Now is the time to invest in commercial property, analysts say

Dubai: While the focus today continues to be on higher vacancy rates pushing commercial property rents down in Dubai, analysts say a yield of eight per cent is possible on investments in this sector.

"In the short-term, there may be a negative impact on general rental rates because of the number of empty offices and future oversupply. However, we do not expect this to affect the return on the assets we're selling as the rentals are locked in for the contract period of three to five years," Porush Jhunjhunwala, head of commercial sales and leasing at Better Homes, told Gulf News.

According to Better Homes there is plenty of opportunity and returns can be significantly higher compared to the residential market. "Now is the time to pick up a great commercial property in a strategic location at the best price, and with a possible long-term tenant," Jhunjhunwala said.

Buying a tenanted commercial property allows for a guaranteed return on investment for an extended period of time and select assets can generate a minimum of an eight per cent return.

"We have income generating assets mainly in JLT, Downtown and DIFC. In JLT we have assets for Dh800 per square foot which are producing income of eight to 8.5 per cent per annum," Jhunjhunwala said.

Demand for commercial assets, however, remains relatively low, particularly in the strata title market. Most of the demand is for space to rent in single-owner buildings, said Craig Plumb, head of research at Jones Lang LaSalle.

"Rental values are still declining in the office market in most areas of Dubai, but this does not mean to say there are no good deals to be had, as there remains selective demand from occupiers who are seeking to benefit from the more competitive market conditions," Plumb said.

Current benchmark

The current benchmark for rental yields for prime quality single-tenant buildings is in the range of 8.5 to nine per cent, as the recent sale of Building 5 at Emaar Square confirms. "This assumes a long lease being in place at market rates, with the range varying slightly depending on tenant quality," Plumb said.

Jones Lang LaSalle would expect rental yields for strata title office space elsewhere to be somewhat higher than single-tenant buildings let on long term lease.

"There will clearly be a range, depending upon the quality of the tenant, the length of the lease and the extent to which the rent is at or over the current market level," said Plumb.

As finance availability is limited, buyers need yields at these levels to justify what are mostly all-cash purchases, he added.