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16 April 2024

Global office service charges: How Dubai compares

By Parag Deulgaonkar

Average service charges for Grade A office buildings in Dubai are relatively lower than those in New York, London, Hong Kong and Tokyo, according to Jones Lang LaSalle (JLL).

The charges in the emirate stand at around Dh33 per square feet per annum compared to Dh50 in New York, Dh59 in London, Dh68 in Hong Kong and Dh90 in Tokyo. The global average of Dh42 psq per annum.

One of the prime reasons for lower charges is the relatively low wage rates in Dubai compared to other global office markets, the global consultancy says, adding that the competitive nature of the market restricts the ability of landlords to pass on the full cost of operating buildings to tenants who have a wide range of alternative properties from which to select.

Prime rents, however, in Dubai remain much lower than the above stated global markets. In the emirate, rents stood at Dh130 per square feet per annum in the fourth quarter of 2012 whereas rents in New York, London, Hong Kong and Tokyo during the same period were at Dh213, Dh558, Dh512 and Dh494 psf per annum, respectively.

A comparison of the ratio of service charge to net rent reveals that Dubai is the highest at 25 per cent, while in New York the ratio is 24 per cent, London 11 per cent, Hong Kong 13 per cent and Tokyo 18 per cent.

But unlike more mature markets in Dubai there is little correlation between the actual costs of operating buildings and the amount the owner can recover in service charges. Hence, many owners experience a shortfall between the level of costs incurred and their ability to recover these costs from occupiers.

A significant factor impacting operating costs for owners is the increased complexity and sophistication of office buildings in the emirate.

The market has seen the completion of more mixed-use buildings in recent years, with office space being combined with retail, residential and hotel uses in the same structure. This increases the amount of common areas, the costs of managing these areas and the complexity of allocating these costs fairly to different users of the building.

Although globally service charges reflect actual operating costs, in Dubai they are driven by market forces that drive the charges below actual operating costs with owners facing an operational deficit and in a few instances higher than actual that leaves tenants paying for a level of service that they do not receive.

Graham Howat, Head of Property and Asset Management at Jones Lang LaSalle MENA believes changes are taking place for good.

“The future looks promising with the continued move to a net rental model ensuring a greater level of disclosure of operating costs. Greater transparency will also result in closer partnership between building owners and occupiers as it will help reduce disputes and enhance the long term value of the asset. Widespread adoption of global best practices may take time as it’s a relatively new real estate market, but the UAE is definitely moving in the right direction,” he adds.