Insight Prices for available space are falling to levels that would have seemed more fantasy than fact just a few months ago.
Dubai rental rates seem like a dream
Prices for available space are falling to levels that would have seemed more fantasy than fact just a few months ago as Dubai's commercial property market becomes hamstrung by the practice of multiple owners having interests in the same development, Nathalie Gillet reports The classified advertisement would have seemed unbelievable just a year ago: new offices for rent from just Dh99 (US$26.95) per square foot near Dubai's commercial heartland.
Back then, the city was unique in being able to boast 100 per cent office occupancy, with prime rents topping Dh400 per sq ft. Today, commercial buildings around the city lie empty. Investors, fearful of a coming residential property crash, switched to buying offices. However, instead of acquiring entire tower blocks that could be easily let to large corporations and sold on to major investors, many buildings were sold by the floor - a decision that is now crippling the market.
As new offices reach completion, landlords are struggling to let them to potential tenants with large space requirements. At the same time, the big pension funds that traditionally invest in such properties are unable to buy them because of their typically short leases and the challenges in dealing with dozens of owners instead of one. "Fragmentation is one of the main problems in today's office market, as many office buildings in Dubai have been sold under the form of strata-title interests," says Nicholas Maclean, the managing director of the property services company CB Richard Ellis (CBRE) in Dubai. "In order for buildings to then be sold on, the opinion of all the separate owners has to be sought."
Business Bay will be Dubai's biggest new office location, where millions of square feet in new units are being delivered near the site of the world's tallest tower. The development is pitched towards large international corporations seeking quality quarters in one of the city's prime locations. One example is Bayswater, a 24-storey office tower that stands in the middle of Business Bay and is being readied for handover in just three months by Omniyat Properties. In the lobby, workers are busy applying finishing touches. The same developer is also near to completing the nearby 30-storey One Business Bay project.
That's the good news. The bad news is only about 10 per cent of both buildings have been pre-let. Like many other towers being delivered across the emirate, both have multiple owners. One Business Bay has some 45 owners while Bayswater, despite having fewer floors, was sold to more than 180 individual investors, according to the developer. Leasing can be even more challenging when a larger company looking for more than one floor finds itself negotiating with 10 or 20 different owners to agree a rent.
It means that such strata-title buildings are remaining empty longer then necessary, according to Mr Maclean. That is impacting office locations around the city including Business Bay, Tecom and Jumeirah Lake Towers, where brand-new office space was being advertised for Dh55 per sq ft yesterday. "The conditions were quite unique in the UAE. There was a shortage of office space and high demand, which drove prices up very high," says Charles Neil, the chief executive of the developer Landmark Properties. "The high price was another reason for units being sold off by pieces."
Office rents and sale prices in Dubai have in fact multiplied four-fold in less than three years according to the international property consultancy DTZ. That led to a feeding frenzy among investors wanting a piece of the action no matter the size of the property on offer. "People were looking desperately to buy any piece of Dubai at any price," said Ahmad Saidali, the vice president and head of investments of CBRE Middle East. "But in a market which is oversupplied, we still have difficulty in finding suitable space for clientswho require large office space. It is difficult to reach an agreement when you have four different owners on the same floor."
As a result of the global financial crisis and oversupply, office rents have fallen by more than 40 per cent from their peak in the middle of last year, brokers say. Almost a third of all Dubai office space is already empty, according to Jones Lang LaSalle, one of the world's largest commercial property brokers. To make matters worse, Dubai is expected to double its available stock in two years to nearly 70 million sq ft of space, with most analysts predicting that about half of the existing buildings will be empty by that time.
"Between 2006 and 2008, it was very difficult for investors to get an idea of supply," says Mr Neil. "Had they known it, they would never have gone into it." Investors are hoping that large funds will enter the market and absorb some of the recently completed buildings. The problem is that even though a number of funds are waiting on the sidelines, they have yet to start actively buying, according to the Japanese bank Nomura. They are also unlikely to be interested in strata-title buildings, according to Mr Maclean.
"The institutions that we are dealing with and that are regularly coming into the market now are only looking for whole buildings," he says. "I had no single institution come to us looking for strata-title interests because they understand the difficulty of owning a component of a building when they don't have control over the whole. "Trying to make contacts with several landlords for one building, most of whom seem to be from overseas, is proving to be impossible. You only need one landlord who is not co-operative to scatter the whole deal. Large investors don't have the time to do that."
To address that problem, some developers and landlords are trying to set up holding companies with the right to grant leases on behalf of several owners and to offer one entity for occupiers to negotiate with. Still, getting different owners to agree to that concept is proving difficult; many never expected to become landlords and only intended to hold their units for a short period before selling them at a profit.
"Many only bought because they presumed they could flip," or sell out quickly, Mr Maclean says. "Now they are finding themselves responsible for letting it, and have no experience with it." Omniyat's two office buildings in Business Bay may be in a better situation than many others coming onto the market because the developer is offering shared services for owners. "We have set up a property services department where owners can use our team to lease, manage, fit out, resell the units," says Lloyd Budd, the commercial director of Omniyat Asset Management. About half of the owners in the two buildings have signed up to the service.
As competition for tenants increase, landlords will have to offer more incentives to potential occupiers. "The solution will be how creative they can be in terms of leasing out office space," says Mr Neil. "High-quality tenants want to be in a building with other high-quality tenants. What we are also going to see now is a trend for landlords to start giving out much longer leases, exceeding 10 years."
Omniyat hopes to attract tenants with tactics such as a free month's rental per year of terms signed and other fit-out incentives. "It is a fantastic time to be a tenant," says Mr Budd. "Dh150 seems to be the market now." However, the classified pages still paint a bleak picture for the emirate's landlords. The telephone salesman for the offices being advertised for Dh99 on Sheikh Zayed Road insists there is only one floor left, but he sounds a bit desperate.
"This is a good price," he assures a caller. "You will like our building." @Email:firstname.lastname@example.org