Dubai Office Market Update

Transcription

1 Dubai Property Dubai Office Market Update Q core-me.com

2 CONTENTS Economic background Office leasing transaction cost Market performance Area review Near term outlook

3 Q Dubai Office Market Update ECONOMIC BACKDROP he backdrop of volatility and geopolitical uncertainty continues to affect global trade volumes and in turn the job market. Anecdotal evidence suggests that the impending US elections is pushing many international corporate occupiers to hold expansions/relocations until the end of 2016 and the first phase expansion of new large corporate occupiers continues to be limited. Although Dubai pulls the most weight for economic development in the region, contradictory signals are emerging from employment demand drivers - Emirates NBD displayed a higher PMI index growth with new work accounting for a positive boost and the business expectations index rose to a 15-month high of 71.3 in September from 60.1 in August. However, Monster.com indicated a 24% drop in job creation compared to last year in the UAE, the lowest in the last 18 months. Having said this, employment activity is expected to gain momentum, particularly for engineering and production sectors, as Expo 2020 contracts kick off. OFFICE LEASING TRANSACTION COSTS With the marginal softening of rentals in core business districts over the last few quarters, Dubai is increasingly becoming favourable with international occupiers looking to expand in this gateway city. Interestingly, Dubai offers attractive rents and strikingly lower overall lease transaction costs for both financial corporations as well as creative/sme firms when compared with other global cities. FIGURE 1 Lease transaction costs* Total rent Agency fees Total maintenance/service charges Other taxes Security deposit 4,000,000 3,500,000 3,000,000 Lease transaction cost in USD 2,500,000 2,000,000 1,500,000 1,000, ,000 0 Dubai Dubai London London Paris Paris Hong Kong Hong Kong New York New York Source: Core, UAE Associate of Savills research *Total lease transaction cost for a standard 5,000 sq.ft. office over a lease term of 3 years core-me.com core-me.com 03

4 Dubai Office Market Update MARKET PERFORMANCE After a very active June 2016, early Q3 showed signs of the traditional summer sluggishness. However, activity levels picked up again in September - albeit keeping the average rentals flat across most submarkets. There are mixed perceptions forming in the market as many occupiers are actively browsing for space across different districts, although with a lag in decision making. Corporate tenants sometimes assume the commercial market will mirror residential market dynamics. However, the former is more complex, with each sub-market at different stages of the real estate cycle, influenced by a variety of drivers. There are many submarkets - both freezones and onshore areas - that are following distinct dynamics and may be at a different stage of their individual real estate cycle. For example, areas such as, Tecom and have been facing steady upward pressure on rents while other economic clusters are witnessing a varied range of rental drops over the last few quarters. Nonetheless, occupancy levels have moderately edged upwards in Q and we expect many of the current prospective tenants to transact in Q and early Q1 An increasing preference towards fitted out units is also coming into play, especially from tenants with smaller requirements as occupiers look to reduce the transition time as both local and global occupiers firm up their next year real estate budget allocations. The trend of landlords undercutting each other to attract tenants, particularly in a few of the strata buildings with lower occupancy levels on Sheikh Zayed Road, Business Bay and, continues. Overall, a vast majority of landlords are adapting to present conditions and are proactive in decision making with a higher degree of flexibility. Many landlords are pushing to keep the headline rentals constant while adding incentives such as contributions in fit-outs, extended rent-free periods and shorter lease terms to retain or attract new tenants. As illustrated earlier, core areas and Grade A assets even in secondary districts remain an anomaly to these trends, by strongly overperforming against the market average. Intrestingly, the rental range in single landlord developments such as and is maintaining a minimum variance as landlords are able to control and align rents with growing occupancy levels and demand. An increasing preference towards fitted out units is also coming into play, especially from tenants with smaller requirements as occupiers look to reduce the transition time. Furthermore, as parking increasingly becomes an issue in most of the secondary districts, access to Dubai Metro becomes a key differentiator. Prime examples of this trend are commercial buildings in cluster C, D, E and I in and Executive Tower and One Tower in. Supply Building use conversions, from commercial to other asset classes in a few developments, along with a delay in deliveries, have caused a contraction in the supply pipeline for Supply figures for 2018 and 2019 look steady with major developments such as s next phase and ICD Brookfield Place coming to the market. As existing occupiers look to optimise footprint where possible, we foresee further second hand stock to marginally top-up the expected supply figures in the near term. "Corporate tenants sometimes assume the commercial market will mirror residential market dynamics. However, the former is more complex, with each sub-market at different stages of the real estate cycle, influenced by a variety of drivers." FIGURE 2 Dubai commercial real estate cycle Prime locations Secondary locations Rents rising SZR WTC to 1st interchange (Grade A) Dubai Downtown Old Dubai (Deira/Bur Dubai/Garhoud) Rents bottoming Tecom (DIC/DMC/KV) (Grade B) (Grade A) Source: Core, UAE Associate of Savills research 04

5 Q As existing occupiers look to optimise footprint where possible, we foresee further second hand stock to marginally top-up the expected supply figures in the near term. FIGURE 3 Dubai office rental range - Q Annual rent / sq.ft Range Average 0 Downtown SZR (WTC to 1st interchange) Tecom (DMC/DIC/KV) (Tecom C) Bur Dubai Deira DHCC Garhoud Source: Core, UAE Associate of Savills research FIGURE 4 Average office occupancies - Q vs Q Occupancies Q Occupancies Q Grade A anomalies: Almas Tower Gold Tower and Silver Tower Ubora tower Occupancies Downtown SZR (WTC to 1st interchange) Tecom (DMC/DIC/KV) Tecom Bur Dubai Deira DHCC Garhoud Source: Core, UAE Associate of Savills research, REIDIN FIGURE 5 Change in rents (Q vs Q3 2016) Area Change in minimum rent Change in average rent Change in maximum rent Dubai Downtown 5% SZR (WTC to 1st interchange) 2% 6% Tecom (DIC/DMC/KV) 7% 9% -7% (DMCC) Bur Dubai -4% -2% Deira DHCC -2% 17% 15% 14% Garhoud -2% Source: Core, UAE Associate of Savills research core-me.com 05

6 Dubai Office Market Update AREA REVIEW Freezones continue to pull higher occupier demand. paradoxically saw a marginal fall in occupancies as few tenants downsized, although there has been a spike in the upper rental range as smaller offices are commanding a 15-2 higher rent due to a lack of availability of similar unit sizes. The Gate Building, Precinct and Village arguably hold the highest headline rents in Dubai, and Index Tower and Burj Daman are able to command similar figures due to their build quality and location. Nonetheless, more affordable options are available at Liberty House and Park Towers within the district. As construction work picks up pace across upcoming buildings, we expect pre-leasing activities, particularly from blue-chip occupiers, to gather momentum. TECOM (DIC/DMC/KV) continues to outperform the average Dubai office market as occupancies hover northwards of 9 across most towers and we see strong demand, especially from existing technology and media occupiers looking to expand. This has led Huawei to purpose build its new national headquarters in TECOM. Furthermore, other buildings coming to the market such as The Butterfly and Habib Sajwani are witnessing steady demand. Dubai Design District () has bucked the overall trend of flat rentals and was able to lease out 85% of its first phase, now commanding 7 higher rents than its opening lease rate last year. Due to its extremely high occupancies, it is now able to be selective in choosing fashion and design tenants. We expect a similar positive response to its next phase which is estimated to be delivered in : After a sharp annual drop of more than 2, rents seem to have finally bottomed out while the lower rental range saw no change from Q2 to Q for example, Mazaya Business Avenue saw steady absorption owing to the lowest entry point of AED 60/ sq. ft. it offers in the district. September and early October have seen a revival in interest from SME and commodity tenants with a bulk of activity concentrated in the 1,000 sq. ft. to 2,000 sq. ft. bracket. Large spatial requirements have been limited to prime assets such as Almas and One. Proximity to Dubai Metro and availability of parking remain key points, along with overall lease terms, that are driving decision making in this submarket. Few buildings, such as the JBC, are witnessing very high occupancies which may start exerting moderate upward pressure on rentals due to their single ownership and perceived locational advantages. Dubai Downtown has been able to maintain its headline rentals steady while Grade A buildings such as Emaar Square and Boulevard Plaza have witnessed a 5% increase in their upper rental range due to very high occupancy levels. Requirements range between 3,000-4,000 sq. ft. and are generally larger than those witnessed in the surrounding districts of Sheikh Zayed Road and. As HSBC is scheduled to move into its purpose built facility by the end of 2017, we expect its current office in Emaar Square to also come to market, adding the only near term stock to the district. Commercial construction activity around Sheikh Zayed Road and, which is leading the supply pipeline, is expected to keep rental rates under pressure, while better access and build quality should help keep rents steady in the near term. However, continues to see increased enquiries from small to mid-size occupiers, especially from start-ups and SMEs and was able to maintain its average rentals throughout Q Older core areas such as Bur Dubai, Deira and Garhoud experienced limited movement in activity levels from thier captive market, keeping the rents relatively flat across most buildings. NEAR TERM OUTLOOK Downtown SZR TECOM (DIC/DMC/KV) Bur Dubai Deira DHCC Garhoud 06

7 Global presence OVER 700 OFFICES AND ASSOCIATES WORLDWIDE Please contact us for further information Core research Executive team Prathyusha Gurrapu Senior Manager - Research & Advisory +971 (0) prathyusha.gurrapu@core-me.com David Abood Partner +971 (0) david.abood@core-me.com Joel McQueen Director - DMCC Office +971 (0) joel.mcqueen@core-me.com Core - UAE Associate of Savills As one of the largest UAE property services firms, Core, UAE Associate of Savills, combines expert local market insight with the international strength provided by 700 offices globally. Core s multi-lingual advisers share an entrepreneurial spirit with a commitment to cultivating long-term, collaborative client relationships. Our local roots, commitment, and attention to detail are backed by the global standards of Savills 150-year-old brand, giving our clients direct access to 30,000 experienced practitioners, with a deep understanding of specialist real estate services in over 60 countries. Our bespoke residential and commercial property advice enables our clients to make informed real estate decisions both locally and abroad, through a single point of contact in any of the 15 languages spoken by our consultants, in one of our 3 offices, in Downtown Dubai, Jumeirah Lake Towers and Abu Dhabi. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Core, UAE Associate of Savills, accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Core s research team. Core Real Estate Brokers.

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