Economic slowdown curbs appetite for office space in Dubai

Dubai, UAE, August 16, 2016:

Demand falls
Demand for office space in Dubai has receded in the past six months, as the ripple effect of the oil price collapse and the subsequent economic slowdown in the rest of the Gulf reverberates across the emirate’s commercial property market. As firms retrench staff and reconsider their future strategy in the wake of global economic challenges, decisions to acquire, expand or move office space have commonly been put on hold, which has resulted in an exaggeration of the seasonal summer slowdown throughout late Q2 and early Q3 2016.

Free-zone areas have, however, remained in relatively high demand. TECOM’s Dubai Internet City (DIC), Media City (DMC) and Knowledge Village (DKV), DIFC and Dubai Design District (D3), for example, all contain internationally recognised, Grade A space. As such, the prime, central areas of these free-zones have very low vacancy rates, of around 5%, compared to submarkets such as Sheikh Zayed Road (Trade Centre), which has stock of mixed quality and age, and vacancy rates closer to 20%.

Lack of rental growth
Still, rents remained stagnant in the second quarter of 2016, with falls recorded in six of our 22 submarkets. Most declines have been recorded in areas with higher vacancy rates, particularly of second hand stock, such as Garhoud (-18%), Al Barsha (-10%) and Deira (-5%). A couple of submarkets have seen minor uplifts in upper limit rents, including the DIFC (6%) and the wider Tecom submarket (7%). However, these are the exception, as no movement was recorded in either lower or upper limit rents in 14 submarkets during Q2.

The general lack of rental growth is unlikely to change in the short-term. Across the market as a whole, we do not expect rents to fall much further, particularly as they are at a point where they are considered to be fair market value and landlords appear unwilling to lease below a certain level. However, we do see landlords offering increased incentives, such as rent free periods and fit out contributions to attract tenants and as such, we expect a period of minimal rental change for at least six to nine months before there are any signs of an uplift.

Unique schemes buck the trend
Despite the slowdown, it is important to note that a number of submarkets contain buildings that do not follow the same trajectory as the wider market and have rents that go beyond our upper limit figures as they are considered flagship, prime, signature schemes. Burjuman Business Tower (AED 180 psf), for example, commands rents above the wider average for Bur Dubai of circa AED 120 psf because of the unique quality of office space and specification it offers. Emirates Towers in Sheikh Zayed Road also remains extremely popular and has very low vacancy rates, despite the slowdown in the wider market.

Source: Cluttons
*Free-zone. **Reflective of initial off-plan price offers at project launch