Some Dubai office buildings are so ill-conceived and poorly located that they will never be occupied, while others may command no more than the cost of maintenance, according to CB Richard Ellis Group Inc.
“Some buildings will be permanently vacant and will never be let because they are wrongly located, they are of poor quality or have the wrong legal structure in place,” Nicholas Maclean, Middle East managing director for the U.S. property broker, said in an interview.
Speculation fueled Dubai’s property market after foreigners were allowed to buy real estate in parts of the emirate in 2002. Buyers with no experience in property management flocked to purchase floors in planned office buildings before any work started, resulting in poorly finished towers in inconvenient locations with multiple owners, Maclean said.
Such places have to compete for tenants in a Dubai market with an overall vacancy rate of 40 percent, with newly developed areas on the outskirts hit the hardest. At least 20 million square feet (1.85 million square meters) of space, about 40 percent of Dubai’s existing office supply, will be added in the next four years, CBRE estimates. That will put further pressure on prices that slumped by 60 percent on average since the peak in mid-2008.
“The further you are away from Sheikh Zayed Road, the less desirable the location and therefore the quicker rents fall,” Maclean said, referring to the main business thoroughfare near Dubai’s coast. “Why would you go there when you can get accommodation for a relatively low price closer to town?”
Landlords are providing incentives such as rent-free periods of as long as 12 months on seven-year leases and fitting-out allowances to attract tenants, Jones Lang LaSalle said in a report earlier this month.
“While increasing incentives may make one specific building more attractive than another, there are still projects for which it is difficult to attract tenants at any price,” Jones Lang said. Some properties should be demolished or converted to other uses to reduce excess supply, it said in a September report.
Dubai had 2.6 million square meters of offices under construction as of June, the third most in the world after Shanghai and Moscow, Colliers International said in a report this month.
Most of the new commercial buildings will be completed in the next two years, mainly in areas that have already seen rapid construction, such as Business Bay and Jumeirah Lakes Towers. Most are held by numerous landlords in an arrangement known as strata title, where a building is legally divided horizontally or vertically into separately owned properties. Tenants generally prefer negotiating with a single owner, Dubai-based MacLean said.
“If you’ve got a 10-story building and 10 owners and you want to take the whole building, you have to deal with 10 separate owners on one lease,” he said. “It’s impossible.”
Offices in Dubai International Financial Centre, a tax free area near the main business district, are commanding the best rents in Dubai, along with those in Emaar Square and on Sheikh Zayed Road. Rent per square-foot in DIFC is 350 dirhams ($95), while Emaar Square offices near the 200-story Burj Khalifa are priced at about 200 dirhams a square foot. When they do bring in tenants, offices on the periphery of Dubai are achieving rents as low as 40 dirhams, Maclean said.
“That is good for Dubai because two years ago you had to pay a significant rent for Silicon Oasis,” he said referring to a development that’s a 25-minute drive inland from Sheikh Zayed Road. “Now we’ve got a market that is functioning properly.”
Rents in the best-located buildings “are at the bottom of the cycle,” Maclean said. “The others, further away from the center of the city, have significant declines still to come.”
The Dubai Financial Market Real Estate Index closed 1.3 percent lower today. The index has fallen 85 percent from a record high in September 2005. Emaar Properties PJSC, Dubai’s biggest developer, closed down 1.5 percent at 3.94 dirhams, while Union Properties PJSC lost 1.2 percent.