Dubai: In a real estate marketplace that's been so bereft of good cheer for some time, a trend that is starting to emerge more forcefully could well get hopes floating once again.
This has to do with a gradual pick-up in commercial lease enquiries related to offices located in key locations such as Dubai Media City and DIFC.
The level of enquiries has kicked up a notch or two since the second half of October. What makes this all the more crucial is the interest relates to new office stock, long seen as the problem area because of the significant capacities being raised in this category and what it would mean for future demand and supply.
But with hints starting to seep through of a general improvement in the economy, albeit in a very early phase, market observers are hoping some of the new office stock will be absorbed without much difficulty. But the caveat is this is a flight to quality.
"Companies are starting to upgrade to superior quality buildings in a low-rent environment, while many others are looking at it, though they may have left it too late to do so this year," said Hannah Jeffery, associate at the property consultancy firm Cushman and Wakefield. "Typically these are companies that came in at the height of the boom and didn't have a great deal of choice.
"At the same time, there is still some hesitancy among some tenants as they feel rents could fall further. Yes, rents are still on the decline, but the level of the drop has reduced."
For companies that are seeking a move, the preference is for office spaces of between 5,000 to 10,000 square feet on average. It's not just the existing businesses that are out to take advantage of the soft market.
Recent weeks have seen multinationals which have not had a presence here make an entry through satellite offices and a limited workforce. And unlike in the past, they are finding landlords willing to consider leasing spaces of 5,000 square feet and less.
Incentives
Three- to five-year lease terms are also becoming the norm in the commercial leasing space, which is another incentive for tenants. "The ability of landlords to offer flexible terms such as putting in break options or on service charges, this can really help establishing your building as a location for businesses," said Jeffery.
"They should take confidence in the fact that Dubai is still the preferred region for corporates that are here and for those looking to come in."
Others in the market also confirm this is the case. A top official at the Easa Saleh Al Gurg Group, which has a sizable residential and commercial portfolio, said that it has had no issues with getting tenants for a newly completed high-rise on Baniyas Street. "There are people and companies moving to Dubai anew, no doubt about that," said Abdullah Al Gurh, group general manager. "Within commercial property, demand for offices, warehouses and retail outlets are all there — but only at the right price."
As far as office locations go, both DIFC and Dubai Media City are beneficiaries. In the case of the former, "It's driven by DIFC obliging tenants to return as part of the strong campaign they have been running for more than two quarters now," said Jeffery.
Rates
"Rents in DIFC are now between Dh300-Dh350, significantly higher than the rest of the market. But tenants who want to be in DIFC are much more comfortable with the existing rates."
Where DMC is concerned, the upswing in recent corporate tenant interest is turning out well for it. So much so, it has easily fended off the challenges posed by office buildings in JLT and the upcoming ones in Business Bay.
"Tenants see the DMC location as more or less complete from a project basis, which means they do not have to wade through construction sites to get to their offices," said an official at a company which has just moved in there. "Then again, DMC has been established address for more than ten years now."
Jeffery agrees that DMC is the preferred free zone choice for non-financial companies.
Rents too are downright favourable, with those buildings carrying the free zone status in the Tecom zone fetching Dh150 a square foot compared with the steep Dh300-Dh350 during the peak.
Those buildings in the Tecom Zone that do not have the free zone status — as in Tecom C — carry rents of Dh55-Dh60 a square foot. "There's a significant premium differential between free zone and non-free zone status," said Jeffery.
Current levels
"There weren't that many completed buildings in Tecom's secondary locations during the market peak, so the current lease levels of Dh80-Dh100 a square foot are what they started off with."
Beyond DMC and DIFC, the choice office locations are Emaar Square and Emaar Business Park, but vacancy rates have there have been historically low. Those in Business Bay are still some months away from completion.
All said and done, even with the recent improvement in rental demand for offices, it will not be enough to keep all of the upcoming offices occupied. But at this point in time, if it manages to tap into a good percentage, that would still do.
Free zone status
A sharp differential in rentals exists within the Tecom zone between those buildings that come with the free zone status and those that don't. In such a situation, is it possible for the latter to seek a free zone status and thus be eligible to raise their own rents?
"It's not something we have seen a great deal of, but it could be difficult particularly for a building covered by Strata Law and where you will need a 100 per cent consensus from the owners' association whether they want to apply for free zone status or be excluded from it.
"Properties within Tecom C have been sold off on Strata and it's not clear whether the authorities would consider issuing free zone licences to them. "While a free zone status boosts the property's appeal in terms of rentals, it doesn't give the owners' associations the flexibility to set rents. That has to be as per those set by the free zone authorities. Thus a free zone licence can be a two-edged sword."
