Market Performance
- Core buildings within the DIFC district continued to outperform the market with near full occupancies.
- The upcoming stock in DIFC, Gate Village 11, is nearly pre-leased, underpinned by demand from occupiers for a presence in this financial hub.
- Downtown is anticipated to see higher internal tenant movement within the district due to consolidation and relocation and the rents in the district are expected to hold steady.
- Sheikh Zayed Road (Trade Centre to first interchange) office performance picked up with a number of large transactions, particularly in the H Hotel Tower and Conrad Towers, while the first to third interchange saw steady retail and office take-up for its low-rise commercial units.
- Business Bay witnessed an uptick in occupancy levels due to an increase in demand from SMEs and start-ups coupled with relocations from the old town districts such as Garhoud, Bur Dubai and Deira.
- Dubai Internet City (DIC) and Dubai Media City(DMC) maintain their strong performance as demand continues to outstrip supply. We expect some occupiers who are nearing the end of their lease terms and looking to expand to do so with other Tecom entities and freezones or potentially resort to purposebuilt-solutions. This location also remains a top preference for institutional investments.
DMCC saw leasing activity gaining momentum after a slower Q2.
- Across the city, strong growth in upcoming supply, particularly in the prime office segment, is expected to put downward pressure on grade A rents in the mid-term. Conversely, rents in the grade B & C segment are likely to remain under pressure in the near term as most existing stock struggles with low absorption levels. Given that supply in this segment is not expected to increase notably in the medium term, we expect to see Grade B and C rents gradually stabilise as the existing vacant stock is slowly absorbed over the next few years.
Supply
- Office market supply grew by nearly 2.3 million sq. ft. over YTD 2017 including over 740,000 sq. ft. which is currently being handed over in One Central (Offices 2 and 3).
- This supply increase is indicative of Dubai’s office market adjusting to the dominant need for single-owned prime stock – a segment where demand has consistently outstripped supply.
- Prime offices are now forecast to account for a substantial 71% of the total stock expected from 2017 to 2019, finally overtaking Grade B and C deliveries.
- In the coming few months, the existing stock in prime locations will also see a significant amount of office space become available for lease due to consolidation activity and relocations within Dubai.
- Following the robust delivery pipeline of 2017, more than 2.2 million sq. ft. of office supply is predicted for 2018.
Demand
- A number of positive demand drivers for the commercial real estate emerged over the course of 2017.
- The Emirates NBD Dubai Economy Tracker Index (DETI) indicates the non-oil private sector saw solid expansion over the last few quarters, with a sharp rise in business activity and new work.
- Employment figures have been flat, possibly as most firms have optimised resources and aim to continue working on lean structures.
- Most enquiries have been related to relocations and consolidations, and average transaction size is now 4,000 to 5,000 sq. ft., notably smaller than in previous years.
- Furthermore, demand for business centres and micro offices continues to be buoyant as occupiers with smaller spatial requirements, and new entrants in
particular, prefer plug-and-play facilities eliminating occupation timelines.
- The level of international enquiries remained constant as a number of global companies, especially in the legal and BFSI sectors, seek to establish their presence in the region.
Beyond 2020
- Beyond 2020, a number of large projects are in the early stages of development.
- Emirates Towers Business Park is likely to be one of the most critical developments to the commercial market as it will add over 6 million sq. ft. of mixed use space to the total stock. The AED 5 billion district will allow companies based in the Business Park to benefit from DIFC’s legal and regulatory framework, which is expected to further strengthen the area as a global financial hub and absorb some of the underlying demand for the core DIFC district.
- Recently, District 2020 and the legacy plans for the Expo site were unveiled. The development will include academic institutions, galleries and museums, and is expected to bring a substantial 14.5 million sq. ft. of commercial space onto the market. Notable initial partners include Siemens, proposing the location for its global logistics headquarters, and Accenture which is looking to build its digital hub. This list is expected to grow in the run up to Expo 2020.
- DMCC also unveiled plans for Uptown Dubai, a mixed-use development in JLT
Industrial Market Overview
- The stabilisation of oil prices at around USD 50 per barrel and steady global trade volumes in 2017 are yet to strongly revive demand for industrial and warehousing facilities.
- Low occupancy levels are particularly marked across the older secondary market stock, as many units have outdated built specifications, do not comply with new fire regulations, and offer lower physical infrastructure (electricity, water and loading
requirements).
- Competitively priced grade A stock has been relatively resilient both in ready-built and purpose-built options, albeit spatial requirements have contracted.
- Enquiry levels, which reached their peak in 2014–2015, have remained flat at mid-2016 levels.
- Average area requirements are now in the range of 4,000 sq. ft., primarily for SMEs and tenants in light manufacturing or food packaging.
- Large FMCG and online retail occupiers look towards purpose-building their facilities as existing stock fails to meet highly specific demand.
- We expect the imbalance between the lower quality and higher quality of supply to create potential investment opportunities.
- International grade stock witnesses relatively steady absorption, higher levels of occupancy and steady yields above 9%, despite the relatively lower level of risk compared to many other asset classes.
