Flight to quality in UAE’s office mart

The Dubai and Abu Dhabi Office markets are currently oversupplied, with vacancy rates in Dubai at 30 per cent and higher in certain parts of the city. There is some very good, ‘Grade A’ office accommodation and plenty of indifferent and secondary accommodation available to let.

This is good news for occupiers looking either to relocate or expand into more space. Increasingly, it will be the better specified properties which will be leased up as the economy recovers and businesses in the UAE come to expect higher specification standards in their buildings.

Companies no longer expect emerging market standards from their office space in the UAE. One of the dilemmas faced by occupiers is knowing exactly what they will be getting from their landlords in servicing and management standards from their new highly specified office buildings.

Businesses which want ‘Grade A’ office specification and are prepared to pay the higher rents for this space do not expect to receive ‘Grade F’ servicing standards.

As many residents in the UAE have discovered to their cost, service charges, their calculation and apportionment can be very unclear. Historically this lack of transparency has also been the case in the Dubai and Abu Dhabi office markets.

Fixed charges — or charges linked to the level of rent — have been the norm, with charges bearing little relationship to the actual cost of providing services to the building or to their quality.

Service charges in the UAE office market have not been so clearly defined or transparent as they are in other commercial and financial centres. To some extent, this reflected the emerging market status of the UAE. But as the real estate market in the UAE matures, things are changing and for the better.

Driven by a demand for higher standards of service and a desire by corporate occupiers to manage their operational costs more effectively, greater transparency in operating costs is increasingly occurring, especially in the higher quality office stock.

Average service charges for the best office space in Dubai and Abu Dhabi stand at Dh33 a square foot and this can represent up to 30 per cent of the rent paid. Not surprisingly, occupiers are demanding more information from their landlords about the costs and the services provided.

Pro-active landlords are becoming much more open with their tenants about running costs and service charges. Best practices in producing accurate budgets on time and disclosure of detailed costs within the budget to tenants, and how these costs are shared, is becoming more evident.

Best value for money is not necessarily lowest cost. Over 60 per cent of the costs of services to buildings are not commodity and ‘unit cost’ priced. Occupiers of quality office space expect a higher level of service.

Tenants also expect their landlords to buy these services at best price and through a professional procurement process. They do not expect their landlord to hire their friend’s cleaning company or the maintenance of the mechanical equipment to be carried out by inappropriately trained technicians. Due process in specifying, buying and delivering the building services at the right price is increasingly under scrutiny by tenants.

This trend towards transparency in running costs is good for landlords also. The adage ‘you cannot manage what you cannot measure’ is particularly apt for the Dubai and Abu Dhabi office market where up until recently many landlords had no clear picture of the true cost of running their buildings.

Fixed charges, or none at all were levied on the tenants and little or no analysis was carried out into cost comparison or benchmarking. More thorough analysis of running costs improves the landlord’s ability to understand the true financial performance of their assets. Having a thorough understanding and good records of true running costs also helps when an owner wants to sell the asset.

— The writer is the CEO of Jones Lang LaSalle, Middle East & North Africa.