Meeting real estate needs

High demands and high returns make the UAE a prime real estate zone for global investors.

As the UAE economy continues to soar, the commercial property market has been experiencing an unparalleled boom.

In a recent report by real estate consultant, Colliers International, Dubai and Abu Dhabi are attributed with having the lowest vacancy rates for office space in the world, at just two per cent. Indeed, even though approximately 90 per cent of Dubai's buildings have been allocated for commercial use, the demand for commercial real estate still exceeds availability. Therefore it is hardly surprising that at 43 million square feet Dubai has ‘the highest construction per square foot anywhere in the world,' comments Danial H. Schon, Vice President of Schon properties, whose developments include Schon Business Park, located in Dubai. Meanwhile, reports from the developer Nakheel state that they alone will add ten million square feet of retail space over the next four years.

"The global attraction and recognition created by great developments such as Burj Dubai and The Palm has put Dubai on the world map," says Sanjeet Joher, Group Chief Operating Officer of KM Holding. He adds, "Dubai has now become one of the top ten cities in the world that commands the most expensive commercial spaces [which is] an encouraging sign that Dubai is at the forefront of the global commercial market."

With the establishment of JAFZA, the world's fastest-growing free zone at Jebel Ali and the subsequent planning of more free zones in the UAE, many multinational companies such as the oil services giant Halliburton, are establishing headquarters in the Emirates. This has resulted in an unprecedented demand for entire commercial buildings from corporations that want to set up base in Dubai and according to Schon, "[this] economic progress has caused a shortage of commercial space." However, it seems that this may not be just to benefit from the tax advantages and the region's central location for many important global trade routes. Schon says, "Demand continues to build up from countries such as Pakistan where political instability is causing people to set up base in Dubai."

This demand has only been heightened by delivery delays as Robin Lohmann, Managing Director of ACI Real Estate, explains. "A lot of properties which have been sold have not been delivered so far. For this reason there is still a huge demand for ready commercial properties at least for the next two years." Of the approximate 70,000 office units promised through more than 400 projects last year, only 30,000 units were actually delivered. Naturally with this unfulfilled need, prices have risen at an exponential rate. Schon says, "A shortage of office space has taken rents over Dh400 per square foot in Grade A locations. Also, the rising costs of construction and land have taken prices around 20 per cent higher this year.
"
On comparing the leasing or rental rates of 2007 with the prevailing rates, it is generally expected that there will be an increase in charges by more than 60 per cent for a newly leased out commercial space in Dubai for the year 2008-09. To date, office lease charges have been the highest on Shaikh Zayed Road, ranging Dh3,800 per square metre, followed by Deira with Dh3,000 per square metre, if published reports are to be believed.

It is not just the leasing price that has increased as Lohmann explains. "The purchase price in Dubai for commercial properties has increased exponentially over the last 14 months. Prices in Dubai are [now] between Dh950 per square foot and Dh5,500 per square foot depending on the purchaser interest and in which areas in Dubai he would be interested in locating his office. [Regarding our properties] the selling price ranges from Dh2,000 to Dh4,500 per square foot."

Of course there is a major financial advantage to purchasing commercial real estate. Investing in buy-to-let office space in Dubai can offer excellent returns. For example, if a commercial space in Business Bay for Dh1,500 per square foot is purchased, an annual return of 15 per cent is estimated by industry observers, making Dubai an even more attractive prospect for foreign investors.

While there are property analysts who predict that this vast amount of commercial space due to hit the market will have the effect of increasing vacancy rates slightly thus leveling out rising rental costs, not every industry insider is in total agreement. "The prices around the Burj Dubai development will likely triple in value when the Burj Dubai is completed in late 2009," states Joher of KM Holding, whose portfolio of developments include the B2B Tower and Tamani Arts offices.

Lohmann of ACI Real Estate agrees. "A lot of commercial properties will come into the market like ready buildings in Business Bay." Such examples may include Boris Becker Business Tower and Michael Schumacher Business Avenue, both ACI Real Estate projects. Lohmann continues, "If we focus on the growth of the economy as well as on the growth of people who are coming here to live and work it will take a few years to level this market." So, although an oversupply will initially exist, it will eventually achieve stability as Dubai is confirmed as a global business hub.

Commercial development has not been restricted to Dubai alone. There has been multi-million dirham developments planned in the other emirates, most notably Abu Dhabi. With Abu Dhabi becoming increasingly diverse in its business interests, the price of office space has jumped by almost 40 per cent in the past few years as Lohmann explains. "The Abu Dhabi commercial market has been increased dramatically. Prices 14 months ago were below Dh1,000 for freehold properties. Now those properties have prices between Dh2,500 and Dh3,000 per square foot."

However, this shortfall in office space will be addressed as The Abu Dhabi Chamber has announced that there will be more than Dh990 billion in planned investments in the emirate in the next five years, Dh750 billion of which is for construction and real estate. In a report by real estate consultants Strutt & Parker, it is estimated that office space in Abu Dhabi will double to 2.7 square metres by 2013 and will rise to 4.5 million by 2020. In addition, retail space in the emirate will soar from 860,000 square metres to 2.8 million by 2013 and 4.7 million by 2020, with shopping mall space tripling by 2010.

Many of the developments in Abu Dhabi will be mixed-use developments assimilating residential and commercial properties. These include Saadiyat Island, a project with an estimated cost of Dh100 billion and with a completion date of 2018.

In addition to commercial and residential areas, Saadiyat Island will serve as a cultural haven not just for Abu Dhabi but for the whole of the Middle East.

Al Reem Island on the other hand will focus solely on commercial and residential development. The island's developers quote the overall dimensions of the project as 6.5 million square metres and investment costs as exceeding Dh100 billion. Most importantly for Abu Dhabi's investment prospects, the project has gained international interest as one of the emirate's first free zones with an extensive business district including several 40 and 50-storey towers, which will hopefully be capable of matching the predicted demand for commercial space.