineering and architectural firms also seeing significant movement.

“Moving forward, we expect movement of audit companies, law firms and consultancies to take advantage of the DIFC dual licensing as the blue chip firms look to consolidate to a central headquarters,” says Reason.

Meanwhile, technology, IT and media companies, as well as legal and consultancy firms, remain either stable or in growth mode. “They often seek space in established free zones or in Dubai’s central business district. We believe this trend will continue in the medium term,” says Dana.

Demand from the financial services sector remains subdued and while there has been relatively little demand from oil and gas companies, Dana says this is a relatively small sector in Dubai.

A raft of international companies are expected to set up businesses in Dubai in preparation for the World Expo 2020, potentially increasing orders and demand. “The macroeconomic environment should become less of an issue as businesses adapt to a new pricing strategy to overcome the drop and knock-on effect of low oil prices,” says Stevens.

New supply

With 2.5 million sq ft to be delivered this year, the total supply could reach 3.2 million sq ft, according to Asteco. Much of the supply will be from Dubai World Trade Centre’s new dual licensed buildings.

“In some areas, we have seen oversupply have an adverse impact on sales and rental prices,” says Stevens. “Business Bay, for example, which has a significant amount of existing and upcoming office space, saw a year-on-year rental decrease of 5 per cent, while from a sales perspective, prices dropped by 16 per cent during the same period.”

However, Dana says future supply levels do not represent a significant threat of oversupply.

Outlook

JLL predicts rental rates in Dubai for the remainder of the year to remain relatively flat. “There are many established companies in the UAE looking to optimise their occupancy strategies as part of their plans in Mena,” says Dana. “As landlords are willing to provide additional attractive terms in return for long-term commitments, we expect the high level of activity to continue for the remainder of the year.”

Industry observers note that weakened oil prices have caused businesses to either consolidate their operations or downsize, leaving notable vacancy levels in the market. “We expect the market to remain flat in the coming months with recovery expected in the latter months of 2018,” says Vucinic.

Knight Frank also anticipates minimal improvement for the remainder of the year, but still expects the market to be better than the previous year. “In the run-up to Expo 2020, we would look to expect greater performance from areas such as Dubai South, as the residential communities and overall infrastructure improve,” says Reason.

The second half of 2017 is expected to hold many possibilities for tenants, but is likely to be a challenging year for landlords, according to a Knight Frank report. The growth of REITs as a commercial investment vehicle is also expected to bring further liquidity and is likely to attract more investors as it signals market maturity.

The emirate’s expanding landscape is also set to support future demand for office space with demand being likely from the FMCG, Islamic banking and financial technology sectors. Demand for commercial office space in and around Dubai South, meanwhile, is expected to gain traction with the expansion of Al Maktoum International Airport and the Dubai Metro Red line.

Zawya