22 August, 2010

Dubai Commercial Property Market – Simple Case of over supply

End of Lease Decisions!
For those of you that have visited our main office you will know it is a converted residential villa which has a cute “boutique” feel about it. It is well located and we enjoy great views of the Burj Al Arab. The most important benefit is the excessive parking as we could probably park over a 100 cars comfortably. It is not a great use of space and i have been mulling over the pros and cons of moving.
The lease we signed has now come to an end and we are considering the other options .The Landlord has given us a discount to renew but not to market rates as he is able to rent it for a higher level now as a residential unit. The market has turned full circle for office space as 3 years ago the occupancy of offices was estimated to be 99.9%. It is now about 70% and falling and it is likelu that the 70% figure is a bit generous.
The options
If you drive over to Jumeirah Lake Towers (JLT) you can pretty much see exactly what the problem is. Not the credit crunch but just an awesome amount of over supply. 100 forty storey towers sit in JLT and a lot have been developed as office space. To compound the issue over near Dubai Mall you have Business Bay providing even more stock for the market to try and absorb.
The past 3 months has seen our residential lettings department record our best figures and I had to try and work out why everybody says Dubai is quiet when we are seeing rental properties snapped up.
The Problem
New companies are arriving to set up in Dubai with big names such as Lukoil ( from Moscow ) and Google ( The World’s larget company) taking office space over the past few months. These companies then need to house a few hundred workers. We are benefitting from this at the moment and have a tenant company client list that looks like it was stolen from the FTSE 100. So why is there a problem?
The simple fact is that these two companies occupy 4 floors of office space but have taken over 300 residential units for rent. In JLT alone there are over 1,000 floors of office space coming on line in the near future. This is why the rents have plummeted. On the optimistic side, if you ever hear a rumour that it is impossible to find office space in JLT then you can bet your bottom dollar that I am sat in a very expensive hotel in Monte Carlo enjoying the successes of the Dubai property revival.
In short, commercial space has been over developed and the ratio of office space versus residential will be out of sync for a long time. There is too much residential space also although this problem is apartment sensitive as the villas are holding up very well.


The Future
There are some good quality commercial tenants entering the Dubai market and the sensible landlords will appreciate that even Google will want the best space they can get at a reasonable rate. It is going to take a long time to pick up the slack of the existing and new offices coming on line and I fear the commercial rates will slide a lot further yet.

One man’s Opinion
As usual I do have an opinion on the problem. Dubai is a great place for companies to base their operation. It is tax free, the airport routes are the best in the world and the Ports are equally as impressive. There are a hundred reasons why some of the best companies in the world would want to be present in Dubai. However, over the past 5 years, as the economy rocketed, new start up companies found it very easy to set up and make huge profits over night. There was an endless amount of commercial activity which did not really have any substance and these badly run companies could not believe their luck. The World has changed and it is the fittest who will survive and now we are left with a base of well run companies who have proven their worth. In addition the companies that are arriving to Dubai are quality companies that can offer the economy a solid contribution.
The next phase of the economic cycle will see the “super profits” replaced by “normal profits.”We are now at the beginning of a new curve where “Normality” will be the main ingredient.
It is this normality that will drive the next cycle of growth. Unfortunately the imbalance of Normality versus Stupidity will take some time to redress itself. The quality commercial space will be occupied by quality tenants and Dubai will grow slowly but effectively
I really don’t foresee a lot of new “start ups” any time soon and the companies that do set up will be ones with a track record but will proceed with caution. They will take smaller units than before and act with more prudence.
The quality office sspace will be occupied by better quality tenants and Dubai will slowly show signs of growth again.

All that said, E &T will probably pay over the odds for a commercial villa with a great view and more parking lots than the NCP on Deansgate Manchester.