The oversupply situation facing Dubai property is most acute in the office sector. This is going to mean some great bargains for tenants over the next few years, and at some stage opportunist buyers will have their chance for the deal of a lifetime.
Dubai office rentals in the upcoming Business Bay district have fallen by 68 per cent from peak prices to $238 (Dh875)/ft², according to the latest quarterly study from Jones Lang LaSalle. Office rents in other areas are down 40 to 60 per cent with rentals of $43 (Dh155) to $81 (Dh295)/ft². Downward pressure is due to the rapidly increasing supply of offices in Dubai, and a stagnant to falling level of demand.
Jones Lang LaSalle says that vacancy levels for offices will exceed 45 per cent by the end of 2010. Most of the near-empty projects will be in non-prime areas like Jumeirah Lakes Towers, Business Bay, Dubai Silicon Oasis, Tecom, Deira and Bur Dubai. That only leaves the Dubai International Financial Centre (DIFC) and the surrounding area as relatively healthy; and the Dubai Marina.
And even in the DIFC the proof will only come as financial sector tenants actually take up the space that they have leased. Some note that the financial sector is notorious for leasing accommodation just in case they require it and then paying penalty to get out.
Business has been appalling for the Dubai financial sector since the credit squeeze and property crash which started in October 2008. There were big write-offs for the banks in 2009 and the accompanying downsizing shows no sign of getting over.
You haven't seen anything yet
Yet the real office oversupply problem is only just beginning. Jones Lang LaSalle has the current office stock at 46 million ft² rising by another 30 million ft² by the end of 2011 of which 20 million ft² will be completed this year. This is oversupply on a truly heroic scale, a doubling of the office supply within a three-year time span. Go back to helicopter photographs of Dubai three years ago and the skyline was very different.
What tends to happen in such a situation is that as rental prices fall, the best locations still take up the demand while even very low rentals fail to fill up the least desirable locations. Indeed, agents report continued demand for Grade A buildings, single ownership buildings and the DIFC.
Buildings with multiple owners, as happens with freehold towers sold to multiple buyers, are particularly disliked by tenants worried about who will act as their landlord in the case of problems with the building.
In more mature global property markets, this would be the sequence of events: developer goes bankrupt; administrator sells office block cheaply to new buyers; new buyers seek lower rents; office market recovers; new buyers sit on large profit.
But that just doesn't seem to be happening in Dubai right now. The banks seem reluctant, or indeed instructed, not to bankrupt any developer. Often both are government owned or controlled, and so pulling the plug would cause losses just as big if not greater than holding tight.
In that case, many office towers could sit vacant for years until the market requires the space. Other projects are counting on off-plan buyers to stump up the cash to complete them, and whether this money is forthcoming over the next couple of years is anybody's guess.
The landlord factor
But as ever, one man's disaster is another's opportunity. Service sector tenants have not had it this good for years. Also for investors there are going to be some great bargains in the near future as not all owners will stand rents at these levels: imagine if you are trying to pay a big mortgage with these rents, it would be impossible to meet the payments.
However, at what rental level the market will stabilise is presently hard to tell. Landlords in Dubai are known for having deep pockets, and in the 1999 to 2001 real estate slump, they kept offices empty rather than discount rentals. That said there were some great deals to be had with free air-conditioning and other benefits.
Tenants should go for short leases to get the best deals, and look again within a couple of years and hope to lock-in to a longer lease at the very bottom of the market. Usually when the oversupply is at its greatest the best rental deals will be on offer.
The same is true for bargain hunting by real estate investors. Buyers should probably hold off until the market has had a real shake out. Normally in global real estate markets that sort of crisis is painfully self-evident - with headline bankruptcies among the top developers - but the clues might be subtler in Dubai, and simply counting empty towers could be the sharpest measure of how low the market has sunk.
Then there will be an opportunity for buying units or whole towers at historically low prices. But be careful, as these prices may not be as low as you would expect due to the government's big role in Dubai real estate as the biggest landlord and its ability to corral national landlords to follow its lead.
All the same you should then be able to buy in the best locations at reasonable rental yields with capital values on the floor. Nothing is a more consistently successful investment strategy in the property world.
Moreover, as the oversupply situation is going to be worst in the commercial property market, logic would suggest that this is going to be where the biggest bargains occur.
After that you have to hope that Dubai quickly gets its act together to bring in banks and service industries to revitalise its status as the commercial hub city of the Middle East. Investing with that turnaround in mind does not seem nearly so speculative as forking out to buy empty office towers after a real estate crash. For many investors this will undoubtedly turn out to be the deal of a lifetime.
Peter Cooper is More supply in the pipeline
Landmark Advisory's April 2010 leasing guide predicts 19 million ft² of additional office space coming on to the market in 2010, with approximately another 11 million ft² in 2011. "The commercial market is witnessing increased supply from new projects such as Business Bay where 6 million ft² of office space is due for completion this year. However, the majority of the new space in Business Bay is expected to be handed over in Q4 2010 due to infrastructure delays," says Jesse Downs, director of research & advisory services, Landmark Advisory.
