A shortage of prime office space in Dubai, UAE, which is being underpinned by robust demand, has created a strong upward pressure on rents across the city, a report said.

This is supported by a rapidly diminishing supply of Grade A space in more centrally located submarkets and free zones, 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 Dh250 ($68) per sq ft, which represents a near 14 per cent rise on the first quarter (Q1) and a 25 per cent 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 per cent over the past 12 months to reach an average of Dh130 ($35.4) per sq ft.

Steve Morgan, chief executive of Cluttons, Middle East, said: “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 (Dubai International Financial Centre), Downtown Dubai and on Sheikh Zayed Road, where Grade A space lets for between Dh220 ($59.8) per sq ft and Dh280 ($76.2) per sq ft. There are, however, exceptions to this range, with space at Emirates Towers for example letting for Dh300 ($81.6) per sq ft, 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.

“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,” Morgan said.

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 Dh200 ($54.4) per sq ft to Dh 250 ($68) per sq ft in 2012 to about Dh400 ($108.8) per sq ft today for well situated, prime mixed-use or residential plots, representing a 60 per cent to 100 per cent increase in prices over the last 48 months.

Cluttons’ report shows that, with prime office space in desirable centrally located submarkets and free zones 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 said: “Sustained demand is expected to come from the fast expanding SME (small and medium enterprises) 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 per cent) and Barsha (18 per cent) for instance, have shown the most significant rises in the city this year, topping out at Dh120 ($32.6) per sq ft and Dh100 ($27.2) per sq ft, 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 per cent.

Compared to this time last year, rents are up by 29 per cent, 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 12 months to over Dh40 ($10.9) per sq ft.

Durrani said: “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 (DWC), 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 per cent rise over the past 12 months, while at DWC itself, annual land rental values currently hover between Dh2.80 ($0.76) per sq ft and Dh4.20 ($1.14) per sq ft, 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 free zone 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 Dh30 billion ($8.16 billion) e-commerce market. The GCC alone accounts for roughly half of the Middle East and North Africa (Mena) region’s e-commerce activity, which is projected to grow by 35 per cent during 2015, according to Visa International. – TradeArabia News Service