Rents in central business districts to stabilise in Q1

Lease rates in Dubai's central business districts are likely to stabilise during the first quarter, according to a real estate consultancy.

"There is unlikely to be any change in leasing rates for office spaces in central business districts in the first quarter," Mohammed Faheem, Research Analyst, CB Richard Ellis, Middle East, told Emirates Business.

However, in secondary locations, landlords are likely to offer more "incentives" to a tenant rather than changing office leasing rates. In its fourth-quarter report on the Dubai property market, CBRE said vacancy rates in CBD areas are likely to remain unchanged as no new supply is expected during the first quarter.

"In secondary locations, however, new stock is likely to increase vacancy rates, which currently is about 30 per cent," said Faheem. He added leasing an office space was becoming a concern as tenants with a larger office space requirement were having to deal with multiple owners.

"This is not positive from a tenant's point of view," he said. "The new supply entering freehold areas in Dubai is having to deal with multiple owners, which is a concern in terms of leasing. Tenants with larger space requirement have to deal with multiple owners to acquire a space which is not a positive aspect for tenants."

According to CBRE, the available office space in Dubai currently outstrips demand as new completions are adding further pressure to the existing vacant stock.

Faheem said current occupancies are coming from new as well as existing companies. "The drop in lease rates over the past one year has seen existing companies relocating / upgrading their office space to newer locations and quality accommodation."

Newer areas experiencing high vacancy rates are likely to see rates dip further as competition for tenants continue to lead landlords towards greater incentive packages," the report said.

Office spaces in the central business district (CBD) areas of Dubai are faring better than secondary and tertiary locations. While the vacancy rate in the CBD area of Dubai is in single digits, vacancy rates in secondary and tertiary areas of the emirate is about 30 per cent, it said.

"A substantial upturn in demand will now be required to slow rising vacancy rates in 2010," said the report. Sliding lease and occupancy rates continue to incentivise landlords to offer rent-free periods, inclusion of service charges and multiple cheques.

The report said landlords were willing to contribute to fit-out costs. However, this was apparent only for longer lease terms of five years and more, as well as larger office space. New office space continued to emerge from existing as well as new office districts.

"The market downturn has forced a number of companies into downsizing to cut costs. This, in turn, has increased the availability of discounted fitted-out space as tenants look to reduce liability to leases taken during the market boom. Generally we have found occupiers offering space at 35 per cent to 45 per cent lower than their actual lease interest," the report said.

During the course of 2009, a total of 0.58 million square metres of new office accommodation entered the Dubai market from both freehold and non-freehold locations. Majority of this space (approximately 54 per cent), were in freehold locations of Dubai International Financial Centre (DIFC), Dubai Silicon Oasis, Jumeirah Lakes Towers and Tecom C. The remainder – 46 per cent – was from non-freehold locations.

The ratio of strata to single ownership buildings will shift significantly during 2010, as the vast majority of expected new office supply has been pre-sold on strata basis.

The report said the most notable office space development area likely to enter the market in 2010 is Business Bay. Five or six commercial office towers are either completed and awaiting handover or are in their final stages of completion.

The real estate market remained sluggish during the final quarter of 2009, with few signs to suggest any imminent upturn in fortunes.

According to the Land Department in Dubai, there was a total of 520 transactions in the fourth quarter of 2009, marking a drop of 17.7 per cent compared to the fourth quarter of 2008. In terms of value, the total land transacted equated to Dh3.43 billion, compared to Dh5.09bn in 2008. Although construction activities for real estate projects have slowed down considerably, infrastructure and transportation projects have continued to show exceptional progress.

Office rentals in prime business areas, excluding DIFC, ranged between Dh1,950 and Dh2,400 per sq m per annum during the quarter, with little change from the third quarter. This is around 57 per cent lower as a year-on-year comparison reflecting the negative impact felt in the emirate in past four quarters.

Residential supply in the coming year will have the highest effect on villas. Villa developments expected to be handed over in 2010 include Jumeirah Village, The Villa and Al Waha Villas. Apartment rates may experience a small drop in rates in 2010 but these are unlikely to compare with the declines in 2009.

Keep up with the latest business news from the region with the Emirates Business 24|7 daily newsletter. To subscribe to the newsletter, please click here.

Follow Emirates 24|7 on Google News.