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Global economic crisis hits UAE office rental market

DUBAI, September 6, 2016

The impact of the softening global economy continues to hamper the UAE’s office market as redundancies in the oil and gas, finance and banking sectors have stifled demand for office space across the emirates, according to leading international real estate consultancy Cluttons.

Cluttons’ 2016 UAE Property Market Report, which highlights the consultancy’s expectation for the office market performance throughout the year, is witnessing declines of close to 5 per cent in Abu Dhabi and Dubai, while Sharjah will witness declines of closer to 10 per cent by the end of the year.
Faisal Durrani, the head of research at Cluttons said: "Global economic headwinds in the form of the Chinese slowdown, the era of $40 per barrel oil, the ongoing sovereign debt issues in the EU and the global fall out now playing out as a result of Britain’s decision to leave the EU are amongst the most significant growth dampeners for the UAE."
"Despite the relatively diversified economy across the emirates, the non-oil economy is being subjected to a deterioration in sentiment and overall confidence; vital ingredients for sustaining positive growth," stated Durrani.
"This is undermining rents and capital values, which are, for the most part, weakening across the board as the office market across the UAE waits in anticipation to feel the Expo effect. We believe this will begin to kick in next year as activity ramps up for the mega event," he added.
After the Dh100 ($27.2) per sq m declines recorded by office rents in more secondary and tertiary locations in the first quarter, rents have remained largely unchanged in the second quarter.

"The same is true for most major Grade A office buildings in the city, where rents have held steady, after the slight falls in Q1. It is worth noting that while asking rents have remained relatively unchanged, we have observed instances where transactional rates have been lower," pointed out Durrani.
According to Cluttons, the prospect of seeing a surge in take up activity remains low in capital Abu Dhabi with mute economic conditions expected to persist there in the short term.

Consolidation activity remains a dominant feature of the market, while some firms are taking a ‘wait and see’ approach to relocating from more secondary space, deterred by the capital expenditure associated with a move, it stated.
Edward Carnegy, the head of Cluttons Abu Dhabi, said: "Rents are likely to remain under pressure as the year progresses and should there be a fresh wave of redundancies in the oil and gas sector, rents will be depressed further."

"Some landlords have begun to offer greater incentives in order to entice and retain occupiers, but we still expect weakness in rents to persist. If anything, landlords are expected to become more aggressive over the rest of 2016 as the need to retain and attract tenants moves up a gear," he noted.
On Dubai, Cluttons’ report shows that during Q2, office rents across most submarkets in the emirate had registered almost no change, with the exception of Deira where upper and lower limit rents appear to be converging.

Average office rents here range from Dh60 ($16.3) per sq ft to Dh105 ($28.5) per sq ft. The narrowing rental band in this submarket, reflects landlords’ acceptance of the quieter conditions and also highlights the emphasis occupiers are placing on budgets as the cost conscious trend Cluttons reported on at the start of the year beds in.
Murray Strang, the head of Cluttons Dubai, said: "In our own experience, the market remains active, with a steady level of requirements, but these are undoubtedly lower than this time last year."

"Of note is the fact that we continue to receive requests from companies wishing to downsize, or consolidate operations in to a single better value location, reflecting the more subdued state of the economy compared to a year ago," he stated.
Clutton said the only location to record a rise in rents was at the Dubai International Financial Centre (DIFC), where upper limit rents in the DIFC core edged up by six per cent to Dh370 ($101) per sq ft during the second quarter.

Strata-owned buildings in the wider DIFC are yet to achieve maximum occupancy and this is particularly evident in schemes furthest away from the amenities at the core.

"We have seen greater flexibility from some landlords on the peripheral areas of the DIFC, with both favourable rents and incentives being offered. This polarisation of within the DIFC is expected to soften once the retail spine eventually connects all of these peripheral developments with the core," observed Strang.
On Sharjah, Cluttons said after six months of stability in the office market, rents are starting to falter, with two of the city’s three major office markets registering declines of Dh5 ($1.36) per sq ft.

Rents in the prime areas of Al Majaz weakened in the three months to the end of June. The only submarket to remain steady was Al Soor where rents have remained unchanged so far this year.
Suzanne Eveleigh, the head of Cluttons Sharjah, said: "The supply of prime office space remains limited, however the ongoing persistence of the relatively low oil price environment is limiting domestically driven take up from this core occupier group."

"The number of overall requirements is markedly down on this time last year, with the limited number of requirements trickling in from the SME sector, with a very small number of larger requirements from the finance and banking sector," stated Eveleigh.

"Our expectation is for further decreases in average office rents in the region of Dh5 per sq ft before the year is out, taking the total decline during to 2016 to about Dh10 ($2.72) per sq ft," he added.-TradeArabia News Service

Tags: UAE | Sharjah | Cluttons | economic crisis | Office rents |

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