Supply
- Supply growth continued to visibly outpace demand, led by the completion of a number of large commercial developments including The Opus, The Exchange, Motorsport Business Park and Innovation Hub Phase One, adding 1.3 million sq. ft. to the market and bringing the total existing stock to 100.83 million sq. ft.
- With retention an ongoing concern for Landlords, the supply of secondary units to the market will mechanically increase over the year with a number of relocations across key districts.
- Downtown Dubai, in particular, will see an increase in secondary stock vacancy levels due to Marriot International’s move from Emaar Square to Central Park Towers DIFC, and HSBC’s relocation from Emaar Square to its newly built-to-suit office building.
- New additions to Dubai’s office market supply this year are largely concentrated in the Grade A segment.
- Tenants continue to prefer fitted, ‘plug & play’ options, citing reduction in capital expenditure allows for agility and flexibility.
- Landlords are now addressing the shift in occupier preferences by adding flexible solutions to their portfolios.
Demand
- Although the first few months of the year did see slightly weaker enquiries and transaction volumes, VAT implementation had a marginal impact on the office market.
- The effect of VAT was mostly absorbed, as landlords and tenants adjusted to the administrative requirements of tax.
- Upcoming secondary and tertiary tier stock is likely to continue to weaken rents while maintaining slow absorption.
- In response, landlords are gradually increasing incentives to attract new tenants in line with more mature office markets, resulting in a significant number of cyclically opportunistic occupiers.
- Going forward, market sentiment is expected to improve given the implementation of various policy initiatives to reduce business costs and streamline business processes, such as the Dubai Municipality reducing market fees for businesses by 50% (from 5 % to 2.5% of annual rent).
- A number of free zone authorities have also introduced ‘dual licensing’ capabilities, allowing companies to be registered (with distinct legal entities), in both off-shore as well as onshore jurisdictions, while also reducing fees and charges to attract new business.
Sweeping Changes in Regulations to Impact the Office Market
- A number of policy initiatives have been announced by Dubai and UAE Federal Government to attract more investment into the city and drive economic growth, including a 10-year visa for specialists and exceptional students.
- The system will grant up to 10-year residency visas for scientists, innovators, entrepreneurs and specialists in medical, scientific research and technical fields.
- IFRS 16-Another major change to the international financial reporting standards by the International Accounting Standards Board (IASB) is IFRS 16.
- Effective January 2019, occupiers will be required to account for all leases on their balance sheets.
- We expect this regulatory shift to drive occupiers into more agile leases, with a proclivity for shorter terms (less than 1 year) and flexible workspace, or companies with a longer view (depending on the business requirements) acquiring office assets despite potentially negating accounting benefits realised in sale-leaseback structures.
- We also see rising competition amongst free zones, as barriers to entry based on the sector are increasingly blurred.
- Freezones now are offering very competitive licensing structures with many giving an option of dual licensing.
