Lack of rental growth to last for six to nine months, with free zone areas the only bright spot, says report
The economic slowdown in the GCC has taken its toll on the demand for office and commercial space in Dubai in the past six months, despite prime areas such as free zones holding up, according to research by Cluttons.
In its latest Dubai Office Market Bulletin, the real estate consultancy said the seasonal summer slowdown has been an especially severe one throughout the late second quarter and early third quarter of this year. Rents stagnated in the second quarter of 2016, with falls recorded in six of the 22 submarkets in the emirate. Most declines were seen in areas with higher vacancy rates, particularly of second hand stock, such as Al Barsha (-10%), Deira (-5%) and Garhoud (-18%).
Free zone areas in the city, however, have seen a rise in upper limit rents, such as DIFC (6%) and the wider Tecom (7%), Clutton’s report added.
“Free-zone areas have remained in relatively high demand. This includes areas like Dubai Internet City, Dubai Media City, Knowledge Village, DIFC and Dubai Design District, which all contain internationally recognised Grade A space,” said Murray Strang, head of Cluttons Dubai.
“As such, the prime, central areas of these free-zones have very low vacancy rates of around 5% compared to submarkets such as Sheikh Zayed Road (Trade Centre), which has stock of mixed quality and age, and vacancy rates closer to 20%.”
The free zones are the exceptions, however, as no movement has been recorded in either lower or upper limit rents in 14 submarkets during Q2, Strang added.
The general lack of rental growth is unlikely to change in the short term, according to Cluttons’ research. Across the market as a whole, rents are not expected to fall much further, particularly as they are at a point that is considered to be fair market value, and landlords appear unwilling to lease below a certain level, the report said.
Faisal Durrani, head of research at Cluttons, added: “Based on our research, landlords are offering increased incentives, such as rent free periods and fit-out contributions to attract tenants and as such we expect a period of minimal rental change for at least six to nine months before there are any signs of an uplift.”
According to Strang, however, a number of submarkets contain buildings that do not follow the same trajectory as the wider market, despite the slowdown. Rents in these buildings can go beyond the upper limit figures of their surrounding submarket as they are considered flagship, prime or signature schemes.
“For instance, Burjuman Business Tower, with AED180 ($49) per square foot, commands rents above the circa AED120 rate for the remainder of Bur Dubai because of the unique quality of office space and specifications it offers. Also, Emirates Towers on Sheikh Zayed Road remains extremely popular and has very low vacancy rates, despite the slowdown in the wider market,” he added.