Further drop in rentals for office market likely

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Further drop in rentals for office market likely
The report shows that inquiries from international corporates for free zone space in Dubai remains strong. - Supplied photo

Average prime office rents outside primary free zones dip

by

Issac John

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Published: Tue 24 May 2016, 8:25 PM

Last updated: Tue 24 May 2016, 10:03 PM

The current weakness in some submarkets of Dubai's office segment is expected to persist, with further rental declines likely in summer months, according to the latest research from international real estate consultancy, Cluttons.
"Following a period of relative stability, we are increasingly noting instances of negotiated rent reductions materialising at the same time as a growing number of lease incentives offered by landlords," Cluttons said in its Dubai Spring 2016 Commercial Market Outlook report.
"This is symptomatic of a market entering a tougher period, particularly as more macro-economic factors weigh down on the level of occupier requirements. It is challenging to put an exact figure on the level of rent falls given the wide range of submarkets and individual micro-demand drivers, but falls of up to 10 per cent on average cannot be ruled out this year," it said.
In the first quarter, average prime office rents outside of the primary free zones dipped to Dh230 per square foot (psf), reflecting an eight per cent decline on quarter four 2015 and perhaps more significantly, the first downward adjustment in 18 months. Secondary rents dipped by Dh10psf to Dh110psf, while rents for office space in more tertiary locations decreased by Dh5psf to Dh60psf over the same period.
However, office rents in Dubai's prime free-zones held firm during first quarter 2016 as occupancy levels remained high in core areas such as Dubai International Financial Centre, Dubai Media City and Dubai Knowledge Village, Cluttons said.
The report shows that inquiries for free-zone space from international corporates also remains strong. The bulk of activity is concentrated in the 3,000sqft to 7,000sqft bracket, with 75 per cent of all Cluttons' requirements coming for free-zone space.
"We have seen strong pre-leasing activity in further phases of Dubai Design District and One Central and expect that free-zones will remain the key centres of all occupier activity both in the short and long term. It is our view that free-zones can help to transform Dubai into a global commercial hub, with the possibility of Dubai becoming a city-wide free-zone in the future; a move which would help drive the evolution of the office market," said Murray Strang, Cluttons' head of Investment and Agency UAE.
With reports of redundancies in some of the city's core business segments, such as finance and banking, Cluttons latest research indicates there is now a growing trickle of space returning to the market, which is further suppressing rental value growth rates as the supply-demand equilibrium moves further out of kilter.
"The vast majority of landlords have been slow to react to the diminishing level of requirements; however, there is a growing minority responding to the evolving conditions. We have noted instances in Business Bay and JLT, where non-strata landlords are beginning to extend rent-free periods to as long as six months for long term leases, including at One JLT where interest has been much stronger than in other stock in the same area," said Strang.
According to Cluttons' report, in addition to rent reductions of up to 20 per cent in a few extreme cases, landlords in some submarkets have begun to offer contributions to utility bills and fit out costs through gross rents. Some landlords are also accepting shorter lease terms or tenant break clauses and offering to cover tenant's agency fees in some cases in an effort to drive down void periods.
- issacjohn@khaleejtimes.com


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