Strong start to year for office sector in Dubai with rent increases of 20% expected

Dubai’s office sector made a strong start to the year, with the number of leasing transactions up significantly in both annual and quarterly terms in the first three months of 2014.

However, the value of transactions was down markedly on the previous quarter, according to the latest update report from international real estate consultants Knight Frank.

The report says this was not surprising given that a flurry of high value leasing contracts were signed by corporates before the end of last year and owner occupiers of strata commercial space have increasingly been expressing an interest in purchasing accommodation in freehold locations.
 
‘The rationale appears to be that, not only will they be able to build equity in the property over time, but also potentially benefit from capital value gains in the medium term, as well as rental savings,’ it explains.

But Knight Frank expects that quality offices in prime locations will see rents rise 20% this year and 10% in 2015.

The report reveals that the recent completion of projects along Sheikh Zayed Road, in Business Bay and Al Barsha has increased the level of office supply in those areas, providing greater tenant choice and helping to stabilise rents.

‘Broadly, while office take up in Dubai has been rising, new supply continues to be released into the market. Consequently, the market wide vacancy rate has held steady at 50% over the past year,’ the report points out.

‘That said, the prime vacancy rate edged down to 16% as strong economic conditions provided corporates with the impetus to expand their operations,’ it adds.

Overall rental values in locations such as Emaar Square/Downtown, Tecom C and Business Bay have seen double digit increases over the past year. However, this has largely been limited to prime office buildings under sole ownership.

In the first quarter of this year, demand was strongest from the professional sector, which accounted for almost 40% of all enquiries. The technology sector created most demand at 14%, followed by general trading at 12%, while engineering and construction account for 7% of demand, leisure and hospitality 6%, real estate also 6% and oil and gas 4%.

The report also says while demand for prime office space has been picking up, supply has simultaneously been rising. This in turn has kept market wide vacancy rates stable at around 50%.

‘It is worth noting, however, that the prime office vacancy rate edged down to 16% in the first quarter of 2014,’ the report points out.

‘Underpinned by rising demand from corporates and SMEs, and the low supply of good quality office space in prime locations, rents in Dubai are projected to see annual increases of around 20% and 10% in 2014 and 2015, respectively,’ it concludes.