On average office rents across Dubai fell 4.5 per cent in the second quarter (Q2) of the year, with the performance of prime and secondary markets continuing to diverge, said global real estate consultancy Knight Frank in a new report.

Market activity has remained relatively subdued in the first half of the year, added the report titled “Dubai Office Review Q2 2017”.

Macroeconomic overview

Dubai’s GDP increased by 2.9 per cent in 2016, down from 4.1 per cent in 2015. Lower oil prices, higher interest rates and a strong US dollar have underpinned the slowdown in GDP growth. As the economy adjusts to the new norm in oil prices and diversifies in line with Dubai Plan 2021, the slowdown in GDP growth is expected to bottom out in 2017 and begin to strengthen in 2018.

Employment is forecast to grow 1.63 per cent in both 2017 and 2018. Business sentiment remains upbeat with the Purchasing Managers Index remaining positive at 55.

Market review

Dubai’s commercial occupier market saw lacklustre performance in 2016 as a result of slower economic growth. The strong US Dollar since May 2014 has proved to be a strong headwind for Dubai’s economy.

However, despite interest rate hikes by the Federal Reserve, the US Dollar has depreciated rapidly in the first seven months of 2017 (6 per cent), registering the longest period of deprecation since 2010.

Given the Dubai’s reliance on foreign consumer spending, this is likely to provide a boost to economic growth and may encourage firms to resume capital expenditure.  This in turn may lead to increased employment which would translate into additional demand for commercial offices.

Prime rental performance remained relatively stable with average rents shifting 1.3 per cent higher in the three months to June 2017. Demand in these locations remains high due to limited new supply, Freezone Status, international regulatory standards and the quality of local infrastructure.

Vacancies in DIFC remains low with DIFC phase I registering vacancy at 1 per cent as at Q2 2017. However even within these prime locations, for periphery offerings (DIFC Phase II) absorption rates remains low. Although, as the master plan is finalised we expect this absorption rate to steadily increase as the “core” expands.

This trend maybe further heightened with the move towards mixed use developments which encourage urban living by linking business, cultural and lifestyle environments   Grade A office market rents, which includes the following areas Downtown Burj Dubai, Sheikh Zayed Road and the Trade Centre District, fell 4.4 per cent year-on-year and 2 per cent over the last three months.

Increased levels of supply and lower levels of demand have contributed to the fall in rental values, either via concessions or headline rates.

In the city-wide market, the spectrum in quality of product has led to varying rates of both market performance and occupancy levels. On average rents fell 7.5 per cent in the citywide market in the year to June 2017 and 0.7 per cent over the three months.

Key locations where demand from occupiers is centred such as Internet City, Media City and Knowledge Park have maintained low vacancy rates ranging 2-3 per cent and therefore rents have remained relatively stable.

In Business Bay, where supply continues to rise there is a downward trend in rental rates which has led to increased demand for space in strata titled buildings. For the single ownership buildings in Business Bay we are witnessing increasing demand which has helped underpin price stability over the last year.

Outlook

The commercial market activity is expected to pick up in the latter half of the year with rental trends likely to continue their currently trajectory given the embedded supply dynamics in place.

High occupancy in prime markets will continue to support rents, which supports our view that prime rents will rise further this year.

The delivery of additional Grade A stock will off-set any potential upside in rental values. In the citywide sector we expected pockets of outperformance to be sustained due to limited availability of good quality stock in preferred locations, however on average rental value are expected to continue to fall marginally.

Lastly, whilst Dubai’s economy is not as dramatically impacted by swings in oil prices, it is positive news for the region that prices have recently settled at around $50 per barrel, up from lows of $27 per barrel in January 2016. – TradeArabia News Service