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6% drop in prime central Dubai office rents

Prime central Dubai, both Downtown and Sheikh Zayed Road, saw a 6% drop in rents in Q2 2016 as they experienced growing competition from the arrival of new Grade A supply at Dubai Trade Centre District and Dubai Design District, coupled with competitively priced stock at Business Bay.

However, during what has been described as the busiest Ramadan in recent years, factors such as extremely high occupancies, sustained demand from BFSI and ancillary sectors, robust regulations and largely single-owned Grade A stock have exerted moderate upward pressures on the DIFC office market as the freezone witnessed a 6% increase in rents.

The figures have been released as part of the Core, UAE Associate of Savills Q2 2016 Dubai Office Report. According to the report, Dubai has around 90 million sq. ft. of office stock, 30% of which currently qualifies as prime.

Business Bay continues to see a marginal softening in rentals, with a 3% drop, while office occupancy levels are at just 60%, the lowest among all office submarkets.

CEO David Godchaux says: “This is because the area is relatively new and is yet to be fully developed. We see buildings located in the interior of Business Bay facing decreased space take-up compared to the buildings near Sheikh Zayed Road as a gap in infrastructure and access is yet to be resolved. However, we expect absorption levels to moderately go up as the development nears completion along with assistance from the burgeoning demand from start-ups.”

Tecom (Dubai Internet City/Media City/Knowledge Village) emerged as the highest performing established office submarket, with a 10% rise in rents. “Occupancies hover northwards of 90% across most towers and we see a strong demand, especially from existing technology and media occupiers looking to expand, not being met due to constraints in supply,” says Mr Godchaux.

JLT saw the sharpest drop in rentals – 10% – as the submarket largely consists of strata owned Grade B stock, while oversupply issues and entry points as low as AED 60/ sq. ft., are further lowering the market average.

Mr Godchaux says: “Due to the wide bandwidth of entry points in this submarket and proximity to prominent residential clusters, we continue to see consistent demand from corporates, start-ups, SMEs and a revived interest from metal-based commodity tenants.”

Electrolux, Emerson and Continental were among the major tenants taking space in the freezone during Q2. “Grade A properties such as Almas Tower and One JLT, which command almost 60% higher rentals than JLT’s market average, have maintained relatively steady rentals in this quarter,” adds Mr Godchaux.
Deira and Bur Dubai saw 4% and 5% rises in rents respectively, while Dubai Healthcare City demonstrated a marginal rental rise of 2%.

In terms of the office sales market, there was a drop in prices in all locations, with secondary districts such as Business Bay, Tecom C and JLT witnessing a higher year-on-year decline at 9%, 13% and 16% respectively. DIFC (3% decline yoy) retained its position as a top performing location.

Mr Godchaux says: “We don’t expect an immediate revival in sales prices in the near term, however, a mechanical yoy rise in yield levels has materialized across most of the office submarkets, as rental drops have not echoed the sale price drop to the same extent.”

Around 7.3 million sq. ft. of additional supply is expected to come online by 2018, with Business Bay accounting for about 30% of this.

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