Demand for office space sees sales and rental prices continuing to soar

The increase in sales prices, which was revealed through Asteco's quarterly market research, has led to the city commanding one of the highest global rental yields for commercial premises - ranging from 17 to 18%.

According to Asteco's 2007 fourth quarter report, rent for office space increased by about five per cent on average over the last quarter, with Sheikh Zayed Road and Oud Metha seeing the highest rises of 6 and 12% respectively. And, when compared to last years rates (2006 Q4), Dubai's office rentals saw a significant increase of 44% with occupancy rates continuing to hover between 97-99%.

"The price increases reflect the fact that Dubai's commercial sector has almost no liquid secondary market at present," says John Allen, Director Research Valuation and Consultancy at Asteco. "The limited delivery of new office accommodation over the past few years has resulted in a persistent market undersupply, resulting in strong increases in office rental rates and sales prices," he adds.

Asteco anticipate that the prices of commercial units will witness another surge as these buildings near completion next year. "We believe that there will be another spike in office rental and sales prices this year too. This is because people are willing to pay higher prices for a tangible asset, as opposed to a concept design," says Allen.

Asteco's report also states that there will be a shortfall of approximately 18 million sq.ft of office space supply next year due to construction delays. 29% of this office space supply is expected to come from the Business Bay development.

Allen believes that as the final touches are added to new commercial premises, the market will change in favour of those wishing to lease ready office space. "We would imagine that landlords will become more competitive as the supply increases," he says. "We expect to see more high quality finishes being offered and offices tailored to suit tenants' requirements. More importantly for businesses, rents will stabilise and reflect true market values."

An additional factor likely to impact the commercial property market in 2008 will be the application of the new 'green rules' that will come into effect from early 2008. Following an earlier directive by His Highness Sheikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, developers are now being asked to comply with new standards, which have been drawn up by The Dubai Executive Council's Committee for Green Buildings.

"Contractors are now being requested to adhere to the new standards to ensure a healthy and environment-friendly lifestyle in the UAE," says Allen. "Although in the long-term this will help promote a better quality of life, in the short-term it will involve an increase in construction prices."

Asteco believes that confidence among investors and end-users to lease commercial premises will strengthen next year. "Although we anticipate that the number of new projects being announced will decrease due to higher costs being passed on to developers, we will see more companies setting up in Dubai because of continued economic growth, new government initiatives and direct foreign investment."