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CONTENTSEconomic background
Office leasing transaction cost
Market performance
Area review
Near term outlook
core-me.com
Q3 2016
core-me.com 03
OFFICE LEASING TRANSACTION COSTSWith the marginal softening of rentals in core business districts over the last few quarters, Dubai is increasingly becoming favourable with international occupiers looking to expand in this gateway city. Interestingly, Dubai offers attractive rents and strikingly lower overall lease transaction costs for both �nancial corporations as well as creative/SME �rms when compared with other global cities.
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
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Hong Kong(Corporate)
Hong Kong(Creative)
New York(Corporate)
New York(Creative)
Leas
e tr
ansa
ctio
n co
st in
US
D
Total rent Agency fees Total maintenance/service charges Other taxes Security deposit
FIGURE 1
Lease transaction costs*
Source: Core, UAE Associate of Savills research
*Total lease transaction cost for a standard 5,000 sq.ft. office over a lease term of 3 years
Dubai(Corporate)
Dubai(Creative)
London(Corporate)
London(Creative)
Paris(Corporate)
Paris(Creative)
Dubai Office Market Update
evidence suggests that the impending US elections is pushing many international corporate occupiers to hold expansions/relo-cations until the end of 2016 and the �rst phase expansion of new large corporate occupiers continues to be limited. Although Dubai pulls the most weight for economic development in the region, contra-dictory signals are emerging from employ-ment demand drivers - Emirates NBD displayed a higher PMI index growth with “new work” accounting for a positive boost and the business expectations index rose to a 15-month high of 71.3 in September from 60.1 in August. However, Monster.com indicated a 24% drop in job creation compared to last year in the UAE, the lowest in the last 18 months. Having said this, employment activity is expected to gain momentum, particularly for engineering and production sectors, as Expo 2020 contracts kick off.
ECONOMIC BACKDROP he backdrop of volatility and geopolitical uncertainty continues to affect global trade volumes and in turn the job market. Anecdotal
FIGURE 2
Dubai commercial real estate cycle
Source: Core, UAE Associate of Savills research
MARKET PERFORMANCE
After a very active June 2016, early Q3 showed signs of the traditional summer sluggishness. However, activity levels picked up again in September - albeit keeping the average rentals �at across most submarkets.
There are mixed perceptions forming in the market as many occupiers are actively browsing for space across different districts, although with a lag in decision making. Corporate tenants sometimes assume the commercial market will mirror residential market dynamics. However, the former is more complex, with each sub-market at different stages of the real estate cycle, in�uenced by a variety of drivers. There are many submarkets - both freezones and onshore areas - that are following distinct dynamics and may be at a different stage of their individual real estate cycle. For example, areas such as DIFC, Tecom and D3 have been facing steady upward pressure on rents while other economic clusters are witnessing a varied range of rental drops over the last few quarters.
Nonetheless, occupancy levels have moderately edged upwards in Q3 2016 and we expect many of the current prospective tenants to transact in Q4 2016 and early Q1
2017 as both local and global occupiers �rm up their next year real estate budget allocations.
The trend of landlords undercutting each other to attract tenants, particularly in a few of the strata buildings with lower occupan-cy levels on Sheikh Zayed Road, Business Bay and JLT, continues. Overall, a vast majority of landlords are adapting to present conditions and are proactive in decision making with a higher degree of �exibility. Many landlords are pushing to keep the headline rentals constant while adding incentives such as contributions in �t-outs, extended rent-free periods and shorter lease terms to retain or attract new tenants. As illustrated earlier, core areas and Grade A assets even in secondary districts remain an anomaly to these trends, by strongly overperforming against the market average.
Intrestingly, the rental range in single landlord developments such as DAFZA and D3 is maintaining a minimum variance as landlords are able to control and align rents with growing occupancy levels and demand.
An increasing preference towards �tted out units is also coming into play, especially from tenants with smaller requirements as occupiers look to reduce the transition time. Furthermore, as parking increasingly becomes an issue in most of the secondary districts, access to Dubai Metro becomes a key differentiator. Prime examples of this trend are commercial buildings in cluster C, D, E and I in JLT and Executive Tower and One Business Bay Tower in Business Bay.
SupplyBuilding use conversions, from commercial to other asset classes in a few developments, along with a delay in deliveries, have caused a contraction in the supply pipeline for 2017. Supply �gures for 2018 and 2019 look steady with major developments such as D3’s next phase and ICD Brook�eld Place coming to the market. As existing occupiers look to optimise footprint where possible, we foresee further second hand stock to marginally top-up the expected supply �gures in the near term.
04
Dubai Office Market Update
“An increasing preference towards fitted out units is also coming into play, especially from tenants with smaller require-ments as occupiers look to reduce the transition time.”
Prime locations Secondary locations
Business Bay
DIFCDAFZA
Dubai Downtown
Business Bay(Grade A)
Old Dubai(Deira/Bur Dubai/Garhoud)
Barsha Heights
SZRWTC to 1st interchange
D3
Tecom(DIC/DMC/KV)
JLT(Grade A)JLT
(Grade B)
Ren
ts r
isin
gR
ents
bot
tom
ing
"Corporate tenants sometimes assume the commercial market will mirror residential market dynamics. However, the former is more complex, with each sub-market at different stages of the real estate cycle, in�uenced by a variety of drivers."
FIGURE 3
Dubai office rental range - Q3 2016
FIGURE 4
Average office occupancies - Q2 2016 vs Q3 2016
FIGURE 5
Change in rents (Q1 2016 vs Q3 2016)
Source: Core, UAE Associate of Savills research
Source: Core, UAE Associate of Savills research, REIDIN
Source: Core, UAE Associate of Savills research
Q3 2016
core-me.com 05
“As existing occupiers look to optimise footprint where possible, we foresee further second hand stock to marginally top-up the expected supply figures in the near term.”
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Ann
ual r
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/O
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Range Average
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(WTC
to
1st in
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hang
e)
SZR
(WTC
to
1st in
terc
hang
e)
DIFC
Teco
m
(DM
C/DIC
/KV) JL
T
Barsh
a Heig
hts
(Tec
om C
)
Busine
ss B
ay
Bur D
ubai
Deira
DHCC D3
Garho
ud
DAFZA
Downt
own
DIFC
Teco
m
(DM
C/DIC
/KV)
JLT
Barsh
a Heig
hts
Teco
m
Busine
ss B
ay
Bur D
ubai
Deira
DHCC D3
Garho
ud
DAFZA
0%
10%
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30%
40%
50%
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90%
100%
Occupancies Q2 2016 Occupancies Q3 2016
Gold Tower and Silver Tower Almas Tower Ubora towerGrade A anomalies:
Dubai Downtown
SZR (WTC to 1st interchange)
DIFC
Tecom (DIC/DMC/KV)
Barsha Heights
JLT (DMCC)
Business Bay
Bur Dubai
Deira
DHCC
D3
Garhoud
DAFZA
0%
2%
-3%
7%
-6%
0%
-6%
-4%
0%
-3%
17%
-3%
0%
FIGURE 4
Average office occupancies - Q2 2016 vs Q3 2016
-3%
0%
0%
0%
-6%
-3%
0%
-2%
0%
-2%
15%
-2%
0%
5%
-6%
6%
9%
-7%
-6%
0%
-3%
0%
-3%
14%
-3%
0%
Change in minimum rent Change in average rent Change in maximum rentArea
AREA REVIEW
06
Dubai Office Market Update
Freezones continue to pull higher occupier demand.
NEAR TERM OUTLOOK
Downtown
SZR
DIFC
Barsha Heights
JLT
Business Bay
Bur Dubai
Deira
DHCC
D3
Garhoud
DAFZA
TECOM(DIC/DMC/KV)
DIFC paradoxically saw a marginal fall in occupancies as few tenants downsized, although there has been a spike in the upper rental range as smaller of�ces are commanding a 15-20% higher rent due to a lack of availability of similar unit sizes. The Gate Building, Precinct and Village arguably hold the highest headline rents in Dubai, and Index Tower and Burj Daman are able to command similar �gures due to their build quality and location. Nonethe-less, more affordable options are available at Liberty House and Park Towers within the DIFC district. As construction work picks up pace across upcoming buildings, we expect pre-leasing activities, particular-ly from blue-chip occupiers, to gather momentum.
TECOM (DIC/DMC/KV) continues to outperform the average Dubai of�ce market as occupancies hover northwards of 90% across most towers and we see strong demand, especially from existing technolo-gy and media occupiers looking to expand. This has led Huawei to purpose build its new national headquarters in TECOM. Furthermore, other buildings coming to the market such as The Butter�y and Habib Sajwani are witnessing steady demand.
Dubai Design District (D3) has bucked the overall trend of �at rentals and was able to lease out 85% of its �rst phase, now commanding 70% higher rents than its opening lease rate last year. Due to its extremely high occupancies, it is now able to be selective in choosing fashion and design tenants. We expect a similar positive response to its next phase which is estimated to be delivered in 2019.
JLT: After a sharp annual drop of more than 20%, rents seem to have �nally bottomed out while the lower rental range saw no change from Q2 to Q3 2016 - for example, Mazaya Business Avenue saw steady absorption owing to the lowest entry point of AED 60/ sq. ft. it offers in the district. September and early October have seen a revival in interest from SME and commodity tenants with a bulk of activity concentrated in the 1,000 sq. ft. to 2,000 sq. ft. bracket. Large spatial requirements have been limited to prime assets such as Almas and One JLT. Proximity to Dubai Metro and availability of parking remain key points, along with overall lease terms, that are driving decision making in this submarket. Few buildings, such as the JBC, are witnessing very high occupancies which may start exerting moderate upward
pressure on rentals due to their single ownership and perceived locational advan-tages.
Dubai Downtown has been able to maintain its headline rentals steady while Grade A buildings such as Emaar Square and Boulevard Plaza have witnessed a 5% increase in their upper rental range due to very high occupancy levels. Requirements range between 3,000-4,000 sq. ft. and are generally larger than those witnessed in the surrounding districts of Sheikh Zayed Road and Business Bay. As HSBC is scheduled to move into its purpose built facility by the end of 2017, we expect its current of�ce in Emaar Square to also come to market, adding the only near term stock to the district.
Commercial construction activity around Sheikh Zayed Road and Business Bay, which is leading the supply pipeline, is expected to keep rental rates under pressure, while better access and build quality should help keep rents steady in the near term. However, Business Bay contin-ues to see increased enquiries from small to mid-size occupiers, especially from start-ups and SMEs and was able to maintain its average rentals throughout Q3 2016. Older core areas such as Bur Dubai, Deira and Garhoud experienced limited movement in activity levels from thier captive market, keeping the rents relatively �at across most buildings.
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Core - UAE Associate of Savills
As one of the largest UAE property services firms, Core, UAE Associate of Savills, combines expert local market insight with the international strength provided by 700 offices globally.
Core’s multi-lingual advisers share an entrepreneurial spirit with a commitment to cultivating long-term, collaborative client relationships. Our local roots, commitment, and attention to detail are backed by the global standards of Savills’ 150-year-old brand, giving our clients direct access to 30,000 experienced practitioners, with a deep understanding of specialist real estate services in over 60 countries.
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This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Core, UAE Associate of Savills, accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Core’s research team. © Core Real Estate Brokers.
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Core research Executive team
Prathyusha GurrapuSenior Manager - Research & Advisory+971 (0) 4 423 9933prathyusha.gurrapu@core-me.com
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