Dubai’s Peculiar Commercial Real Estate Problem
Finding office space in Dubai should be a snap: The office vacancy rate stands at more than 40 percent. Yet after searching fruitlessly for more than two years, Standard Chartered, the U.K.’s third-largest bank, decided to put up its own tower. When construction is complete in 2012, it will occupy 8 of the building’s 13 floors.
Standard Chartered is confronting a peculiarity of Dubai’s troubled real estate market. During the business hub’s property boom from 2002 to mid-2008, developers sold sections of yet-to-be-built apartment and office buildings to investors. The result is that in many buildings each floor has a different owner, making it difficult for large tenants to find enough contiguous space and modify it to suit their needs. By the end of last year, 22 percent of Dubai’s 61 million square feet of commercial space was held by multiple owners under what are known as strata titles.
The site of Standard Chartered’s new headquarters is not far from the Boulevard Plaza towers, which the British bank shunned because they have several owners, according to Robin Pugh of real estate broker Jones Lang LaSalle, who helped the bank in its search in 2008 and 2009. “We want to be in a building that is managed well and maintained well,” says Christopher Harris, Standard Chartered’s regional head of projects. “When you have a single entity you tend to get serious facilities management in place, and that’s really important.”
Negotiations with a group of landlords tend to be long and frustrating, says 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 says. “Corporate occupiers don’t want to deal with multiple landlords,” Albert says, and companies needing more than 8,600 square feet tend to steer clear of commercial buildings with strata titles. That effectively rules out a large portion of the Business Bay and Jumeirah Lakes Towers developments, where much of Dubai’s office space is being built.
Dubai’s landlords are trying to fill empty commercial space that’s equal to about nine Empire State Buildings, and the space coming on the market is even more problematic. About 41 percent of the 13.1 million square feet due to be completed this year will be held by multiple owners, as will 81 percent of the additional 12.7 million square feet to be completed in 2012, says Matthew Green, head of United Arab Emirates research at CB Richard Ellis Group. According to Jones Lang, Dubai’s office vacancy rate, now 44 percent, will surpass 50 percent over the next 12 months.
Strata titles can be a headache for owners as well as tenants. When a building has several owners, there’s an increased likelihood that one or more will be out of the country or in financial distress, complicating decision-making. “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,” says Ludmila Yamalova, a partner at law firm HPL Yamalova & Plewka in Dubai. “Who pays for what can become a very big issue.”