Traditionally a soft market, Dubai’s commercial real estate has been under scrutiny ahead the upcoming six-month Dubai World Expo 2020. And, despite encouraging signs within the Emirate’s prime CBD market, many are questioning the likelihood of a recovery in the secondary sector as the market continues to exhibit a ‘flight to quality’.
According to JLL’s Head of Research in the Middle East and North Africa (MENA), Craig Plumb, Dubai’s commercial sector has “generally underperformed the residential sector over the past year or two” and, while occupancy in the Central Business District (CBD) improved slightly in the first half of the year, office rents remained largely unchanged, says JLL’s Dubai Real Estate Market Overview report for the second quarter.
There has been no significant change in average rentals for single-owned buildings within the CBD over the past year, says Plumb. Average rental rates in the CBD registered a marginal increase of 1.3 percent year-on-year to AED (United Arab Emirates Dirham) 1,947 (US$530) per square meters in the second quarter.
The office market posted moderate growth even as the gross leasable area of quality office space in Dubai increased to 8.8 million square meters (sqm) with the completion of the Tamani Art Building in Business Bay. The new building made available an additional 33,000 sqm of supply.
Fundamentals in the secondary office market are significantly weaker, according to Plumb. Due to a sustained oversupply of strata office products and a general softening of demand, rentals for secondary buildings and those in suburban locations have declined significantly, by more than 35 percent, Plumb says.
However, an imminent relaxation of regulations, announced in May, allowing companies operating within Dubai International Financial Centre (DIFC) to obtain licenses to operate in mainland Dubai could help to support prices going forward.
“Onshore activities (except those relating to the financial sector) are now permitted within the DIFC, and dual licenses (that allow firms to undertake both onshore and offshore activities from a single location) are examples of such changes. These new regulations should expand potential demand within the DIFC and contribute to the overall economic growth of the city,” says the JLL report.
Among the commercial real estate sectors, Plumb identified retail as the weakest performing. “With the soft demand and significant levels of new supply (220,000 sqm) expected to complete over the second half of 2017, vacancies could increase from their current level of around 10 percent and rental levels will experience further downward pressure,” he explans.
Similar to the office sector, sentiment in the retail market is expected to turn around as preparations gear up for Dubai World Expo 2020, a six-month long exhibition that will showcase trade and innovative products from all corners of the world. “The pressure to complete and hand over projects is expected to intensify in the coming two years, in anticipation of the potential boost to retail spending around Expo 2020,” according to Plumb.
Unlike commercial real estate, the residential market saw brisk sales. Data from the Dubai Land Department showed that 5,400 completed residential properties were sold in the first five months of 2017, an increase from the 4,500 units transacted during the same period in 2016.
Based on the department’s data, total investment in the real estate sector reached AED 58 billion (US$15.79 billion) in the first six months of the year. Of this amount, AED 28.6 billion came from foreign investors, mostly Indian, Pakistani, British, Chinese and Canadian nationals.
“The Dubai residential sector has been a “buyers’ market” over the past two years, with average prices for both villas and apartments declining between five and 10 percent in the year to June 2016,” says Plumb.
“Prices have stabilised since then with a decline of less than 1 percent this year.
According to JLL, prices may increase over the next 12 months, pending delays to supply completions.
Despite the high levels of foreign capital flows into the Dubai residential market over the first half of 2017, Plumb noted that there had been no notable transactions of commercial or retail premises. “This continues the trend seen in recent years, with most completed commercial and retail assets being tightly held, leaving only less attractive or under construction projects available on the market.”
Click here to read more on real estate investment in the Middle East
Head of Research, JLL MENA