Expo 2020 injecting confidence into Dubai’s commercial property markets

Occupier demand continues to reflect the confidence injected into Dubai’s commercial property market through the Expo 2020 win and overall increase in economic activity, a new report suggests.

Linked to this has been a steady rise in the level of demand for prime Grade A space in particular and as a result of the strengthening demand, rents have continued to climb, says the latest commercial property market report from Cluttons.

During 2013, prime office rents rose by 8%, with a further 10% increase being recorded in the first quarter of the year, pushing average Grade A rents to AED220 per square foot.

The report points out that as a result of the economic vigour, several firms are expanding their footprints and some are focussed on achieving this by consolidating their operations into a single location.

Furthermore, the propensity for multinational organisations to relocate their regional teams to Dubai continues to gather pace as political uncertainty and conflict persists in parts of the region. ‘In particular, we have recorded a shift away from cities in Egypt and Lebanon, with some organisations permanently moving staff to Dubai,’ the report says.

The rising tide of occupier demand is having a knock on impact on supply, which is rapidly being depleted in free zone submarkets such as Dubai Internet City and Dubai Media City (TECOM A&B).

The upturn in occupier requirements has helped to drive upper limit rents in TECOM A&B by almost 29% to AED180 per square foot between the third quarter of 2013 and the first quarter of this year.

The report explains that the falling supply levels in centrally located free zones is aggravating demand for space in more secondary locations such as Dubai Health Care City and the International Media Production Free zone (IMPZ), with both recording rising levels of interest from occupiers.

Elsewhere, TECOM’s Dubai Design District (D3) has reported 500 expressions of interest since the project was first announced late last year.

‘Where space permits, we expect to see free zones expanded to cater to occupier demand, such as the recently announced AED1.1 billion Silicon Park at the Dubai Silicon Oasis, in addition to the development of further retail and commercial projects across the DIFC,’ the report points out and adds that centrally located submarkets also remain in high demand.

‘Despite this seemingly voracious appetite to secure locations in the city’s free zones, submarkets closer to central Dubai such as Business Bay and Downtown Dubai remain very popular with occupiers who have a business need to be close to the heart of the city. Upper limit rents in Business Bay have benefited from the increased occupier activity, with top end rents rising to AED 140 per square foot, up 17% on the third quarter of 2013,’ it explains.

‘With the gradual absorption of centrally located Grade A space expected to persist, we forecast vacancy levels to drop sharply across these highly sought buildings by the end of the year. We anticipate an upturn in build to suit options as occupiers are forced to explore secondary solutions to the chronic Grade A supply shortage.

‘As a result, land plots in centrally located submarkets like Downtown Dubai and Business Bay are expected to be highly sought. In particular, larger, more liquid occupiers from the banking sector, a number of whom remain on the market for space in the region of 100,000 per square foot to 150,000 per square foot expected to pursue this option,’ it adds.

The report also points out that the upturn in demand, especially from the real estate sector, is triggering the implementation of an unofficial quota system by some landlords, as they work to minimise the exposure to any one sector in particular. ‘We expect to see this trend gather pace across the city as building owners take a more strategic view of their assets,’ it explains.

Occupier demand has risen during the first quarter and requirement levels have been stronger for areas around Al Maktoum International Airport and Jebel Ali Free zone as companies begin initial preparations for the expected spike in activity leading up to the World Expo in 2020.

The continuing economic vibrancy is expected to maintain demand for space across the emirate’s industrial landscape. Dubai Industrial City (DIC) for instance, is reporting strong occupancy levels, with a 5% vacancy rate being reported and a 158 new companies joined DIC last year and a sharp upturn in revenue from warehouse and land leases was also reported, both of which rose by 52% and 44%, respectively.