Dubai developers could switch focus from apartments to offices as an off-plan housing glut saps demand, according to a new report.
The scenario outlined in the report from the property information company Reidin and the Unitas Consultancy mirrors a similar change of direction by developers in the emirate in the run-up to the 2008 property crash.
Back then several towers were changed from residential to office use. That created a glut of office space in the market that still persists despite increasing demand.
“Developers will begin to change course again towards the commercial segment in order to cater to the pent-up demand,” said the report.
The report says a “flurry” of off-plan units have been launched since the market began its recovery in 2012, which initially depressed sales of completed homes 26 per cent year-on-year by sucking liquidity out of the market.
Since then, however, as more off-plan launches have taken place this trend has reversed, and recent off-plan sales have been conducted at a discount of about 20 per cent to completed homes in an attempt to entice buyers.
Citing sales in Arabian Ranches as an example, the report’s author, Sameer Lakhani, who is managing director of Global Capital Partners, said that when the master developer Emaar Properties launched its Palma project in mid-2013 it did so at rates that were considerably higher than completed properties in the area.
“Subsequent launches were at significant discounts to the secondary [completed homes] market,” he said.
The report notes that just 4 per cent of the launches that have taken place over the past five years have been for commercial property, and there is a “pent-up demand” for such space as a result.
The report also shows that office rents in Business Bay climbed by 19 per cent year-on-year to the first quarter of this year, while residential rates dropped by two per cent. In Jumeirah Lakes Towers, office rates increased 13 per cent, while residential rates were up 3 per cent.
Knight Frank’s first quarter Dubai Office Market report, which was published last week, said demand for space had picked up during the fourth quarter of 2014 and into this year’s first quarter.
“Occupier activity in the shape of expansions, new start-ups, consolidations and renewals has continued to reduce vacancy levels, especially within prime office developments,” it said. “The healthy level of demand and low supply of prime office space has helped to exert continued upward pressure on rents.”
Yet the report also showed the amount of empty space in the market as a whole remains quite high – at 27 per cent of the total. Mr Lakhani argued that the growth in rents experienced in areas such as JLT and Business Bay demonstrates that demand is outweighing supply.
“The conventional wisdom is that there was a large overhang of space from the last boom, but in the last year or so rents have started to paint a different picture,” he said.
“When we look at rental rates, they are going up relatively sharply. We suspect that if the residential market is going to remain soft, then developers are going to look at commercial options relatively quickly.”
Not everyone is as bullish about the prospect of a city-wide bounceback, though. Craig Plumb, the head of research at JLL Mena, said that “there has been little uplift in average rents [for Dubai offices] since the market bottomed in 2011-12, due to the large volume of new supply being delivered to the market.
“While some office properties have been able to increase their rental rates, this has been largely a reflection of local factors such as increased occupancy levels in the building or local infrastructure improvements, rather than any market-wide improvement in conditions.”
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