Office landlords feel pressure

The primary reason for these declines has been a lack of activity in the market, which has meant landlords are willing to offer lower rents to secure rents, added Khan.

As the market added over 1.3 million sq ft of space year-to-date, with another 0.44 million sq ft expected over the remainder of the year, Dubai’s office market has seen an increase in relocation and consolidation activity this year, said property consultant Core.

“With many international occupiers consolidating their portfolio either into purpose-built facilities or more competitively priced office premises, it exerted downward pressure on both grade A and particularly grade B office sectors,” said Edward Macura, partner at Core.

He expects rents and capital values to remain under pressure, with a significant prime office stock to be delivered over the next year.

Top investment areas

As Dubai’s office market is expected to remain subdued, with JLL in its own research noting a drop in rent of up to 13 per cent year-on-year to Dh1,638 in the third quarter, the emirate continues to be one of the region’s most sought-after office destinations.

In Dubai, there are limited office transactions in investment areas where much of the stock is held by family holdings. However, according to Ian Albert, regional director and head of research and advisory at Colliers International Middle East and North Africa, there are freehold investment areas, including Dubai International Financial Centre [DIFC], Downtown Dubai, Business Bay, Jumeirah Lakes Towers and Dubai Marina and Barsha Heights, that provide opportunities.

DIFC, for instance, has performed well with over 80,000 sq ft of net absorption in the third quarter, he said.

Simon Townsend, senior director and head of strategic advisory and consulting at CBRE, agrees that DIFC has seen the most significant activity as it continues to attract corporates across a variety of commercial sectors, in addition to finance and investment companies.

“As construction continues on the prominent ICD Brookfield Place development within the heart of DIFC, we expect this trend to continue,” he said.

In addition to DIFC, Townsend said modern commercial properties at Dubai World Trade Centre (DWTC) and in the established developments of Tecom and Emaar Square continue to be highly sought after.

Future growth

“However, in addition to these newer zones, there remains a strong correlation between commercial interest and the traditional commercial business district of Shaikh Zayed Road, especially around the Emirates Towers junction,” he added.

Knight Frank revealed that its clients are currently investing with future growth in mind rather than value. “Some key areas that offer this growth include Dubai Media City, Downtown, DIFC phase one and Dubai Design District,” said Khan.

For shell-and-core space, Andrew Love, head of investment and commercial agency at Cavendish Maxwell, said Dubai Wharf is offering competitive commercial terms.

“Alternatively, Ubora Tower in Business Bay is a ‘best-in-class’ asset, which offers occupiers fully fitted flexible floor plates at sensible lease rates. Given the quality, ICD Brookfield in DIFC is offering competitive rates for those who are willing to sign up a pre-lease,” he said.

Deciding factors

Townsend said there are many factors that affect an occupier’s decision. “The physical characteristics of the property are important as more emphasis is being placed on workplace efficiency. As a result, floor-plate efficiency remains a key consideration with well-configured, column-free, flexible floor plates being highly desirable,” he said.

The other factors that make these locations attractive for office investment include easy licensing and regulation, and accessibility to highways and public transport. “The occupier profiles, too, play a major role as institutional investors look for blue-chip occupiers, for example, in DIFC and Downtown,” said Albert. “Quality of space and building upkeep are also very important, particularly for occupiers that want to ensure they are located in a well-maintained building.”

ROI

While transaction details are generally not made public in this market, Macura said typically gross yield levels for grade A assets are between 6 per cent and 7.5 per cent. Khan said they are currently seeing prime yields for best-in-class products at circa 6.5 per cent, such as the Edge Building, which was acquired by ENBD REIT. “Whereas the wider market is trading at 7.5 per cent to 8.5 per cent in terms of yield,” he added.

A growing number of companies are now trying out flexible open-plan workspaces that allow collaborative thinking for workers. This follows a trend seen in other cities such as London, where occupiers such as ‘WeWork’ dominate occupational office demand, said Andrew Love, head of investment and commercial agency at Cavendish Maxwell.

Ian Albert, regional director and head of research and advisory at Colliers International Middle East and North Africa, agreed that co-working spaces have been very successful, as they accommodate varied businesses, from start-ups and freelancers, all the way up to multinational corporations.

These operators are quite different to the standard serviced office models that Dubai has been familiar with for the past 15 years, according to Albert. There is more focus on promoting a lifestyle that is considered ‘fun’ and ‘energetic’, rather than just a space to do business, he added.

Townsend agreed work is fundamentally different than it was 20 or even just five years ago, while the pace of change, fuelled by technology and a host of economic and cultural trends, is accelerating faster than ever before.

“Corporates are continuing to place a strong focus on technology and flexible space to enhance the user experience, increase workforce productivity and encourage employee retention,” he said.

The wellness agenda has evolved into a core pillar of corporate real estate strategy. According to CBRE, four out of five occupiers either implement or plan to introduce wellness programmes across Europe, Middle East and Africa.