Dubai office rents triple since 2005

Rental rates in Dubai have tripled and, on average, have risen to a whopping AED 270/280 per sq. ft. in 2007 from AED 90/100 per sq. ft. in 2005.

"We expect commercial office rents to remain high throughout 2007 and 2008 mainly due to construction delays. However, by 2009, a significant amount of new supply will reach the market which will address this strong demand and ease rental increases going forward,"

commented John Allen, Director Research Valuation and Consultancy at Asteco.

With supply falling short of demand, rent increases have been consistently strong in 2007 with Dubai office rentals showing an increase of 55 per cent on an average over the past year. According to Asteco's third quarter rental research, rents on Sheikh Zayed Road have jumped to AED350/375 per sq. ft. compared to AED220/240 in 2006.

Other areas commanding high rental rates include Bur Dubai and Karama at AED 280 and AED 265 per sq ft. which have shown a 24 per cent and 51 per cent increase over 2006 third quarter rates respectively.

"With escalating rents demand for outright purchase of commercial units has also increased as Dubai's office market offers one of the highest returns worldwide - more than 20 per cent - as prices are relatively lower here compared to international markets,"

added Andrew Chambers, Managing Director of Asteco.

In addition, residential developments in Dubai have been dominant over commercial, resulting in shortage of office space, and most mixed-use buildings dedicate only 20 per cent to commercial areas.

However, office rents are expected to stabilise in the long term when the projected commercial units are completed. Even though new companies are opening branches in Dubai and there is an expansion in the non-oil sectors, including tourism and finance, the current planned additions in commercial space may be more than what the market can absorb, according to Chambers.

Business Bay is also slated to be the next commercial hub of the city, providing approximately 28.5 per cent (14,276,352 sq. ft) of the total expected supply of 50.1 million sq. ft by 2010. Other key areas such as Jumeirah Lake Towers and Dubai Investment Park will also contribute substantially with an additional 17.8 per cent and 16 per cent of office space over the next 24 months.

On the residential front, apartment rental rates in Dubai have increased by a significant 25 per cent from 2005 to 2006 and by 18 per cent from 2006 to 2007. Starting at AED74,000 in 2005, rents in New Dubai areas reached AED92,000 in 2006 and climbed to AED110,000 in 2007.

Sheikh Zayed Road, Dubai Marina and the Greens recorded the greatest increase over 2006 rates recording an average increase of 26 per cent, 31 per cent and 44 per cent respectively.

On the other hand, with the delivery of Jumeirah Beach Residence apartments in the third quarter of 2007, Dubai Marina saw a significant increase in supply, resulting in a slight decrease or no change in rental prices.

Rental rates in Old Town (Burj Dubai) stabilised as well due to the expected increase in supply within the area. Overall residential rental increases in the third quarter of 2007 were only 10 per cent on average compared to the last quarter, with the highest increases in Old Dubai, Sheikh Zayed Road and Bur Dubai, which saw limited supply.

Interestingly, villa rentals in this quarter have increased in both new and old Dubai areas at an average of 24 per cent in 2007. Villas in Mirdiff and Springs reported increases of 60 per cent and 58 per cent respectively for three-bedroom villas.

"Overall, villas are still outperforming apartments due to their relatively limited supply. The relatively larger family sizes of UAE nationals and GCC expatriates are also driving demand for villas," added Allen.

Contrary to the commercial sector, demand for residential space is projected to fall significantly short of expected supply in both 2007 and 2008. This mismatch between supply and demand is expected to soften the Dubai residential market, impacting the high-end apartment units targeting the high-income proportion of the population.

In contrast, however, apartments catering to middle income residents are in limited supply and will continue to see high occupancy and price levels. In both the cases however, a situation of oversupply is unavoidable by 2009, which will put downward pressure on prices. The extent of the oversupply situation will depend on the timeliness of deliveries.

Founded in Dubai in 1985, Asteco is the UAE's largest property services company. Its services include retail, commercial and residential sales and leasing; strategic consultancy; property management and marketing; feasibility studies and valuations; and research and investment.

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