Cluttons: Oman office sector remains fragile but logistics sector shows strong growth potential

The report presents a flourishing outlook in the industrial market, while the office market remains relatively fragile.

Logistics

The manufacturing sector contributed OMR701m ($1.82m) to Oman's GDP in Q1 2012 compared to a contribution of OMR603m ($1.6m) in Q1 2011, representing an increase of 16.3%. In a similar vein, the transport, storage and communications sector contributed OMR487m ($1.3m) in Q1 2012 compared to OMR454m ($1.2m) in Q1 2011, representing an increase of 7.3%. These sectors combined make up 16.1% of national GDP and, as they show strong growth, they will continue to create substantial demand for logistics facilities.

The Sultanate has bucked the GCC-wide trend of falling rental values over recent years and the market shows strong stability. Monthly warehouse rental values currently range from OMR3 to 4 per square metre in the Muscat capital area to OMR2 to 3 ($5 to 8) per square metre in Sohar. As the industrial sector continues to grow in Oman, demand remains strong for warehousing and light industrial facilities but supply remains very limited, meaning prices should continue to remain stable in the short to medium term. Cluttons notes that there is an evident gap in the rental manufacturing and logistics sectors with market conditions supporting the development of such facilities.

Looking ahead, Cluttons foresees potential for the development of the Barka area as a logistics hub to serve the Muscat capital area, the continuing expansion of Sohar as a major industrial and logistics cluster, the development of Duqm as a new industrial port city, and the potential for Salalah to leverage on its established port and proximity to the region's major shipping route.

Office

Demand in the office sector continues to be outstripped by the new supply coming into the market. In these competitive conditions, building quality and design, property management and maintenance, car parking and rental incentives are becoming increasingly decisive in attracting and keeping tenants. Demand is strongest for smaller (50 to 250 square metres), fully finished office spaces in prime locations, as opposed to larger, shell and core office spaces.

The lack of suitable parking facilities remains a critical and unaddressed issue for most office tenants in the capital. Suitable levels of car parking are becoming increasingly important in attracting tenants, with many occupiers requiring significantly in excess of the minimum Municipality guidance of two spaces per 100 square metres of leasable office space.

Successful leasing therefore depends on landlords meeting not only price expectations but also a number of other elements. Many landlords remain unwilling to reduce rents to market levels or provide incentives with the result that buildings stay unoccupied. Vacancy levels in such properties are high and are increasing.

Overall, the rental values for office prices in Muscat have generally remained steady over the course of the year for good quality office space. The highest rental values for shell and core space reach OMR 7 (USD $18) per square metre per month, compared with OMR 8.5 (USD $22) per square metre per month for fully furnished space. Rental values however, are declining for lower-grade buildings in sub-prime locations.

In summary, there is a clear mismatch between tenants' requirements and the majority of the office space being built. The outlook for the market is fragile. Cluttons foresees a glut of supply in the market over the next 12 months as more lower-grade buildings are released, with demand remaining steady and focusing mainly on higher end, well designed and well managed office spaces.