According to the Jones Lang LaSalle's ‘Dubai Real Estate Market Overview' report last month, Dubai's current stock of office space stands at 43.6 million square feet. The current vacancy level is estimated to be 33 per cent of that or about 14.4 million square feet. In addition, the 2010-2012 pipeline of new supply has been revised 33 per cent (pure coincidence of repetition) due to delays and project cancellations to 40 million square feet from 60 million square feet. So we'll roughly have 54.4 million square feet that will most certainly remain vacant; that's a vacancy rate of 65 per cent.
Average Grade A rentals (Dubai International Financial Centre, etc.) are currently at Dh250 per square foot and are estimated to decrease even further before stabilising by 2011 at the earliest.
So 54.4 million square feet priced at a Dubai average of Dh150 would yield roughly Dh8.2 billion of annual revenue for landlords. So what do you do when you can't rent all this space?
A) Hold out: We've been doing that, it's hard and it's about to get even harder.
B) Lower rent even further: We've been doing that too. Existing companies aren't expanding, in fact quite a few have shut down. What about new ones? No, that's not a growth market.
C) Government demolishes some of its new real estate: While that would actually contribute to rebalancing supply and demand, most of that real estate is directly borrowed against.
D) Section off a large government-owned development and offer its offices and shops, in shell and core state, to entrepreneurs and artists for a minimal all-in Dh5,000 licence fee, effectively deregulating entrepreneurship.
Yeah, I'll go with D. Yes, I'm still a socialism-detesting objectivist. In fact, that's exactly the reason why I would propose this. The government would allocate a development that is deemed predominantly unleasable. However, it should have proximity to a healthy feed of residential areas its market. Clear criteria would be set up that would show who is eligible to occupy this development. Such criteria would include a business plan,presentation and a statement of net worth that would demonstrate that the person starting this business could only start a business in this development. In other words, people who can afford to open businesses in traditional commercial areas should not be allowed to occupy spaces here; this is an incubation process. Once approved the person would be given a number of years where no rent is due. This number of years should be aligned to the government's official forecasts of economic growth, i.e. when Dubai expects to get out of the downturn. More complex mechanisms can be explored, e.g. profit sharing above and beyond business plan forecasts. Once that period ends, then semi-market rate rents would be charged to the tenants and one would hope that those businesses and artists can afford to stay by then.
The space would be expected to be finished, decorated and furnished. This would prove especially important because if the business fails, as a great many will, the liquidation process would only be realistically able to absorb the furniture and fixtures and some of the decoration. The turnover of businesses would lead to a very interesting gentrification process.
It would be easier with the artists; they would only have to demonstrate that they are in fact practising artists. This group would be more interested in live/work spaces. This, in turn, would also make a mixed used development more appropriate. No one wants to paint in an area that is dead at 6pm.
Countless studies show that periods of economic downturn have always proven to be an ideal time for start-ups. They mainly cite the lower cost of rent and the leniency of suppliers when it comes to sales credit. Over the past 15 months, I've come across countless ideas, business plans, projects and initiatives by both residents and visitors. In addition, and quite separately, I've come across many artists, musicians, playwrights, writers, poets, designers and film makers in Dubai or wanting to come to Dubai. These two groups could do nothing less than form the nucleus of Dubai's next economic boom. Yes, they are the kernel. If certain circumstances are in place then Dubai could very possibly undergo a fundamental shift in its business model.
So in summary, this would have three benefits for Dubai:
1) Decrease the real estate supply: These projects would effectively exit the market's supply. It's like taking a publicly listed company private; it's still there but it no longer affects the market index nor does the market sentiment affect the company's valuation any more.
2) Boost for start-ups: This would allow them to invest their capital in their business' marketing, staffing and development of their products and services; all good things that would trickle down the economy and also allow them to stay in business longer during challenging times.
3) Content creation: It would finally become possible for artists to produce work in Dubai as opposed to galleries, theatres, bookstores and festivals — almost exclusively — importing it.
Of course, once such a process begins there will be a host of additional businesses to build upon, such as the development of a venture-capital community around this development. Also, further regulatory revisions would be required, e.g. bankruptcy law and the introduction of visas for entrepreneurs and artists.
It's worth nothing that even with a moderate success rate of 30 per cent, the process should be analysed, improved and then reintroduced for the next generation of Dubai's entrepreneurial and creative community. After all, isn't that how great companies are made? I'd rather we host these than the marketing departments of multinational firms with globally predetermined marketing strategies. There is no reason why such an initiative wouldn't be endorsed by the government of Dubai; all it requires is a shift in our mentality from that of a landlord to that of an incubator.
Mishaal Al Gergawi is an Emirati commentator on socio-economic and cultural affairs in the UAE.