_It's a favorable time for Dubai occupiers
Dubai’s GDP grew by 1.9% in 2018, down from 3.1% a year earlier, according to data from Dubai Statistics Centre, the slowest rate of growth witnessed since 2010.
A slowdown in the annual percentage growth rate in 12 out of the 19 broad economic sectors in Dubai has contributed to the overall rate of growth slowing. The only two sectors which have recorded negative annual growth rates are the manufacturing and mining and quarrying sectors, these sectors account for 9.2% and 1.6% of Dubai’s total GDP respectively.
On a more positive note, three out of the five largest sectors have seen their annual rate of growth increase in 2018 compared to the year prior. Overall, business sentiment remains fragile across Dubai. This is despite the Emirates NBD Dubai Economy Tracker Index (DET) recording a reading of 57.6 in March 2019, the highest reading since May 2018. As this is above the neutral50 level it indicates a relatively strong expansion in the non-oil sector.
"Landlords are actively offering favorable terms to new and existing occupiers. Rent free incentives are becoming a more common practice, in order to maintain and attract key corporate occupiers.”
However this more positive backdrop is as a result of firms discounting prices, particularly in the wholesale and retail trade sector, with selling prices declining at the fastest rate since December 2018.
Take-up activity remains limited from new occupiers with new licence issued falling by 2.7% in 2018. Renewal of existing licences remained relatively flat with only a 0.1% increase witnessed in 2018. Finally, cancellations of licences increased by 22.4% over the same time period.
Demand remains primarily from firms looking to consolidate operations, with 75% of current demand for floor space of up to 5,000 square feet. Demand is also centred towards product which requires limited capital expenditure.
Given these conditions landlords are actively offering favorable terms. Rent free periods are becoming more common. Landlords are willing to concede longer rent free periods and offer contributions to other costs to occupiers willing to sign longer term leases, a practice being received very favorably by global occupiers.
Rents
Rents in the prime sector of the market as at Q1 2019 registered at AED 240 (sq.ft/p.a.), down 3.6% in the year to Q1 2019. Vacancy in this sector has remained relatively low compared to the wider market, this is due to occupiers taking advantage of softer market conditions to upgrade their office space.
Grade A rents, which fell 5.1% in 2018, have seen the rate of decline moderate with rents falling by 3.3% in the year to Q1 2019. We are likely to see the performance of the Grade A market weaken further, as new supply enters the market. Citywide office rents fell by 5.0% in the 12 months to March 2019, however this headline figure masks the performance of strata owned stock which has seen rents fall by over 20% in some cases, over the same time period.
Engineering and construction firms were the single largest source of demand with 13.9% of demand coming from the sector. General services and real estate were the second two largest sources of demand with a share of 11.1% each of total enquiries.
OUTLOOK
As a result of subdued demand across the market we expect that rents will continue to fall further over the course of 2019. In recent history this has been driven primarily by the surge in supply, which will continue to be the case as we expect almost 490,000 square metres of office space to be delivered this year.
However in the short term we expect demand to remain weak which, is likely to put further pressure on rents. One of the factors behind this slowdown has been due to the lack of demand from existing tenants. This is as a result of firms adopting a wait and see approach as details of the 100% foreign ownership laws emerge, before committing to any expansion or capital expenditure plans, this includes initiatives such as the proposed common Free Zone license law amendment announced in May.
Although firms are witnessing tougher trading conditions, they are not willing to relocate to secondary locations in order to reduce costs, particularly given the inherent licencing limitations these locations have. Prime and Grade A office locations still remain most desirable, given not only due to the quality of the product, Free Zone and dual licencing but also due to the amenities these mixed use developments offer. DIFC has always garnered the most interest in this capacity but developing areas such as DWTC are also beginning to pique the interest of occupiers.
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For more information on the UAE commercial market, contact Matthew Dadd.