Q1-Dubai Office Market 2016 - CORE · PDF fileDespite the global economic downturn, ......
Transcript of Q1-Dubai Office Market 2016 - CORE · PDF fileDespite the global economic downturn, ......
An International Associate of Savills
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Market in MinutesDubai Office Market Q1 2016
SUMMARYOverview
Core ResearchDubai Property
Middle Eastern real estate economies are typically volatile and sensitive to both oil price movements and political events. However, as the region’s real estate markets mature and their economies move away from such reliance on this sector, it is anticipated that such volatility will become less evident. Leading this progress towards greater stability, Dubai has now passed through its �rst real estate cycles and is displaying the charac-teristics of a maturing market with rational investor behaviour driving developer and end user activity.
Nevertheless, the role of oil price movements cannot be ignored even in Dubai, and the sharp downward movement of oil prices during 2015 has resulted in signi�cantly less liquidity amongst the investment and business sectors throughout the Middle East. The UAE Dirham’s peg against a strengthening US Dollar is also providing an increasingly challenging environment for developers as Dubai real estate becomes increasingly expensive for international buyers. Source: Core Savills Research
Movement of Currencies Relative to the US DollarGRAPH 1
EURGBPINR
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
0.000
0.002
0.004
0.006
0.008
0.010
0.012
0.014
0.016
0.018
0.020
Jan-
13
Mar-
13
May
-13
Jul-1
3
Sep-1
3
Nov-13
Jan-
14
Mar-
14
May
-14
Jul-1
4
Sep-1
4
Nov-14
Jan-
15
Mar-
15
May
-15
Jul-1
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Sep-1
5
Nov-15
1 G
BP
/EU
R =
XX
US
D
1 IN
R =
XX
US
D
02
Market in Minutes | Dubai Office Market
Source: Core Savills Research
GRAPH 3
Source: Core Savills Research
By year end 2015, Dubai’s of�ce market supply reached an estimated 8.4 million square metres, of which approximately 2.4 million square metres (28%) is located in the prime areas of DIFC, Downtown Dubai, Sheikh Zayed Road (Trade Centre to First Interchange), Dubai Internet City and Dubai Media City, while the bulk of total supply (4.2 million square metres – 51%) is in secondary of�ce locations such as Business Bay, Deira, Bur Dubai, Dubai Healthcare City, Tecom C and Jumeirah Lake Towers.
Despite the global economic downturn, prime and secondary stock growth was extremely rapid in the 5 years until 2011 but moderated to 7%, 3% and 5% in 2012, 2013 and 2014 respectively.
Prime and secondary supply growth fell further in 2015 to around 5% with notable additions in Deira, DIFC and TECOM, although Business Bay saw the bulk of secondary of�ce space completions, with approximately 318,000 square metres of new stock in 2015.
The development pipeline in Dubai indicates a further 7% prime and secondary sector supply growth in 2016, primarily in Business Bay.
The growth in supply is likely to be most signi�cant in Business Bay over the next few years as the area seeks to establish itself as one of Dubai’s premier business districts. Given the rapid growth in supply, of�ce sector sale prices in this area remain under slight downward pressure, at least for the moment.
In more general terms, the context of a strengthening dollar, growing supply and weakening oil economies across the Middle East are causing some downward pressure on Dubai of�ce space at present and this will likely continue in the short term although naturally this creates a yield opportunity compared to compet-ing ‘global cities’.
GRAPH 2
Dubai Office Supply by Location Type (2015) Prime and Secondary Office Supply – Dubai (2005 to 2019)
21%
28%
51%
Secondary PrimeSecondary CBDPrime CBDTertiary
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e 2017e 2018e 2019e
“The office sales market witnessed a drop in prices across almost all locations with secondary districts such as Business Bay, Tecom C and JLT seeing a higher year on year decline.”
Tecom CTecom C
DowntownDowntown
Business BayBusiness Bay
JLT
JLT
DIFC DIFC
0
500
1000
1500
2000
2500
3000
Q1, 2014 Q2, 2014 Q3, 2014 Q4, 2014 Q1, 2015 Q2, 2015 Q3, 2015 Q4, 2015
Market Performance
Key issues for large scale international tenants remain property management and the ability to expand or contract across multiple �oors, requirements that are dif�cult to satisfy in buildings sold on a strata title basis. This issue is particularly problematic in areas such as Business Bay and has resulted in a two tier market, with buildings in multiple ownership commanding lower rents and slower absorption rates than single ownership buildings.
In areas of lower cost and older stock, such as Bur Dubai, enquiries for space during 2015 were steady, with rents remaining more of less around the AED 100-110 per sq. ft. per annum mark. Landlords were �exible during negotiations but price-sensitive prospective tenants appeared reluctant to move when this represented just a marginal change in rental costs. As a consequence, most tenant enquiries resulted in no movement but, despite this, occupancy levels in these traditional areas remain high due to the captive nature of this micro market and limited supply. Similarly, occupancies are especially high in Deira, which has seen marginal increases in rental values since demand is high for the few available units.
At Dubai Healthcare City (DHCC), average rents have remained more or less stable at around AED 120-125 per sq. ft. In TECOM C, rents remained steady through 2015 with marginal increases noted close to the metro station. Rental rate movements in prime locations were varied in 2015, despite landlord �exibility, with rents declin-ing in Sheikh Zayed Road due to the increase in supply. In Downtown, rental rates remained broadly static with Emaar-owned properties in particular continuing to command strong levels of demand and rates.
The strongest performing prime location was DIFC where rental rents rose by around 7%. Emirates REIT, which owns 18 out of the 25 �oors in Index
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Q1 2016
Tower is successfully leasing smaller units at premium rates while landlords in strata-owned properties in DIFC are achieving rapid absorption rates and rental rate premiums by offering �t-outs and other incentives. While demand for of�ce space is expected to continue to be strong in DIFC through 2016, some downward pressure is expected in future due to competition from the Trade Center Free Zone.
The of�ce sales market witnessed a drop in prices across all locations with secondary districts such as Business Bay, Tecom C and JLT seeing a higher year on year decline at 9%, 13% and 17% respectively. The fact that Down-town (4% decline yoy) and DIFC (3% decline yoy) are outperforming the secondary locations indicates that strong investor demand exists for quality Grade A commercial products that are well managed, with suf�cient parking and lifts, large �oor plates and high pro�le tenants.
Source: Core Savills Research
GRAPH 5
Dubai Prime and Secondary Office Rents (Q4 2014 vs Q4 2015)Q4, 2014 Q4, 2015Q4, 2014 Q4, 2015
SecondaryPrime
AE
D p
er S
q F
t
0
250
200
150
100
50
Downtown SZR DIFC DIC JTecom C LT Business Bay Bur Dubai Deira DHCC
Source: Core Savills Research
GRAPH 6
Rental Growth - Q4 2015 vs Q4 2014
GRAPH 7
-6% -4% -2% 0% 2% 4% 6% 8%
Downtown
DIFC
SZR
DIC
Tecom C
JLT
Bur Dubai
Deira
DHCC
Business Bay
The secondary locations saw marginally higher rents even though sale prices continue to decline indicating a rising yield and declining investor interest in favour of more established locations. However, in these secondary locations, investors may �nd long term investment opportunity in fundamentally superior properties such as Almas Tower in JLT.
Given regional uncertainty arising from hydrocarbon price movements, landlords will need to be particularly �exible in 2016, increasingly offering �t-outs, rent-free periods and other incentives to protect both rate and occupancy levels. With Expo 2020-re-lated businesses increasingly seeking of�ce space and supply growth in Dubai moderating, it is likely that the market’s internal dynamics will drive stabilisation through 2016 and a bounce in oil prices, when it comes, will support further growth thereafter.
Dubai Office Average Transaction Prices (2014-2015)
Source: Core Savills Research
Tecom C Downtown Business Bay DIFCJLTSecondaryPrime
2%
7%
1%
4%
-4%
-4%
3%
7%
-1%
-0%
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