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Rising demand for office and industrial space driving up rents across Dubai

Business Bay aerial view

17 December 2014

A shortage of prime office space in Dubai, which is being underpinned by robust demand, has translated into strong upward pressure on rents across the city, and a rapidly diminishing supply of Grade A space in more centrally located submarkets and freezones, according to the latest research from international real estate consultancy, Cluttons.

Cluttons’ Dubai Winter 2014 Commercial Market Outlook report, shows that during the third quarter of 2014, rents for prime office space reached AED250 psf, which represents a near 14% rise on Q1 and a 25% increase on the same time last year. In the secondary market, strong business activity is fuelling the demand for high quality space, with rents rising by 44% over the past 12 months to reach an average of AED130 psf.

According to Steve Morgan, Chief Executive of Cluttons, Middle East: “Following the usual summer slowdown, the market has regained its strength, with strong demand persisting for well-located space. Across the business sectors, the office market remains very active in all segments. We have been recording a steady rise in take up by both existing and new occupiers, with the banking and financial services, real estate and aviation sectors being amongst the most notable.”

The report shows that the most expensive offices remain at the DIFC, Downtown Dubai and on Sheikh Zayed Road, where Grade A space lets for between AED 220 psf and AED 280 psf. There are however exceptions to this range, with space at Emirates Towers for example letting for AED 300 psf, cementing its position as the city’s super prime scheme. Together, these three areas form the city’s core business district, where supply is still limited.

Morgan continued: “It is our view that the Grade A space being delivered at Central Park is anticipated to go some way towards plugging the supply gap for top tier space at the DIFC, where we continue to record a strong level of occupier demand. At the same time however, we expect this new scheme to contribute to further stabilisation in office rents at the top end of the DIFC office market.”

The report also highlights that with the Grade A supply deficit unlikely to ease in the near term across the city’s office submarkets, attention appears to be turning to Business Bay, which not only represents an extension of the Downtown Dubai and DIFC, but is also where land plots are still available, unlike more core parts of the city. The growth in the strength of demand for land plots at Business Bay is evidenced by the sharp rise in land values, which have risen from between AED 200 psf to AED 250 psf in 2012 to about AED 400 psf today for well situated, prime mixed use or residential plots, representing a 60% to 100% increase in prices over the last 48 months.

Cluttons’ report shows that, with prime office space in desirable centrally located submarkets and freezones remaining either unavailable or in very short supply, occupiers are now beginning to consider more secondary options.

Cluttons’ international research and business development manager, Faisal Durrani commented: “Sustained demand is expected to come from the fast expanding SME sector as it positions itself as one of the new core pillars of Dubai’s economy. The expansion of the sector is driving requirements for more secondary and tertiary space, and to an extent the market is already benefitting from this. Upper limit rents in Deira (20%) and Barsha (18%) for instance, have shown the most significant rises in the city this year, topping out at AED 120 psf and AED 100 psf, respectively.”

Industrial

Elsewhere in the commercial market, the report shows that rents for industrial warehouses have continued to rise, with average Class 1 rents at Dubai Investments Park (DIP) rising by 13%. Compared to this time last year, rents are up by 29%, reflecting the strength of demand from occupiers to secure space at DIP, which is viewed as an integrated industrial estate due to the schools and residential elements present. In some instances, basic sheds have seen rents double over the last twelve months to over AED 40 psf.

Durrani comments: “With Al Quoz continuing to evolve as a trendy area, the rising rents are leaving some light industrial occupiers to consider other options elsewhere, with DIP emerging as a particular favourite. Further afield, as expected we are witnessing occupiers mobilising to locate in close proximity to Dubai World Central, Al Maktoum Airport and the World Expo 2020 site, as the area grows towards becoming an integrated global logistics hub.

“At Dubai Industrial City for example, average rents have seen a 45% rise over the past 12 months, while at DWC itself, annual land rental values currently hover between AED 2.80 psf and AED 4.20 psf, highlighting the growing importance of this increasingly significant corner of Dubai.”

At TechnoPark, recent improvements to transportation infrastructure and access to Sheikh Zayed Road (E11) and Sheikh Mohammed Bin Zayed Road (E311) have meant that the area is quickly rising on the radars of potential occupiers.

Cluttons’ latest report indicates that TechnoPark offers occupiers a chance to establish freezone branches, something not available at any other onshore industrial estate, which is aiding in its increased popularity. The previously announced halal foods and cosmetics clusters are to be complemented by an e-commerce cluster, called Matajircom, which will offer SMEs and multinational occupiers an integrated e-commerce business platform.

The unveiling of Matajircom is underpinned by the Government’s efforts to tap into the region’s AED 30 billion e-commerce market. The GCC alone accounts for roughly half of the MENA region’s e-commerce activity, which is projected to grow by 35% during 2015 (Visa International).