Opportunities Emerging in UAE Office Market
Much has been said in the press in recent weeks about the tremendous rebound being enjoyed by Dubai's residential market, which has prompted warnings from the IMF about the pace of the recovery. Capital values accelerated by nearly a fifth in the second quarter alone.
The office rental market, on the other hand, has been slow to reap the benefits of the economy's buoyancy. This is not only the case in Dubai, but neighbouring Abu Dhabi and Sharjah as well, although signs are now emerging that we may finally be on the cusp of a period of stability following four years of declining rents, which is crystallising opportunities for both landlords and occupiers.
In Dubai, office rental values still sit 69 percent below their third quarter 2008 peak and certainly have a long way to recover. But looking beneath the headline figure reveals that prime office rental values have posted their first increase in four-and-a-half years, rising by a modest 2.7 percent during the first half of 2013 after stagnating throughout 2012.
That said, this improvement is confined to select submarkets within central Dubai and where strata ownership barriers cannot hinder take up. Spawned during the boom years, strata ownership was an idea imported from Australia in order to make the office market more accessible to smaller investors by splitting large floor plates into multiple smaller units; however, this has now morphed into the single biggest challenge faced by Dubai's office market as occupiers shy away from the complexities of negotiations with multiple landlords for the take up of large amounts of space.
The irony of this stubbornly persistent attitude means that prime Grade-A office space is often overlooked by occupiers, despite the acute shortage of any space to satisfy some of the larger requirements in the market. This leaves individual owners of office schemes in the unique position of satisfying tenant requirements, while at the same time capitalizing on the first tangible increase in demand for space since before the financial crisis. It is these buildings which have driven the modest turn around in rental value growth rates and we expect this to continue, with iconic buildings such as Emirates Towers commanding even stronger interest due to the "prestige factor" and its location on the doorstep of the Dubai International Financial Centre, which has helped drive rents in the tower to between $76 and $82 (AED280 to AED300 psf).
In the Emirati capital of Abu Dhabi, the office market's supply pipeline remains clogged with schemes yet to complete, while occupier demand is lagging, which is translating into downward pressure on rents, particularly for older buildings in submarkets perceived to be more secondary. Prime Grade A lease rates are however holding steady at approximately $45 psf (AED158 to AED167 psf), buoyed by companies taking advantage of the relatively lower rents available in brand new modern schemes by relocating from older buildings.
Tenants are emerging as the clear winners in the battle for occupiers, with the resultant impact being further downward pressure on rents, which is likely to translate into ongoing rate declines, or stable rents for the more sought after schemes. While no immediate upturn in occupier requirements is anticipated, landlords are now in the unique position of being able to refurbish and renovate older properties in order to challenge some of the new schemes during void periods, thereby increasing their over all competitiveness in the long term.
Sharjah, which sits to the north east of Dubai, has a significantly smaller office market than both Dubai and Abu Dhabi; however it, too, did not escape the reach of the crisis, with office rents plunging to as low as $11 psf (AED 40) in Al Soor, in the city centre. Rents here have made somewhat of a turnaround, rising by 15 percent to approximately $13 psf (AED46), where they have stagnated over the past three quarters. In the highly sought after submarket of Al Majaz, located adjacent to Khalid Lagoon, rents fell to $15 psf (AED 55 psf) following the recession and have remained unchanged for the six quarters to the end of June.
Like Abu Dhabi, landlords in Sharjah have the opportunity to modernize and reposition empty office space. Unlike the UAE capital, the supply pipeline is more limited and with indirect government intervention in the form of The Heart of Sharjah project, the emirate's flagship urban regeneration plan, swathes of urban sprawl adjacent to Bank Street are being cleared and redeveloped, which is helping to support relocation activity, particularly from small and medium sized organizations that have traditionally clustered in that part of the city, creating a steady flow of occupiers for landlords to entice.
Steve Morgan is a partner in Cluttons. He is based in the United Arab Emirates, where he oversees commercial and residential valuation services for the Sharjah, Dubai and Abu Dhabi offices.