The fall in oil prices over the past year is beginning to take its toll on the commercial real estate market in Abu Dhabi, Dubai, and Sharjah, research from Cluttons has found.
According to the real estate consultancy, the direct correlation between oil revenues and state spending will put pressure on the rate of job creation. Moreover, oil prices may decrease further once Iran receives the green light to begin exporting oil, Cluttons said.
“This will impact the rate of office space take up and subsequently, the creation of households and overall residential demand. The impact is expected to be variable across the nation’s three largest emirates,” the statement said.
Abu Dhabi’s office market has already been feeling the pinch of a slowdown in public spending, which dampened demand for new office space.
“Abu Dhabi’s dependence on hydrocarbon revenues has meant that the rate of office take up, which is traditionally dominated by oil and gas companies, has cooled significantly. This is likely to put increased downward pressure on more secondary and tertiary locations, with prime rents likely to face headwinds at the beginning of 2016,” said Faisal Durrani, head of research at Cluttons.
At the Grade A end of the market, however, rents have held steady and are expected to remain stable for the rest of the year due to a general lack of supply.
Meanwhile in Sharjah, office rents held steady during the second quarter, following no change in Q1. This reflects a scaling back in overall requirements and take-up levels while the dominant oil and gas occupiers assess their expansion plans, Cluttons said. Rents are expected to come under pressure in a continued low oil environment, as demand weakens.
According to Steve Morgan, chief executive at Cluttons Middle East, economic factors set off by falling oil prices will impact the level of real estate transactions in the near term. “The decline in oil prices has seen the government take necessary fiscal measures to boost its financial position, including the deregulation of fuel prices and the much talked about future move towards the introduction of VAT and corporation tax.”
“These initiatives will likely cause consumer price inflation levels to increase, resulting in a reluctance of tenants to pay higher end rents and families to purchase homes.”
The expected lifting of Iranian sanctions, however, could be “particularly momentous” for the UAE property market, as Iranian nationals and businesses can be expected to start making significant real estate investments, Morgan pointed out.
Cluttons has already seen an upturn in speculative requirements from Dubai-based Iranian firms looking to expand premises in anticipation of trade with Iran being resumed, he said.
Cluttons also anticipates an increase in international businesses looking to service any Iranian operations out of Dubai, which will place upward pressure on Grade A office rents in sought after locations such as the DIFC, Dubai Internet City, Dubai Media City, D3 and Dubai Airport Free Zone.