Renewed optimism boosts property demand: CBRE

Renewed level of optimism from investors led to an increase in the overall property enquiry numbers in Abu Dhabi, while Dubai is expected to see modest transactional activity as banks relax lending rules, CB Richard Ellis (CBRE) said yesterday.

"A number of banks have made moves to relax lending terms in order to help stimulate growth in the mortgage market. As a result, we anticipate some modest activity in the transactional market. However, this activity will be largely focused on already established locations and properties ready for occupation," Matthew Green, Head of Research and Consultancy, UAE, CBRE Middle East, said in the first quarter marketview report on Dubai property market.

Some banks in the UAE are now offering attractive 25:75 lending options, along with mortgage rates ranging from 5.75 to 6.75 per cent.

CBRE also believes the Dubai Government's announcement on the Dubai World debt restructuring will have a "positive" impact on the property market, but there are still a number of major obstacles before any real recovery can be expected.

"The Dubai outlook has been somewhat buoyed by the government's announcement on the Dubai World debt restructuring, specifically the news that Nakheel is to receive funds in order to begin payment of its contractors and sub-contractors," Green said.

The Dubai Government has indicated that it will inject a total of $9.5 billion (Dh34.89bn) into Dubai World, with Nakheel receiving the vast majority. Although the Dubai office market remained subdued during the first quarter, low levels of demand from existing and new entrants added further pressure to lease and occupancy rates. Demand remains fixed in the smaller size category, compared to larger spatial requirements of greater than 500 square metres prior to the slowdown.

Moreover, residential properties that were converted into office units during the peak are now returning to the market as residential product once more.

"Landlords are finding it increasingly difficult to let sub-standard office space in light of growing supply and improving office quality," Green said.

Vacancy rates continue to grow as supply from both existing buildings and new stock increases.

Tenants continue to prosper with greater availability of accommodation options driving lease rates lower. Notable cost savings remain possible for occupiers taking existing fitted space, with accommodation often available at no premium.

Office rentals stable

Lease rates for office space in the central business district (CBD), excluding Dubai International Financial Centre (DIFC), have remained static compared to the previous quarter. Rates continue to hold in the range of Dh1,940 to Dh2,400 per square metre per annum. On a comparative basis lease rates dropped 43 per cent from first quarter 2009.

"Increased competition for tenants and a continuation of testing economic conditions globally, look set to constrain office demand in the short term, resulting in further declines in lease rates, especially for low-grade stock in secondary locations," he added.

The DIFC area is now experiencing slight lease rate falls in both private developer and DIFC-owned properties, although rental rates are still at a premium over other prime districts, remaining in the range of Dh3,230 to Dh4,305 per sqm pa.

The CBD, which historically enjoyed vacancy levels within single digits, will see further movement into double digits, although it will continue to fare better than secondary and tertiary locations as occupiers are able to enjoy a flight to quality, the report said.

Secondary locations continue to struggle in maintaining occupancy ratios, despite some of the lowest lease rates in five years. Freehold locations, which have emerged over the past three years, remain worst effected, predominantly as a result of a huge number of completions over a short period.

Lease rates in the freehold locations of Jumeirah Lakes Towers and Dubai Silicon Oasis range between Dh538 and Dh860 per sqm pa.

"Landlords have even started to offer lease rates inclusive of service charges in order to maintain high occupancy ratios. Even with these measures, occupancy and lease rates continue to drop," the report said. Prime locations are now showing some renewed interest as a clear two-tier market emerges. Secondary locations remain worst effected, with sales rates comparable with those of 2005 and 2006.

During the first quarter, about 180,000 sqm of new office space entered the market, an increase of four per cent in the total stock. Of this total new space, 67 per cent entered in secondary, freehold locations.

"The outlook for commercial office space is for another challenging year, with further downward movement for lease and occupancy rates as multiple projects in their final stages of construction begin to enter the market," Green said.

Marginal slip

Compared to the previous quarter, lease rates in first quarter 2010 witnessed only a marginal slip.

However, on an annual basis, rates for apartments dropped by a more noteworthy 23 per cent, across the 22 districts reviewed.

The lease rate falls have been larger in leasehold locations than in freehold locations. Product quality, building facilities and the general level of finishing quality within leasehold projects do not compare well against the freehold equivalent.

The 12 non-freehold locations analysed have experienced a 26 per cent fall, against a 20 per cent drop in the 10 freehold districts. Lease rates for residential villas have also fallen across all villa districts.

However, the percentage drop has been low compared to that of apartments, a consequence of basic supply dynamics. On average, lease rates for villas have dropped by 13 per cent on annual basis across all unit types. Due to the location and offering, lease rates in freehold locations are typically faring better than leasehold locations.

The average rate for a three bedroom villa in a freehold location is Dh185,000 per unit pa, while in a leasehold locations it is Dh140,000 per unit pa.

A comparison between freehold and leasehold locations reveals that the drop has been 10 per cent in freehold locations and 15 per cent in leasehold locations. The sharpest falls in leasehold location lease rates have taken place in Al Barsha and Mirdiff due to significant increases in stock during the last year.

Service charges 'concern'

Service charges across freehold locations remain a concern for both current and would-be investors. Falling lease rates have served to accentuate excessive service charge rates set by developers during the peak.

"As lease rates continue to decline, rental yields become further impacted. With the establishment of 'owners associations' still to take place, developers are suspected of exploiting owners for profit, rather than actually servicing developments for the benefit of tenants."

The issue of service charges is thus likely to be a major talking point during 2010, and something that will need the proper attention of Real Estate Regulatory Agency to help further improve transparency and to stimulate and encourage greater investment activity moving forward.

Capital vacancy up

Office rents which peaked in the third quarter of 2008, low demand levels, coupled with increased availability of office space from newly completed developments has resulted in a sixth straight quarter of rental decline.

During the first three months of the year, average prime rents were around Dh2,300 per sqm pa, a reduction of 12 per cent over the previous quarter. Landlords of high quality space remained bullish, typically asking significantly higher rental rates of between Dh2,700 and Dh3,200 per sqm pa.

Vacancy rates increased by about two per cent from the historical levels of less than one per cent in recent years, CBRE said in a separate report on Abu Dhabi.

Rental rates for newly completed office space in Khalidiya and Corniche ranged between Dh1,900 and Dh2,700 per sqm pa, while lease rates for Al Wahda Office Towers started from Dh2,700 per sqm pa for offices on lower floors, to Dh3,000 per sqm pa for offices on upper floors.

Potential occupiers are now able to exercise increased levels of choice, across multiple decision making factors, from location to facilities and services and value for money. With vacancy rates slowly rising, landlords are becoming more and more anxious to fill their developments and to avoid long void periods. The shift in market dynamics is now resulting in increased tenant incentives, and more generous leasing terms for occupiers.

The Abu Dhabi office market experienced increased activity during the quarter, with the strongest demand being for smaller unit types. A small number of firms continue to seek larger spaces of up to 4,000 sqm, although typically these requirements have originated from foreign-based institutions, and professional and consultancy firms.

"Rental rates for high quality commercial products should remain more stable and could even see a return to rental growth later in the year and into 2011. Rental variance for older and inferior product against newly available stocks, is likely to widen as more supply becomes available and greater choice for tenants becomes apparent," Green said.

Overall, the change in the economic climate continues to benefit tenants, with developers pressured to deliver better specification products at lower rates.

Low fall

Slight reductions were observed in average lease rates for both apartments and villas at five to 10 per cent and eight to 15 per cent, respectively, despite some resurgence in activity levels noted during the quarter.

Average rental rates for two and three bedroom apartment units were between Dh110,000 pa and Dh170,000 pa and Dh150,000 and Dh210,000 pa, respectively.

However, there remain a number of prime residential buildings commanding substantially higher rental rates of 40 to 90 per cent above average rates.

This trend has become more apparent for newly completed developments, against lesser quality existing units situated in the Corniche and Bateen areas. Prime locations, coupled with provision of facilities, design and aesthetic, views and surrounding environments, were among the key determining factors for differentiation between high-end residences and wider available supply.

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