Dubai and Abu Dhabi were among the top 10 commercial property locations in the world in 2008, according to a new study.
Cushman & Wakefield (C&W), a commercial real estate services firm, in its recent study said while Dubai's occupancy cost stood at about €1,200 (Dh5,577) per square metre per year in 2008, office space in Abu Dhabi could be rented at €990 per square metre per year.
Dubai was ranked fifth among the most expensive property locations, three places above the 2007 rankings. Rent of commercial property in Abu Dhabi rose at one of the highest rates in the world last year, the report showed. Commercial space rent in Abu Dhabi rose at about 38 per cent in 2008.
"Dubai remained the most expensive destination in the region and is now established as one of the most expensive office destinations in the world," the report said. "Abu Dhabi has a severe shortage of Grade A space and as demand from both national and international occupiers held firm, rental levels have risen by more than a third over a year."
However, the two emirates have felt a cascading impact of the global crisis, it said.
"The Dubai real estate market began to cool towards the end of 2008, with transaction volumes declining and a number of large real estate projects either postponed or cancelled. Rental growth, while still positive, slowed sharply year on year with landlords offering greater incentives to lure occupiers," the report said.
"Demand is now focused on smaller floor plates as occupiers look to scale down their operations," C&W said about Abu Dhabi.
Damascus was the second most expensive location in the region in 2008. "The office market in Damascus is fairly immature and demand for office space is outstripping supply. With very few Grade A buildings, rental levels are high," the report said. Occupancy cost of commercial property in Damascus stood at €990 per square metre per year.
The report titled Office Space Across the World 2009 compares office occupancy costs in 202 key locations in 57 countries around the world. Of these 202 locations, 58 per cent experienced rental growth in 2008, 26 per cent saw rents stabilising and 16 per cent showed a rental fall (compared to only one per cent in 2007). Office rents globally rose on average by three per cent, significantly below the 14 per cent achieved in 2007 and the lowest growth rate since 2004.
Locations in the Middle and Far East overtook Europe as the costliest locations, the report highlighted. London lost its status as the world's costliest office location for the first time in nine years. Far Eastern commercial hubs Hong Kong and Tokyo emerged as the costliest office locations in the world. The cost of occupying a prime square metre of office per year in Hong Kong stood at €1,743. It stood at about €1,649 earlier, which is a fall of 19 per cent year on year.
Rents in Hong Kong actually fell four per cent in 2008. The much larger 23 per cent fall in London's West End pushed occupancy costs down further to €1,403 per square metre per annum.
The authors of the report maintain that Hong Kong may witness a sharper fall in 2009. "Although rents in Hong Kong fell, the drop was not as severe as witnessed in other leading cities such as Tokyo or London. This is primarily due to Hong Kong's comparatively low vacancy rates. Many banking and finance occupiers have not yet reached the end of their lease, so are not currently looking to either relocate or downsize. There is also a limited supply of new stock coming on to the market in the immediate future. However, there seems little doubt that rents will continue to fall over 2009, perhaps at a faster rate then before," said John Siu, General Manager, C&W Hong Kong.
CHINA ON THE UP
On a relative scale another good performer was China. "A strong contender for overall rental growth last year is China that recorded a 12 per cent overall increase in rents. However, events did take a turn for the worse as the market weakened toward the end of the year," a C&W communiqué said.
"The success of the China market is due, mainly, to strong demand over the first half of 2008. This slowed quickly in the second half as development plans were delayed. However, many have since resumed construction," said Richard Middleton, Executive Managing Director, C&W. "Recent reports show a re-emergence of tenant demand, particularly in the pharmaceutical, education and legal sectors, as occupiers reassess their space requirements. As rents for prime office space in Shanghai and Beijing are off by up to 25 per cent, companies are looking at renegotiating their leases or relocating to take advantage of cost-saving opportunities offered in a five-year lease."
C&W blamed the tumbling rates in London on the financial crisis. "The impact of the global economic downturn has been felt in all markets. The expansion of financial institutions, particularly hedge funds, have driven up rents in London's most prestigious West End market for the past few years but it has now felt the full impact of the credit and banking crisis. The fall in rents and weak UK currency, however, means that for overseas companies, London is now more affordable than it has been in years," it said.
However, the plummeting rents in London may contribute towards making it an attractive destination for locating an office, C&W analysts said. "Whilst 2008 has not been a great year for London's commercial property market, the fall in rental values and weakening of the sterling have meant that the city has become better value and more competitive in the global rankings. Although it is difficult to remain objective amongst the maelstrom of bad news, London remains the number one location in Europe that international businesses choose to locate in. Its increasing cost competitiveness will only help this status," said James Young, head of Central London offices, C&W. Irish capital Dublin fell out of the top 10 places for the first time in three years. It went down to the 15th position from ninth with annual occupancy costs standing at €620 per square metre. This includes a decline in rents of 13 per cent. On a larger scale, Western Europe was the poorest performing region with average rental growth of only one per cent.
BEST PERFORMING REGION
South America was the best performing region with rental growth averaging 12 per cent for the year.
"Overall the Americas have performed well in 2008, with regional growth rising by six per cent. South America outperformed the regional average with rents rising by 12 per cent over the year. South American growth was driven by the impressive performance seen in Brazil. Both Sao Paulo and Rio de Janeiro saw strong rental growth over the year, with rents in Rio de Janeiro moving up by almost 30 per cent. Absorption rates were at record levels, and despite new market space being completed every year, the markets were still characterised by a lack of Grade A space," C&W said.
"Both Mexico and Colombia performed well with nine per cent and 20 per cent rental growth, respectively. The Bogota market was characterised by a lack of Grade A space and the highest level of absorption for five years. As a direct result of disequilibrium in the markets, development activity increased during the year and vacancy started an upward trend, although still at low levels."
While the US real estate market was subject to a lot of speculation last year, the rental office market increased by four per cent. Canada also saw slight growth of six per cent.
"The US market saw a gradual downturn in business sentiment during the year, but the final quarter saw significant job losses, which resulted in a sharp reduction in occupier demand. Consolidations and renewals were the drivers of occupier activity. Sublet space began to rise and combined with significant development, overall vacancy rates in central business districts and suburban markets rose in the fourth quarter," the report said.
"In Canada demand for space weakened as the year progressed. What was evident, particularly towards the year-end, was that the occupiers were halting decisions and reassessing their space needs. The national vacancy rates rose for the first time in 26 quarters, in part due to high level of developments completions," C&W said.
The severe global financial crisis has ensured a somber outlook for 2009.
"The outlook for this year isn't as optimistic due to the slowing markets everywhere. Vacancy rates are set to peak in 2010 since many developments are yet to reach finishing stage. On the up side, there is still evidence that some markets are in dire need of modern, updated property, preventing oversupply due to delayed projects. The short-term outlook is definitely subdued and time will tell what happens as economies pick up their reigns yet again," C&W said.
Asia, Africa and the Middle East are expected to see recovery prior to Europe and America, the report said. "These regions will not be immune from the slowing occupational markets, but the availability of Grade A space is still particularly low that will help support rents in a number of key office markets. Nevertheless, occupiers are expected to play a waiting game anticipating a further fall in the rents," C&W said.
The levels of vacancy in office space is expected to peak in 2010 instead of 2009, the report said.
"Supply levels are rising due to development completions and space rationalisation, resulting in increase in second-hand space. Vacancy is now almost likely to peak in 2010 rather than 2009. On the plus side, many markets remain undersupplied with modern, efficient property and many proposed developments have been delayed over the past 12 months, which should prevent an oversupply in many markets."
"The outlook for occupancy is subdued in the short term. Even in those markets where take up has held up, future demand is down and outlook for 2009 has deteriorated. Businesses continue to delay expansion plans and increasingly will look to reduce staff and that will impact on property supply and demand. As such these leasing markets have shifted in the tenants' favour and will present opportunities for occupiers to renegotiate existing lease commitments or to seek more cost-effective space," C&W said.
Rents are expected to fall drastically in 2009, the study noted. The most affected markets will be the ones located in economies with excess debt and other structural imbalances such as extreme exposure to global corporate houses, the report said.
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