Sharjah offices see 'sudden drop' in rentals, but…

Competing forces are at play in Sharjah’s office rental market, with rents remaining steady or declining during the third quarter of the year, but set to climb higher in the current quarter due to rising demand for prime space, according to a new report. In addition, ample parking remains a key factor affecting rents of an area, the report highlights. 

The Sharjah Winter 2014 Commercial Market Outlook report by real estate consultancy Cluttons shows that, during Q3 2014, rents across Sharjah’s main office markets held steady, with the prime areas of Al Majaz retaining their position as the city’s most expensive area for office space, with rents remaining stable at Dh75 psf.

These flat rents are attributed to the sudden drop in rental rates across some Grade A buildings in the area, Cluttons highlights.

The once “stubborn landlords” are relenting and lowering rents, the report states, but not before they managed to undermine rents in the area. In fact, the landlords may now be trying to undercut each other, the report suggests.  

“This drop in rental rates has been recorded in schemes where landlords, who were previously reluctant to lower rents, are now being forced to reassess their options due to prolonged void periods,” says Steve Morgan, Chief Executive of Cluttons, Middle East.

“This behaviour has started to undermine rents in the prime areas of Al Majaz, which is being further exacerbated by landlords attempting to undercut one another in an attempt to drive take up,” he adds. 

Rents in the prime areas of Al Majaz stand almost 12 per cent below this time last year, the report states, while the fringe areas of Al Majaz have seen rents surge by more than 18 per cent in the 12 months to the end of Q3 2014.

Like elsewhere in the UAE, occupiers are focussed on Grade A stock, which remains in limited supply, the report states. In particular, high spec Grade A space with adequate parking provisions continues to be highly sought. While most top tier schemes do offer ample parking, these quality developments are operating at close to full occupancy, it adds.

And for those thinking of landing a bargain now, things may no longer be as ‘desperate’ for the landlords, with demand for limited Grade A office space rising thanks to an improving economic environment in the emirate.

The ongoing diversification and growth of Sharjah’s economy, as well as a limited supply pipeline of Grade A office space, is set to positively impact on rents in the emirate’s commercial property market, Cluttons says.

In addition, the overall development pipeline of new office schemes remains limited. The only notable new scheme in central Sharjah is the recently completed Dh130 million 40-storey Al Hind Tower in the Al Majaz area, with asking rents standing at Dh60 psf.

Cluttons' latest report on the emirate’s office market reveals that occupiers are focused on Grade A space, similar to other emirates in the UAE. Further, with Sharjah’s general economic restructuring now starting to bear fruit, the demand for top quality office space by occupiers continues to rise, and is focused on Grade A space.

Looking just at the first nine months of 2014, the best performing submarket was Al Soor, which recorded a 9 per cent growth in office rents. This was followed by the fringe areas of Al Majaz (8.3 per cent).

The report also highlights that this trend is expected to drive Grade A space take up, against a backdrop of low levels of Grade A stock.

In the short term, while supply levels play catch up to an extent, office rents at the top end of the market are expected to come under increased upwards pressure. This will leave incumbent occupiers with little choice, but to absorb the higher costs, or seek alternative options.

“The shortage of Grade A space and capital expenditure associated with any potential move, will mean that larger occupiers will be either unwilling, or unable to relocate and are likely to absorb any rent hikes. We anticipate that smaller occupiers will be more flexible due to their cost conscious behaviour,” said Morgan.

This trend of rising office rentals is more or less in line with what the emirate’s residential market is witnessing. Even as rental growth elsewhere in the UAE – notably in Dubai and Abu Dhabi – is slowing down, residential rental growth in Sharjah are not expected to decelerate substantially, Cluttinsd said in an earlier report.

Despite the strengthening supply pipeline, Cluttons does not forecast the upturn in fresh stock to dent the rate of rental value growth, it noted.

“This is primarily due to the exceptionally strong underlying demand. Furthermore, the most critical component to unlocking any new supply is the ability of developers to secure utility connections through Sewa, which can easily stall the handover of schemes by six to 12 months, thereby inadvertently stemming any surplus flows of fresh residential stock,” that report said.

According to Cluttons, the Sharjah market will tend to remain in favour of landlords in the near to medium term as tenants opt to remain in their current accommodation rather than relocating in order to contain costs.

As per a Sharjah Municipality ruling, landlords are free to fix new rents after the expiry of a three-year rent contract with a particular tenant, but are not allowed to raise rents for two years after the first hike.

Industrial

Elsewhere in the commercial sector, with both economic activity and the population continuing to expand, there has been an upturn in warehouse requirements from companies expanding operations in Sharjah, as well as those new to the emirate, says the Cluttons report.

According to it, the rezoning of peripheral areas of several of Sharjah’s industrial areas to “commercial use” has meant that there has been a steady flow of warehouse occupiers looking for alternative premises. The rezoning of these external parts of the industrial areas has translated into heightened interest for space in more internal areas, which have subsequently seen rents driven up.

“Although there has been no official enforcement of the change of land use in the wider industrial areas yet, we have already begun to see a knock on impact on the limited number of vacant land plots in more central areas, with prices continuing to rise,” said Faisal Durrani, Cluttons’ international research and business development manager.

“Land prices in the Sharjah Industrial Areas currently stand at between Dh200 psf and Dh300 psf, depending on the size of the plot and the proximity to main roads. With the availability of larger plots dwindling, it is inevitable that values will continue to creep upwards, which is likely to catalyse the development of more peripheral and emerging industrial estates,” Durrani added.

The report indicates that, away from the Sharjah industrial areas, the appetite to relocate to the emerging industrial areas around Sharjah International Airport and the existing Al Saja’a Industrial Area, is growing.

The advantage of these areas is the widespread availability of larger land plots and better access to both the northern emirates and regional and international markets, due to the air-freight links available through Sharjah International Airport.

The report also points out that, with Sharjah Municipality’s rent rules also extending to cover the commercial sector, industrial occupiers who have been in situ for a period of three years are being subjected to substantial uplifts at renewal, which is driving relocation to these more affordable areas.

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