Shortage to send office space rates soaring by 60%

 
An acute shortage of office space in Dubai is set to force up the cost of leasing commercial real estate by as much as 60 per cent this year, according to industry experts.

The amount of space available for office use and other commercial activities would have to go up by 325 per cent to meet the surge in demand. “The increase in commercial leasing costs is based on simple supply and demand,” Peter Penhall, CEO of Gowealthy, told Emirates Business. “Currently the city has 1.72 million sq ft of commercial space but another 7.29 million sq ft is needed to keep up with the demand. Costs will escalate due to the shortage of office space.”

Another factor is that business is booming in the oil-rich GCC in general and in Dubai in particular despite the slowdown in the global economy caused by the US sub-prime crisis. The revenues and profits of large companies in the region are on an upswing – and this makes extra spending on rent inevitable, said experts. “Most primary buyers have the capacity and cash flows to cope with rising costs but this may put pressure on small and medium-size businesses,” said Penhall.

“However, smaller businesses occupy niches and this does not mean being limited to backstreet clusters. For example, Tecom rentals are not out of reach and profit margins of most firms in Dubai will permit them to carry on in the short-term.”

Leasing charges are the highest in the Sheikh Zayed Road area at $304 (Dh1,116) per sq m, followed by Dubai Media City at $188 per sq m.

The leasing market is expected to get a further boost once the strata law comes into force. “The strata law hasn’t been finalised yet but once it comes into effect it will allow ownership of individual space in multi-storey buildings – and this applies to both residential and commercial spaces,” said Penhall.

Marwan bin Ghalaita, CEO of the Real Estate Regulatory Authority (Rera), said: “The introduction of the new laws and regulations in Dubai is intended to further protect real estate investors and the community at large. In addition, it will deter potential violators from committing irregularities to achieve profits at the expense of the city.”

Penhall said: “Until now ownership has depended on the sale and purchase agreement but an owner was not able to register space with the land department as is the case with a villa or piece of land,” he claims. “The implementation of the strata law will open up a stream of commercial mortgage seekers in the market as banks and other financial institutions will be more willing to lend for such properties.

“The law will establish an individual or company’s ownership of a property. In the case of the commercial sector, more companies will be able to get a mortgage for a property in a multi-storey building.

“If a buyer defaults the banks will be able to take over the property and recover their costs. This will be positive for the market and influence the prices of commercial spaces in a multi-storey building.”

Ghalaita said: “The strata law is designed to handle the day-to-day management of buildings and overcome the complexities of owners’ association and master community declarations by introducing a simple but comprehensive system of rights and responsibilities.”

An analyst said: “The law, which clearly defines the relationship between developers and owners through the owners’ associations, will help remove ambiguities about who is responsible for common property management and reduces scepticism among investors. Under the law, owners through their associations will be able to participate in the budgeting of the common property management processes. This process will increase the confidence owners have in their investment as properties will be protected, organised and better managed.”

“The strata law relates to the management of common property and shared facilities such as parking, fire services, air-conditioning, lifts, pools, gyms, walkways, roadways and gardens, collectively referred to as ‘strata’ in some countries,” said an expert.

“Under the law, an association of owners should be established as a regulatory framework to maintain the quality of the shared facilities of a development.”

An owners’ association is a special non-profit entity made up of unit owners and formed upon registration of the first unit sale. It has a board elected by a general assembly of three to seven members and is responsible for the management, maintenance and operation of common areas.

The expert said: “Under the law, the developer will be liable for 10 years from the date of issuing the property’s completion certificate for building repairs and rectifying any defects in structural elements of the property. The developer is liable for one year for mechanical, electrical, sanitary and plumbing installations.”

Freehold owners in Dubai have to pay service charges under the new law. The charge will be paid to the owners’ association and another fee will be paid to the developer. The association will have to pay the service fees into a dedicated account in a bank chosen by the members.  he association will then select a property management firm to manage the monies collected for maintenance purposes and the developer will receive fees.