The leasing of space before completion is a common feature of mature office markets. Attracting tenants ahead of the completion is a win-win situation, providing certainty of income to developers and allowing major tenants to influence the design and delivery of their future space.
It is common practice in London and Hong Kong for leasing campaigns to commence at the same time as construction, in the hope of attracting one or more major ‘anchor tenants’ and reducing the risk of undertaking purely speculative development.
It is, therefore, surprising that pre-leases have not typically been a feature of the office market in the UAE or elsewhere in the Middle East, where many developers do not commence their leasing campaign until the project is nearly complete. This situation is beginning to change and we are witnessing a number of major projects marketed to tenants at an earlier stage of construction.
I believe that this trend will continue and that the emergence of pre-leases will be one of the defining features of the Dubai office market during 2015.
There are a number of major projects at different stages of construction that are looking to sign lease agreements. Dubai Design District (d3), a new office park development by Tecom off of Al Khail Road, is the closest to completion. The project is due to be handed over to tenants in the second quarter of 2015 and has already attracted high-profile tenants such as Jumeirah Group and Chalhoub.
As a result, about one-third of the development will be leased three months before practical completion.
The leasing of d3 did not commence until the project was nearing completion, which is relatively typical of traditional market practices in the UAE. There are also a number of other single-owned buildings that are now seeking to attract pre-leases at a much earlier stage. JLL are agents on two of these high-profile projects.
Firstly, on behalf of Dubai World Trade Centre, JLL is advising on the Dubai Trade Centre District (DTCD), located between Emirates Towers and the World Trade Centre Metro Station. The first building at DTCD will be completed in the fourth quarter of 2015 and is an international Grade A and LEED Gold-rated building, providing 172,000 square feet of net leasable area with 20,000 square feet floor plates.
Secondly, JLL are assisting with the leasing of One JLT in the DMCC Freezone in Jumeirah Lakes Towers, which will be also be completed in the fourth quarter. This is an international Grade A and LEED Gold-rated building providing 291,000 square feet of net leasable area with typical floor plates of 20,500 square feet.
At DTCD, JLL is leasing the next phase of office buildings to major tenants now, even though they will not be completed until 2017. This will give potential tenants the chance to influence the details of the project in line with their requirements and may also provide the opportunity for naming rights for suitable tenants.
The willingness of owners to seek pre-leases earlier in the development process is a reflection of the greater importance more enlightened developers are attributing to meeting the requirements of major tenants, while also providing them with the certainty of having secured an income stream before the completion of the project.
From the tenant’s perspective, committing to a pre-lease not only provides the chance to influence the finer details of the project but also provides them with the opportunity to secure space on attractive terms, as pre-leases will typically attract a discount to the rental level that would be sought after completion.
Pre-leases can also be seen as a sign of greater certainty and confidence in the market by tenants. In the past, many tenants have been unwilling to commit before the project’s completion, as they were unsure of the quality or timing of the space being delivered.
With greater office space now being delivered by reputable developers and professional teams, tenants can be more confident of the quality and timing of the space, which encourages them to consider the option of pre-leasing.
While government departments and larger quasi-government agencies have traditionally had space purpose-built to their specifications, this has not generally been the case for private-sector occupiers (with the number of major design and construct projects for private sector tenants in Dubai being extremely limited). One notable project was the Standard Chartered Bank building in Downtown.
The project gave the bank the comfort of successfully fulfilling their real estate strategy both in good time and in a purpose-built building. The trend towards greater pre-leases is a welcome move in this direction and displays the confidence of both parties and the growing maturity of the real estate market.
Given that Dubai is the regional headquarters for many occupiers and often operates as a precursor of trends that eventually spread to the rest of the region, the move towards more pre-leases may be a sign of things to come.
— The writer is Head of Office Leasing, Dubai, JLL Mena.
