Office prices on their way down

Dubai: For years it seemed that Dubai could fill its available office space almost as fast as the emirate could build it.

Demand soared and the prices for both office rentals and sales rose with it.

But now, throughout Dubai's commercial real estate industry there seems to be a consensus that the once thriving office sector market is not immune from the demand-driven market. The prices for office space are expected to fall with end users and tenants reaping the benefits.

A plethora of market research has been released in recent weeks by big names in the sector. And they all say essentially the same thing - office prices are on the way down.

Landmark Advisory predicts that commercial sales prices in Dubai will fall by 35 to 40 per cent and leasing prices by 30 to 35 per cent thanks to an increased supply and decreased demand.

Landmark's research cites many reasons behind this anticipated decline - foremost of which is what it terms the switch from 'greed to need'. The company believes that the UAE real estate sector is now having to adopt the fundamentals of a demand driven market with investors, end-users and tenants being able to benefit from not only lower prices but more favourable terms with monthly rent payment schedules becoming more commonplace and eventually standard practice.

Jesse Downs, Landmark's director of research and advisory services, says there are micro-markets throughout the commercial sector in Dubai which are experiencing relative stability despite the downturn elsewhere.

She says: "It is important to realise that Dubai is not homogeneous. Some areas in the city are more resilient than other areas where prices will experience steeper declines. On average, we think the result will be an overall price decline of 35 to 40 per cent."

These predictions are echoed by Matthew Green, associate director, from CB Richard Ellis. Recent research by the company found that while at the end of 2008 there was no change in the prime rents, which had seen a growth of 29 per cent year on a year, a correction in rents would become apparent in the first quarter of this year. The research highlights that the current crisis has resulted in falling demand for office space as the majority of enquiries over the past two years have come from architects, real estate firms and construction companies - business very much affected by the credit crunch.

"Business from these types of companies has now completely fallen away," says Green. However, he says that for companies staying in Dubai rental decreases and falling office sale prices are good news.

"During the last summer office rentals were at a very high level. Now with reductions on the cards, companies which had been unable to expand may find they now have more money to take on extra staff and perhaps begin to come out of this downturn." Green believes that it will be at least the end of this year and even well into 2010 before the prices of office rentals and sales in Dubai start to pick up.

Research by Jones Lang La Salle shows that there has been a major correction in future supply levels in the second half of 2008, with approximately 50 per cent of the proposed office supply for 2009-2011 now considered unlikely to come forward.

As a result, Jones Lang La Salle has reduced its estimate of total additional supply over the next three years by half from 70 million square feet to 34.6 million square feet.

According to Jones Lang La Salle's Dubai City Profile report, projects announced as recently as October, such as Meraas's Jumeirah Gardens and Nakheel's Tall Tower, have already been scaled back, delayed or phased over a much longer period.

Work on many developments under construction in projects such as Jumeirah Lake Towers and Business Bay have been placed on hold and some projects where construction has yet to start are unlikely to happen in the current economic climate.

Fadi Moussalli, regional director, International Capital Group at Jones Lang La Salle Mena, believes the market dynamic will continue to shift in favour of tenants as more new stock enters the market in 2009.

He says: "While future supply will continue to decline, completions are likely to exceed demand in 2009, resulting in a further increase in vacancies, particularly in poorer quality buildings and those in secondary locations. Rising vacancies are likely to result in the emergency of rent free periods and other leasing incentives, with a resulting gap between face and effective rentals.

"However, quality projects will always find appropriate tenants provided landlords show some realism. The exuberance of the last two years in the commercial property sector is now over, which is a healthy thing. We are now back to basics and the winners will be prime location and good quality stocks."

Property management firm, Asteco, believes that Dubai's office rents have already dropped by 11 to 16 per cent due to the global economic downturn.

In its recent research report, Asteco stated that many office rents in Dubai were affected including free zone development, Bur Dubai, Deira Business District and the Shaikh Zayed Road. Office rentals at Jumeirah Lake Towers have dropped by 14 per cent and rentals fell by 11 per cent in Media City and 14 per cent in Deira.

But Andrew Chapman, Asteco's managing director, believes that office sales are still holding up. He says: "Office sales appear to be more resilient to the downturn as the supply-demand gap in commercial space is still wide owing to the delayed delivery of projects at Business Bay. Given the current scenario, Dubai still has great potential for further business development.''

The author is a freelance writer based in Dubai.

• 14% fall in office rentals at Jumeirah Lake Towers
• 11% fall in office rentals in Media City
• 14% drop in Deira office rentals