Tenants move to better units as rentals fall

Vacancy rates in Dubai's office sector will touch 28 per cent in 2010 and 31 per cent in 2011 as the segment will see additional 11 million square feet of space by 2011, according to a new report.

"Office supply will reach 37.5 million sq ft by 2009, 44 million sq ft in 2010 and 48.5 million sq ft by 2011. This increased supply is expected to increase vacancy rates to 11 per cent in 2009, 28 per cent in 2010 and 31 per cent in 2011," Investment Boutique, a real estate advisory and investment firm, said yesterday in its third quarter market pulse report.

As more supply hits the market, rentals and yields are expected to fall further. Currently, commercial yields are in the range of 9.8 per cent while during the last quarter of 2008 and the first quarter of 2009, yields increased substantially reaching 10.5 to 11.5 per cent.

"A 9.8 percent rental yield remains extremely attractive for investors especially in this depressed scenario. This return compares favorably with other Gulf locations and is extremely attractive when compared to cities in Europe, America, Asia and Australia," said the investment firm.

As a result, landlords are becoming more flexible and sensitive to tenant needs. Lower rents, free ample parking, rental holidays, four to five cheques instead of one and fully fitted spaces are some of the incentives that landlords are offering to attract large long-term tenants to their spaces.

Tenants are preferring to move to better quality units in more convenient locations, with prime locations such as Sheikh Zayed Road witnessing renewed interest. Tenants are also opting for smaller spaces ranging between 1,000 and 2,500 sq ft and have a clear preference for fitted out spaces.

Sub-leasing of office space by companies who have made staff redundant and have spare desks is another emerging trend in 2009, with more than 150,000 sq ft of sub-leased space reportedly available in Dubai.

"The year 2009 has been a tenant's dream with bargaining power rising by leaps and bounds. Companies on the lookout for space are looking for lower price points with additional facilities, while current leases are being renegotiated. Continued job losses and uncertainty about the end of the economic crisis are expected to continue to adversely impact the demand for office space for the rest of the year, while projects that have not yet started construction, or made much progress in construction, are likely to be delayed, if not cancelled," said the report.

Sale prices peaked in the third quarter of 2008, averaging about Dh1,700 per sq ft and have been falling ever since to reach Dh1,200 per sq ft in the third quarter of 2009. While annual rents peaked a quarter after sale prices, averaging about Dh240 per sq ft across Dubai, these have also declined substantially to reach Dh160 per sq ft currently. As such, prices and rentals have fallen by 31 per cent and 33 per cent respectively from their peak levels.

While villa prices are currently down to third quarter 2006 prices, apartments have still only reached the fourth quarter 2007 level.

Lease rates on three bedroom apartments have fallen 34 per cent since their peak last year while rents on three bedroom villas have fallen by more than 45 per cent.

According to Investment Boutique's internal price index, using a base year of January 2005, the villa index reached heights of 300 in 2008 while the apartment index peaked at less than 200, thus villas had significantly farther to fall than apartments in the current market downturn. Sale prices in villa communities such as Emirates Living, Arabian Ranches and Palm Jumeirah have fallen substantially since the peak prices of 2008.

Palm Jumeirah witnessed the largest declines of up to 57 per cent, while villas in Arabian Ranches are now cheaper by 49 per cent since their peak values.

While the Emirates Living district witnessed substantial declines between March and July 2009, demand for these units has recently gone up which has resulted in growth in the number of transactions as well as prices rising in July and August 2009.

In the case of apartments, Downtown Burj Dubai has seen the greatest decline of 77 per cent since the peak but still remains the most expensive residential space in the emirate, priced at 1.5 times the price at Dubai Marina. It should be noted that Downtown figures are somewhat skewed by the meteoric rise of residential prices within the Burj Dubai Tower, said the report.

Dubai Marina has been the most resilient with prices falling only 40 per cent since the peak. Prices in International City fell substantially in January 2009, but have been steady ever since.

Another emerging trend has been the preference for smaller units. One bedroom apartments accounted for 30 per cent of the residential sales in 2009, two bedrooms accounted for 24 per cent and studios accounted for 18 per cent, said the investment company. Villas accounted for a mere 14 per cent of the total residential sales. However, villa transactions are starting to rise with end-users starting to take advantage of the lower price points.

A sustainable positive movement will be seen by end-2010 and early 2011.

"We do see positive sentiment floating in the market resulting in price rises being witnessed in July and August of 2009, with a large proportion of market players believing that the market has bottomed. However, these increases are not the result of any fundamental change in the market – new supply continues to enter the market and will do so well into 2010, while on the demand side, expatriates continue to feel insecure about future prospects, and investors continue to wait for further price declines."

While rents maintain their decline, it is unlikely that sale prices will stabilise or even incease in the short to medium term. "We do, however, believe that the end of 2010 and the beginning of 2011 will see positive movement in prices which will be sustainable over a longer period of time, as supply growth slows down and Dubai's attractiveness rises due to its affordable rents and world class infrastructure," said Investement Boutique.

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