July 25 (Bloomberg) -- Standard Chartered Plc searched for more than two years for new headquarters in Dubai, where more than 40 percent of the office properties sit empty. In the end, the U.K.’s third-largest bank decided to build its own tower.
Companies like Standard Chartered, which will occupy eight of the new structure’s 13 floors, often have a hard time finding large blocks of office space because many buildings have numerous owners, according to Robin Pugh of Jones Lang LaSalle Inc. He assisted the bank in its search in 2008 and 2009.
“For large occupiers, it’s actually quite difficult to find space under single ownership,” said Pugh, head of agency work for the Chicago-based broker. Buildings with multiple landlords “are not suitable.”
Dubai’s landlords are trying to fill empty commercial space that’s equal to about nine Empire State Buildings and rising. Most properties built over the next two years will be held under so-called strata title, where different investors own one or more floors. That will make it harder for renters to find large spaces with a single owner.
Standard Chartered agreed with Gulf Resources Development and Investment LLC to build a 13-story tower near the Burj Khalifa, the world’s tallest building. The bank committed to leasing eight of the floors for at least 15 years and will make a total investment of about $140 million.
The company shunned the 30-story Boulevard Plaza towers nearby because they have several owners, which would make modifying the space more difficult, Pugh said. Developer Emaar Properties PJSC, which built the towers, didn’t respond to e-mailed questions about the number of owners.
During Dubai’s property boom from 2002 to mid-2008, developers sold sections of yet-to-be built apartment and office buildings to investors who often resold them to turn a quick profit. Many office buyers had no experience of managing buildings or dealing with commercial clients and gave little thought to finding long-term tenants.
Negotiations with multiple landlords tend to be long and frustrating, said Ian Albert, regional director at property broker Colliers International. Even when a majority of a building’s owners agree on rents and terms, one will often hold out for a better deal, knowing that the tenant is eager to complete an agreement, he said.
“Corporate occupiers don’t want to deal with multiple landlords,” Albert said. “It may have worked for residential towers, but the commercial market doesn’t operate the same way.”
Companies needing more than 800 square meters (8,600 square feet) of space tend to steer clear of commercial buildings with strata titles, Albert said. That effectively rules out a large portion of Business Bay and Jumeirah Lakes Towers, leaving smaller businesses to pick up the slack.
Most of the new office supply will be under strata title over the next two years. About 41 percent of the 13.1 million square feet of space due to be completed this year will be held by multiple owners. That will soar to 81 percent of the additional 12.7 million square feet to be completed in 2012, said Matthew Green, head of United Arab Emirates research at CB Richard Ellis Group Inc. By the end of last year, 22 percent of Dubai’s 61 million square feet of commercial space was held by multiple owners.
Strata titles were first introduced in Australia in 1961 to help manage apartment blocks owned by various landlords. They divide a building horizontally, creating layers of management for a mixed-use development, according to Ludmila Yamalova, a partner at law firm HPL Yamalova & Plewka JLT.
Regulations Catch Up
In 2007 Dubai introduced a law to govern ownership of jointly owned properties modeled on an Australian version. However, the law wasn’t enforced until regulations were issued by the Real Estate Regulatory Agency in 2010, Yamalova said.
In the last nine months, RERA started moving away from the Australian model and is now devising its own rules, she said.
When a building has several owners, it’s more likely that one or more will be unable to take part in its management because they are out of the country or financially distressed, Yamalova said.
“It’s a lot more difficult to manage a building coherently if one of the owners decides not to pay his service fees or if the tenant wants changes to the space that requires the approval of landlords,” she said. “Who pays for what can become a very big issue.”
Office vacancies in Dubai stand at 44 percent and are expected to surpass 50 percent over the next year as more properties are completed, Jones Lang said on July 5. In the central business district, vacancies reached 27 percent.
The Dubai Financial Market Real Estate Index, which includes Emaar, Arabtec Holding Co. and Union Properties PJSC, has declined 14 percent this year. The benchmark Dubai Financial Market General Index has fallen 6.8 percent.
Office construction is only cost-effective for companies that need large spaces, Jones Lang’s Pugh said. Standard Chartered was able to reach a deal that would allow it to lease a custom-built space that is designed to fit its needs from the location to floor plates and cladding, said Christopher Harris, the bank’s regional head of projects.
The cost of modifying an existing building is often high when it has numerous landlords. Upkeep and maintenance can also prove time-consuming and difficult, Harris said.
“We want to be in a building that is managed well and maintained well to keep it looking like a class A building for its life span,” he said. “When you have a single entity you tend to get serious facilities management in place and that’s really important.”
Builders are doing foundation work on Standard Chartered’s new headquarters, located about 7 kilometers (4.3 miles) from the bank’s other offices in the Dubai International Financial Centre, and the tower will start to rise in the next four months, Harris said. At least 1,250 employees will be working there by the end of 2012.
Office tenants aren’t the only ones turning to new construction to meet their needs. Dubai-based Emirates, the world’s biggest airline by passengers, in March agreed to buy land from Meydan LLC to build 528 houses. Dubai has thousands of vacant homes and Jones Lang estimates that another 54,000 will come onto the market from 2011 to 2015.
“The housing specifications we need for our pilots aren’t currently available in the market,” Ali Mubarak Al Soori, Emirates’ executive vice president of project management and Procurement said in March. “The location of this project near Dubai’s airport and the safety of a gated community for the families of pilots, who are always traveling, are very important.”
State-owned Meydan will develop the community, to be known as Meydan Heights. It will include a shopping center, children’s playgrounds, pools and other amenities. Emirates will acquire the project on a 15-year lease-to-own basis.
So far, landlords have done little to address the ownership issue as prices and rents decline. Office values fell 16 percent in the second quarter from a year earlier, Jones Lang estimated. Average prime rents excluding the Dubai International Financial Centre stood at 1,615 dirhams ($440) a square meter, down from more than 4,300 dirhams in the fourth quarter of 2008.
The issue of numerous landlords isn’t impossible to overcome, Colliers’ Albert said. Building owners can elect boards with the authority to hire property brokers and negotiate rents based on agreed limits.
“Owners must look into central committees or management agents for their buildings, who have clear mandates of what parameters to work with to secure a deal,” Albert said. “The agent can then negotiate as a single point of contact for all the landlords.”
That solution is hampered by the slow progress in instituting owners associations in Dubai. So far, not a single association for either residential or commercial buildings has been formed.
Although interim associations have been started and registered with the real-estate regulator, “those associations are temporary and still don’t have the legal standing,” Yamalova said. “The law is still very much in its infancy and the implementation isn’t there yet.”
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