Dubai Office Stock Q4 2015
- Over 6.0 million sq.ft. of new office space entered the Dubai market in 2015, taking the total office stock to circa 90 million sq.ft.
- Approximately 60% of the new supply delivered during 2015 is located in Business Bay, Dubai Design District and Dubai Investment Park areas which together added 4.1 million sq.ft. of new office space.
- A total of 1.49 million sq.ft. of strata space entered the market during 2015, representing a considerable drop from previous years. With the addition of several office properties either converted to residential or hospitality use over the past two years and weak demand for strata space, we expect new supply to shrink further over the course of the next two years.
- New office space expected to enter the market during 2016, includes supply from Dubai World Trade Centre district, Onyx towers on Sheikh Zayed Road and strata space from delayed projects in the Business Bay and Dubai Silicon Oasis areas.
- Office sale rates across major freehold office locations registered a drop of 6% quarter-on-quarter and 13% year-on-year. A combination of increased supply, vacant stock and weak demand has resulted in a sharp drop in sale rates. Areas such as Jumeirah Village, Arjan, Dubai Motor City and Dubai Sports City which are not primarily established as commercial office destinations have recorded the highest drops in sales rates.
- Jumeirah Lakes Towers and Business Bay, which are relatively popular in terms of small to medium size offices, have witnessed a drop in sale enquiries, as end users and investors are adopting a wait and watch strategy in anticipation of further correction in sale rates. The majority of enquiries during the last quarter were from investors seeking income producing space rather than shell and core or vacant space.
- Office transactions in both value and volume terms dropped more than 50% year-on-year, according to data sourced from the Dubai Land Department. During Q4 2015, over 445,000 sq.ft. of office space was transacted at a total value of circa AED0.59 billion as compared to 900,000 sq.ft. of office space with a total value of AED1.26 billion in Q4 2014.
- The majority of transactions closed during the last quarter were for office units measuring less than 2,000 sq.ft. Of the 300 transactions recorded during the quarter, circa 252 transactions (84%) were for office sizes of less than 2,000 sq.ft. with a total value of AED264 million for small unit sizes, which strongly indicates the investor profile is either for new start-up companies or SME’s. A limited mortgage offering for commercial office space is also impacting transaction volumes despite a rise in new companies in the Emirate.
- Office rents in the prime CBD area remained stable for three consecutive quarters. A lack of new supply and relatively high occupancy rates helped maintain stable rents. Average rents in Downtown Dubai and office towers along Sheikh Zayed road range between AED110-265 per sq.ft. per annum.
- However, secondary locations recorded a sharp drop in rental rates, mainly across new towers that have been delivered to the market over the past six months. Strata space owners in the Business Bay area who were previously quoting a rate of AED120-130 per sq.ft. per annum during Q2 and Q3 2015 are now offering the same space at rents ranging between AED85-95 per sq.ft. per annum (a decline of 25-30%).
- An increase in supply combined with weaker demand is leading to a drop in rental rates across strata owned developments, whilst single held assets continue to enjoy high occupancy and rental rates.
- With circa 4.5 million sq.ft. of new office stock scheduled for delivery in 2016, we expect office rents to remain under stress with secondary and tertiary locations likely to see a drop in rents along with increased landlord incentives to entice new tenants and achieve lower void periods.