Soft UAE office market no barrier for mega commercial asset deals

Dubai: A soft economy is not getting in the way of mega deals happening in the UAE’s office and commercial real estate market. And there have been quite a few of those happening.

For one, there is the ongoing Dh2.2 billion deal by which ADNH (Abu Dhabi National Hotels) is to pick up Emaar Hospitality’s hotel assets in Dubai. And ENBD Reit paid Dh280 million for the swanky Edge Building in Dubai Media City from Sweid & Sweid, and where the net initial yield is about 6.5 per cent, according to Knight Frank.

And just a few days ago, Aldar Investments announced that it will be picking up ownership of the Etihad Plaza and Etihad Airways Centre in Abu Dhabi. The value of the deal - Dh1.2 billion, and which will “enable Aldar Investments to recognise annualised annual net operating income of Dh0.1 billion”.

Competition

According to the latest Knight Frank update on the UAE’s commercial property market, “There is still competition from lenders for exposure to high quality real estate assets and we have seen a number of significant lending transactions complete during the course of the year. The recent decision by the Central Bank of the UAE to loosen the 20 per cent lending cap to real estate previously imposed on banks may also bring further liquidity to the sector.”

So, the deals are happening, but it’s not all hunky-dory. “Volatility and a decline in oil prices toward the end of 2018 and into the start of 2019 demonstrate the fragile nature of the economic environment,” the report notes. “This has impacted business confidence, with firms generally looking for short- to medium-term stability before committing to any expansion plans.

“As a result, the UAE has seen slowdown in employment growth, with the year-on- year figures falling from 3 per cent in Q3-17 to 0.6 per cent in Q3-18. In almost all major employment sectors over this period we have witnessed the annual rate of growth slow or the rate of declines accelerate.”

Which means that investors in office buildings need to be sure they have the tenants lined up for those properties.

Market sources suggest that corporate leasing enquiries continue to be weak, and where possible businesses are tending to stay put in older leased premises - at lower rents - than move into a high-profile address. Clearly, tenants are busy saving on their costs where possible.

But amidst the concerns, there are opportunities.

“More recently, we have seen some private groups return to the market as there are opportunities to acquire assets at significant discounts to historic valuations,” the report adds.

“During the course of the last couple of years, we have seen buyer demographics change within the market with family offices starting to be slightly more cautious over their investment programmes. This has been offset by a number of new institutional investors entering the market, with the intention of creating real estate funds – both private and listed.

“Over the last 12-18 months we have witnessed the bid-ask spread narrowing as sellers adjust expectations given current market conditions and as a result are becoming more realistic to the pricing levels that can be achieved. We envisage this trend to continue during 2019.”

Cost of funds will be a worry

Keep watching US interest rate moves. With lending rates in the UAE also rising in sync, “This has put pressure on financing rates across all sectors of the real estate market, with the spread between yields and lending costs narrowing, which in turn places upwards pressure on yields,” the Knight Frank report states.