Business Outlook: Dubai’s Prime Rentals May Drop Over The Coming 12 Months

According to the author, Dubai has been the only city in the region to experience any growth in prime rentals over the past 12 months.

BY: Craig Plumb

Dubai remains the favored office market within the Middle East, with a growing number of companies moving regional or even global activities to the city.

This trend is expected to continue over the next few years, given the attraction of Dubai in terms of global connectivity and quality of life.

The Dubai economy is already more diversified than its counterparts in the region, and is therefore well positioned to outperform other regional markets in the new ‘post oil’ era.

We see a growing demand from manufacturing, trading and hospitality companies for regional training, education, showroom and other facilities in Dubai, and the increased focus on education, healthcare and innovation ahead of Expo 2020 is likely to further boost office demand.

While not all of this demand will be accommodated in the central business district (CBD), it will further reinforce Dubai’s position on the regional and global stage.

Meanwhile, Dubai has been the only city in the region to experience any growth in prime rentals over the past 12 months.

With continued economic uncertainty and political risks on the global horizon, leasing demand is expected to soften over the rest of the year—with JLL forecasting global take up in 2016 to decline by around 5 percent from 2015 levels.

Office markets around the world have held up better than what many people expected, with prime rents increasing by 3.6 percent in the year to the second quarter of 2016 across the 110 markets covered in JLL’s Global Office Index, the fastest growth in four years.

Dubai is likely to mirror the global slowdown, with no rental growth expected across the overall market over the next 12 months.

As vacancies remain minimal in the Dubai International Financial Centre (DIFC) core, there may be room for marginal rental increases, but these increases are likely to be far below the levels seen over the past 12 months, and probably in the low single digits.

While average office rents across Dubai have seen relatively little growth over the last 12 months, continued demand for space in the prime precinct (DIFC Gate and Village) has resulted in rentals increasing by 20 percent. This demonstrates the two-tier nature of the market and the premium that tenants are willing to pay for office space in the core of the Financial Free Zone.

With vacancies in the DIFC Gate and Village precinct standing at less than 2 percent, tenants wishing to be located in the heart of the financial district have been willing to accept the increases requested by the DIFC authority, resulting in average rents rising in the area from AED250 per sq ft per annum to AED300 per sq ft per annum over the past year.

These net rents are exclusive of service charges, which can add another AED60 per sq ft per annum to occupancy costs.

But tenants have a reasonable choice of space elsewhere in the CBD (where vacancies average 16 percent) and within peripheral areas of DIFC (where well established good quality buildings such as Index Tower and Central Park have high vacancy rates).

However, this has not detracted from demand within the core precinct in the DIFC Northern Campus.

Given that real estate forms a relatively low proportion of total costs, many companies have chosen to pay more for the best quality space in the prime location within the city, in the belief this will allow them to attract and retain the best quality staff.

Unlike Dubai, where DIFC remains the clear leader in terms of demand and is therefore able to achieve a significant rental premium, the status of the prime project is far less clear in other markets.

Sowwah Square is likely to emerge as the prime location in Abu Dhabi, but its ability to achieve premium rentals is currently clouded by uncertainty surrounding the status of the Abu Dhabi Global Marketplace free zone.

Nile City Tower remains the prime office building in Cairo, but most of the demand and the fastest rental growth over recent years has been achieved by projects in New Cairo.

The situation is also uncertain in Riyadh, given further delays in the opening of the King Abdullah Financial District, which will change the face of the CBD over time.

Craig Plumb is the head of research, JLL MENA

 

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