A report compiled by Better Homes and the Investment Boutique into the outlook for the commercial real estate market in Dubai has found that lease rates are likely to drop an average of 64% in 2009 from 2008 levels, and then a further 20% in 2010.
The report authors note that traditional forecasting techniques cannot be applied to the Dubai market as it moves from speculative immaturity to a more regulated field funded by long term investments, meaning that transaction and activity trends from 2008 and before have little relevance.
This is highlighted by Department of Economic Development figures showing that the number of new licences issued in Q1 2009 fell by an average of 21% per month compared to the same period in Q4 2008. In addition, the number of white collar office workers is predicted to fall from an estimated high of 280,088 in 2008, to 237,286 in 2009, and 227,588 in 2010 before rising to 253,598 in 2012 – all against the backdrop of new properties coming onto the market.
Any report analyzing trends in Dubai's commercial real estate sectors also has to deal with the fact that, unlike more mature markets, there is no distinct central business district in the emirate – meaning that it can be difficult to ascertain trends. Businesses are instead clustered into a number of, mostly sector-specific, freezone areas.
Since most corporations are renting office space in these zones, rather than owning their premises, the market reaction to changing rental prices and sudden excess availability of space, a 180 degree turnaround from six months previously, is likely to be rapid.
'Given the unprecedented rental escalations over the past few years, many landlords opted to sign short term leases (one to three years),' says the report. 'This trend not only limited the amount of international institutional investment…it has also created a dynamic in the local market where many commercial leases are resetting over the next two years. Since a number…of companies took space wherever they could afford over the past three years in particular, we anticipate a new pairing of space and businesses.'
In order to keep their yields profitable, landlords are expected to implement a number of strategies over the coming quarters in order to attract potential new tenants and retain their existing ones.
Initiatives could include free parking, or parking expansion programmes for staff, rent-free periods as part of long term contracts, assistance with relocation, or capital improvements to units. Any such initiatives are facilitated by the fact that commercial properties in the city have mostly been bought on strata basis, meaning that individual buildings are under the control of a single owner or management company.
Government action is also anticipated in the market, with the launch of initiatives to attract international funds and investment into the commercial sector.
Regulatory schemes such as reduced visa or licensing fees, temporary extension of visa categories over the 30-day grace period, or programmes to allow for the cost-effective recruitment of part time workers would all boost the sector. Dubai's Land Department, along with the Real Estate Regulatory Agency, have already begun to implement confidence-boosting plans, including an announcement this week that up to 27 'non-viable' projects were likely to be cancelled.
The report notes that lease rates fell by 22% on average between July and December 2008, to Dhs221 per square foot, although the increasing number of vacancies will continue to put this price under pressure.
Potential vacancies are estimated at 11.41% for 2009, rising to 30.55% in 2011 when, despite an increase in the number of potential office workers, up to 20% of extra units will have come onto the market.
Rental returns are therefore expected to fall from an average of 20% per year during the boom, to a more realistic upper limit of 12% per year, in line with international rates. This would represent a drop in asking prices from tenants of approximately 64% compared to mid-2008 leases. 'While such projections may sound extreme, there is anecdotal evidence of such discounts already starting to emerge in areas such as Jumeirah Lakes Towers and Downtown.'
In 2010 lease rates are expected to drop a further 20% from 2009 rates. At this point companies that had been put off by high rents are expected to begin re-entering the Dubai market, preparing for the beginnings of a recovery in 2011.
' the rate of decline in occupancy levels will slow notably. Employment numbers will begin to grow as the global economy recovers and business activity begins to pick up. Office space per worker will grow in line with European standards, suggesting a stabilization of the historically underserved Dubai office market.'