Qatar’s government should consider steps to ease an oversupply of office space in the capital causing rent levels to fall and vacancy rates to climb, as it could potentially impact confidence in the real estate sector, according to a new report.

Monthly rents in Doha’s prime central business district (CBD), the Diplomatic Area of West Bay, have fallen to around QR165 ($45) per sqm this year after reaching highs of QR300 ($82) in mid-2008. The fall in rents has been attributed to rampant construction over the past five years that turned a shortage of office space into a surplus, said the report from leading global publishing, research and consultancy firm Oxford Business Group.

Grade-A office space in the city has more than doubled over the past two years, with 1.4m sqm gross leasable area (GLA) available at end of 2009 compared to 550,000 sqm in 2007. Some 650,000 sqm of new GLA is anticipated to reach the market in 2010, the majority of which (70 per cent) will be located in the West Bay.

The excess of office space has led to flexible deals being offered to firms seeking large units or long-term contracts, while concessions such as rent-free periods and rent caps have become commonplace. The price decline is also apparent in secondary areas of the city, where space is available for as little as QR100 ($27) per sqm per month.

Doha’s office sector had traditionally been spread along primary and secondary locations such as the A, B and C Ring Roads and Grand Hamad Street. This changed when a number of key government departments were relocated to the West Bay, contributing to the rising rents there over much of 2007 and 2008.

The public sector is a significant player in Doha’s office market, occupying around 30 per cent of existing Grade-A space. However, while most government institutions have established offices in the West Bay, new supply is currently experiencing limited demand.

A directive was issued in April prohibiting companies from converting villas and other non-commercial space into offices, and this is expected to only improve occupancy in the market for the short term. However, supply is still exceeding demand and as of Q3 2010 almost 200,000 sqm of space remained vacant, with overall occupancy at 80 per cent.

To compound matters, company registrations dropped 38 per cent in 2009 compared to 2008. Some companies have made budget cuts and put expansion plans on hold, reducing the absorption of new space. While in the past 1000 to 2000 sqm (whole floor) offices were the norm, in recent months, demand has shifted towards smaller unit sizes in the 100 to 500 sqm range.

Delays in the delivery of some projects, with five developments offering a total of 500,000 sqm GLA to be delayed by two years, are creating supply interruptions and a temporary respite. However, the interval is not long enough considering demand growth is estimated at just 200,000 sqm per annum for the next five years.

Based on office developments under construction, more than 2m sqm of additional Grade-A office stock is expected to be delivered between 2011 and 2015. Actual delivery remains uncertain as construction bottlenecks and problems securing development finance have resulted in widespread delays. Though supply interruptions are becoming common for a variety of reasons, the government may also be required to reduce speculative build, which is a bane of the region.

“A moratorium on construction activity in the office sector until current stock achieves at least 90 per cent occupancy could ensure that Doha does not experience the problems evident in neighbouring Dubai,” said Rakesh Kunhiraman, director of Oxford Business Group’s Dubai-based Consultancy Division.

“Ideally, a market should be left to its own devices. However, with a severe oversupply looming on the horizon, it is up to the government to step in to avoid crisis in the office sector, which could easily affect other real estate segments and broader confidence in the economy,” he added.-TradeArabia News Service