Over the past six months, confidence in the Dubai real estate market has increased to more sustainable levels, boosted by the Expo 2020 win and increased regulation. International investors have been encouraged by Dubai’s growing property market, which led to the UAE topping the Occupier Sentiment Index (OSI) and Investment Sentiment Index (ISI) as part of the Q4-2013 RICS’ ‘Global Commercial Property Monitor’.

Retail has continued to be the star performer across the commercial sectors with rental growth set to exceed that of the mainstream office and industrial markets in Q1 2014. This confidence in the sector has brought a number of new retailers into the UAE market and this has been matched by multiple announcements of new malls planned for development over the next two years.

These include a new collaboration between Tecom Investments and Majid Al Futtaim to build a 1 million square feet mall at the International Media Production Zone (IMPZ). That said, international occupiers of office and industrial space have also demonstrated renewed confidence in Dubai, where we have seen both new entrants into the region, in addition to current international occupiers looking to expand their commercial space to support business growth.


Further momentum

The expectation of landlords across all sectors in the lead up and subsequent success in winning the hosting rights for the 2020 World Expo undoubtedly fuelled further momentum across the Dubai real estate market, where some commercial landlords quite literally increased their quoted rental rates overnight. This resulted in a limited number of deals stalling and unlikely to have any significant impact on occupier activity.

In fact, it has encouraged some occupiers to take more immediate action in expansion or relocation to try and insulate themselves from further rent increases in the short term.

International occupiers new to the region, however, often continue to apply ‘Western’ mindsets and business expectations to the Dubai market. Managing their expectations in terms of timing, quality of information, leases, rent negotiation levels, municipality approvals, trade licence processes, etc. is a large part of every transaction. These occupiers are often based in more landlord-led markets such as those in Europe, India and the US, where transactional fees are not met by tenants.

Although the vacant supply of commercial space across the city remains at an optimum level, international grade A quality space appropriate for corporate tenants can be limited in some submarkets and often comes at premium prices across most locations.

An increasing number of non-financial businesses are now interested in registering within the Dubai International Financial Centre (DIFC), which is due in part to the efforts by the free zone to encourage a wider range of business types to register within the precinct that sits in the centre of Dubai.

Current occupancy in DIFC-owned buildings within the Gate Village and precinct has reached almost 100 per cent. This is forcing occupiers to consider strata-owned space within the zone, which is translating into rising rents, although occupancy rates in some of these buildings remain relatively low.

In contrast, the Tecom free zones of Dubai Media City and Dubai Internet City are operating at near 100 per cent capacity across both its own buildings and privately owned stock. This is presenting a problem for established occupiers who need more space but don’t wish to change location or free zone licence.

Other areas that fall under the administration of Dubai’s Department of Economic Development (DED) such as Business Bay and the older buildings on Shaikh Zayed Road remain popular for smaller, local occupiers due to the smaller floor plates. Business Bay was the added attraction of strata ownership, which means that the vast majority of stock available is in the form of smaller units.

Parking in more centrally located sub-markets does, however, remain a challenge for the vast majority of occupiers. We envisage that this will be one of the driving factors which will encourage occupiers to seriously consider relocating to areas on the periphery that can offer better parking ratios, more competitive and flexible lease terms and improving amenities and infrastructure.

Areas that are likely to increasingly emerge on the radars of international occupiers for this reason include Dubai World Central, Dubiotech, Studio City and IMPZ.

 

— The writer is Middle East head at the property consultancy Cluttons