The impact of low oil prices and the subsequent bearing this has had on the macroeconomic environment across the GCC, has been felt across every vertical of Dubai’s property market, but most sharply in the office sector, which has proven to be the most challenging asset class over the past year.
Sales prices and rental rates continued to stagnate in the third quarter due to limited demand in a generally oversupplied market, particularly for strata-titled office units. The lack of transaction activity and reluctance of landlords to lower rates in certain areas resulted in a largely flat market. Although stable rates generally mean the bottom of a real estate cycle, we don’t believe this to be the case for the office sector and anticipate further, more pronounced declines.
Office sales rates fell 6 per cent year-on-year, while rental rates also suffered a drop of a more subdued 2 per cent during the same period. Both office rental rates and sales prices will continue to come under pressure as new developments are handed over with demand expected to remain low. Tenants and buyers will continue to expect attractive rates, incentives and flexible payment terms.
As difficult as the market currently is — there has been evidence of corporates moving away from older stock with demand and take-up of grade A office space in business hubs such as Dubai Internet City, Dubai International Financial Centre (DIFC) and Downtown Dubai — this has to be tempered by the fact this only constitutes a fraction of the overall stock.
From a sales perspective, quarter-on-quarter results remained flat across Barsha Heights, Business Bay, DIFC, Dubai Silicon Oasis and Jumeirah Lakes Towers (JLT). Year-on-year the figures were less forgiving with Business Bay recording a decline of 13 per cent, while DIFC and JLT witnessed drops of 11 per cent and Barsha Heights at 8 per cent. The only area remaining flat, according to our statistics, was Dubai Silicon Oasis.
Rental rates have also seen no changes quarter-on-quarter, with all areas remaining the same. Business Bay once again notched the largest decline year-on-year at 10 per cent. The most favourable rental rates were found in Dubai Silicon Oasis and Barsha Heights, where the price per square foot per year varied from Dh50–Dh80 and Dh50-Dh120 respectively.
Other factors that are impacting the commercial market have been the rise in the number and size of the real estate funds/real estate investment trusts (REITs) in Dubai and the wider region. These have generated attractive yields for investors with low entry and exit costs, greater levels of liquidity and the ability to diversify investment across asset types.
Industry experts believe that there remains room for growth and expect a rise in specialised REITs focusing on specific asset classes. This could potentially lead to a greater pool of proactive landlords offering incentives to secure higher occupancy rates to deliver investor returns.
The value-added tax (VAT) is another area expected to impact the commercial market. Our understanding is commercial property is likely to attract VAT, which is expected to be introduced next month, and although this will likely dampen investor interest in the short to medium term, it may open the possibility of a potential increase in tenant demand for the accounting, auditing and tax advisory sector.
That said, with over 4 million sq ft of office supply delivered last year, a further 1.75 million delivered in the first three quarters this year and 0.6 million sq ft expected to be delivered in the fourth quarter, we expect the office market to remain subdued into 2018.
