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Commercial space to triple by ’10

DUBAI — Dubai's commercial property yields — currently at 20 per cent compared to a global average of 6-7 per cent — will slide back before 2010 when stock of commercial space is expected to triple, analysts said.

Dubai, which is fast becoming one of the expensive business cities globally, with an average rent of $89 per square foot, will also see a marked decline in commercial rents when most of the space additions are expected to hit the market in 2008 and 2009. However, with an average rent of $89 per square foot, Dubai rents are lower in comparison with other international cities —$97 in Hong Kong, $112 in Paris, and $120 in Moscow.

According to EFG-Hermes, an investment bank, by 2010 the overall stock of commercial space will triple to 75 million square feet compared to end-2006. Since most of the commercial space additions are expected to hit the market in 2008 and 2009, the bank said it expected to see Dubai commercial property yields sliding back gradually toward the international average.

In its latest study on the Dubai property market, Egypt's largest investment bank observed that while prices for freehold commercial space have risen, selling prices remain at the bottom end among business cities, coming in at an average of about $400 per square foot, resulting in rental yields of around 20 per cent, compared to a global average of 6-7 per cent.

The study said as there is currently no liquid secondary market for commercial property in Dubai, the emirate's rental yields are based on selling prices for commercial stock that is currently being built and is two to three years from completion.

The study noted that over the short term — with demand for commercial property outpacing supply —rents will continue to rise. "Project delays have thus far put a halt on the expected surge of supply this year (estimated at 7.3 million square feet), with only a very small tranche (mostly in Jumeirah Lake Towers (JLT), DIFC, Shaikh Zayed and TECOM) expected to be delivered in 2007. This has sustained the trend of rental increases."

Market analysis estimate commercial occupancy rates of around 99 per cent in both traditional and newer areas of Dubai. "According to our estimates, office rents have risen by almost 40 per cent year-to-date (YTD) in both old and new areas of Dubai as demand continues to outweigh supply," it said.

The bank's analysis shows that office and commercial rents in Old Dubai (Garhoud, Bur Dubai and parts of Sheikh Zayed Road) have risen

by 36 per cent on average (YTD) and in new Dubai (Shaikh Zayed Road, DIFC, Business Bay, Jumeirah Lake Towers, Internet and Media City) by almost 45 per cent (YTD). "The more luxurious Grade A properties in both areas jumped by around 35 per cent on average. Finding office space in the city remains arduous, with companies settling for less desirable locations, renting temporary space in villas, setting up branches or smaller offices or buying rather than leasing office space. Newer areas of Dubai have become centres of commerce, a trend that explains why rental rate increases are not easing in these locations."

It observed that selling prices for off-plan developments in the DIFC, Burj Dubai and offices in the JLT have increased by approximately 17 per cent over the past eight months due to the desirability of their locations and on expectations of strong yields based on current off-plan prices and expected future rents.