Dubai 2016 market report

1. An International Associate of Savills
core-me.com 01
Market in Minutes
Dubai Office Market Q1 2016
SUMMARY
Overview
Core Research
Dubai Property
Middle Eastern real estate economies are typically volatile and
sensitive to both oil price movements and political events.
However, as the region’s real estate markets mature and their
economies move away from such reliance on this sector, it is
anticipated that such volatility will become less evident. Leading
this progress towards greater stability, Dubai has now passed
through its first real estate cycles and is displaying the charac-
teristics of a maturing market with rational investor behaviour
driving developer and end user activity.
Nevertheless, the role of oil price movements cannot be ignored
even in Dubai, and the sharp downward movement of oil prices
during 2015 has resulted in significantly less liquidity amongst
the investment and business sectors throughout the Middle
East. The UAE Dirham’s peg against a strengthening US Dollar is
also providing an increasingly challenging environment for
developers as Dubai real estate becomes increasingly expensive
for international buyers. Source: Core Savills Research
Movement of Currencies Relative to the US Dollar
GRAPH 1
EURGBPINR
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
0.000
0.002
0.004
0.006
0.008
0.010
0.012
0.014
0.016
0.018
0.020
Jan-13
M
ar-13
M
ay-13
Jul-13
Sep-13
N
ov-13
Jan-14
M
ar-14
M
ay-14
Jul-14
Sep-14
N
ov-14
Jan-15
M
ar-15
M
ay-15
Jul-15
Sep-15
N
ov-15
1GBP/EUR=XXUSD
1INR=XXUSD

2. 02
Market in Minutes | Dubai Office Market
Source: Core Savills Research
GRAPH 3
Source: Core Savills Research
By year end 2015, Dubai’s office market supply
reached an estimated 8.4 million square metres, of
which approximately 2.4 million square metres (28%)
is located in the prime areas of DIFC, Downtown
Dubai, Sheikh Zayed Road (Trade Centre to First
Interchange), Dubai Internet City and Dubai Media
City, while the bulk of total supply (4.2 million square
metres – 51%) is in secondary office locations such
as Business Bay, Deira, Bur Dubai, Dubai Healthcare
City, Tecom C and Jumeirah Lake Towers.
Despite the global economic downturn, prime and
secondary stock growth was extremely rapid in the 5
years until 2011 but moderated to 7%, 3% and 5% in
2012, 2013 and 2014 respectively.
Prime and secondary supply growth fell further in
2015 to around 5% with notable additions in Deira,
DIFC and TECOM, although Business Bay saw the
bulk of secondary office space completions, with
approximately 318,000 square metres of new stock in
2015.
The development pipeline in Dubai indicates a further
7% prime and secondary sector supply growth in
2016, primarily in Business Bay.
The growth in supply is likely to be most significant in
Business Bay over the next few years as the area
seeks to establish itself as one of Dubai’s premier
business districts. Given the rapid growth in supply,
office sector sale prices in this area remain under
slight downward pressure, at least for the moment.
In more general terms, the context of a strengthening
dollar, growing supply and weakening oil economies
across the Middle East are causing some downward
pressure on Dubai office space at present and this
will likely continue in the short term although naturally
this creates a yield opportunity compared to compet-
ing ‘global cities’.
GRAPH 2
Dubai Office Supply by Location Type (2015) Prime and Secondary Office Supply – Dubai (2005 to 2019)
21%
28%
51%
SecondaryPrimeSecondary CBDPrime CBDTertiary
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e 2017e 2018e 2019e
“The office sales market witnessed a drop in
prices across almost all locations with secondary
districts such as Business Bay, Tecom C and JLT
seeing a higher year on year decline.”

3. Tecom C
Tecom C
Downtown
Downtown
Business Bay
Business Bay
JLT
JLT
DIFC DIFC
0
500
1000
1500
2000
2500
3000
Q1, 2014 Q2, 2014 Q3, 2014 Q4, 2014 Q1, 2015 Q2, 2015 Q3, 2015 Q4, 2015
Market Performance
Key issues for large scale international tenants remain
property management and the ability to expand or
contract across multiple floors, requirements that are
difficult to satisfy in buildings sold on a strata title
basis. This issue is particularly problematic in areas
such as Business Bay and has resulted in a two tier
market, with buildings in multiple ownership
commanding lower rents and slower absorption rates
than single ownership buildings.
In areas of lower cost and older stock, such as Bur
Dubai, enquiries for space during 2015 were steady,
with rents remaining more of less around the AED
100-110 per sq. ft. per annum mark. Landlords were
flexible during negotiations but price-sensitive
prospective tenants appeared reluctant to move
when this represented just a marginal change in rental
costs. As a consequence, most tenant enquiries
resulted in no movement but, despite this, occupancy
levels in these traditional areas remain high due to the
captive nature of this micro market and limited
supply. Similarly, occupancies are especially high in
Deira, which has seen marginal increases in rental
values since demand is high for the few available
units.
At Dubai Healthcare City (DHCC), average rents have
remained more or less stable at around AED 120-125
per sq. ft. In TECOM C, rents remained steady
through 2015 with marginal increases noted close to
the metro station.
Rental rate movements in prime locations were varied
in 2015, despite landlord flexibility, with rents declin-
ing in Sheikh Zayed Road due to the increase in
supply. In Downtown, rental rates remained broadly
static with Emaar-owned properties in particular
continuing to command strong levels of demand and
rates.
The strongest performing prime location was DIFC
where rental rents rose by around 7%. Emirates
REIT, which owns 18 out of the 25 floors in Index
core-me.com 03
Q1 2016
Tower is successfully leasing smaller
units at premium rates while landlords
in strata-owned properties in DIFC are
achieving rapid absorption rates and
rental rate premiums by offering fit-outs
and other incentives. While demand for
office space is expected to continue to
be strong in DIFC through 2016, some
downward pressure is expected in
future due to competition from the
Trade Center Free Zone.
The office sales market witnessed a drop
in prices across all locations with
secondary districts such as Business
Bay, Tecom C and JLT seeing a higher
year on year decline at 9%, 13% and
17% respectively. The fact that Down-
town (4% decline yoy) and DIFC (3%
decline yoy) are outperforming the
secondary locations indicates that
strong investor demand exists for
quality Grade A commercial products
that are well managed, with sufficient
parking and lifts, large floor plates and
high profile tenants.
Source: Core Savills Research
GRAPH 5
Dubai Prime and Secondary Office Rents (Q4 2014 vs Q4 2015)
Q4, 2014 Q4, 2015Q4, 2014 Q4, 2015
SecondaryPrime
AEDperSqFt
0
250
200
150
100
50
Downtown SZR DIFC DIC JTecom C LT Business Bay Bur Dubai Deira DHCC
Source: Core Savills Research
GRAPH 6
Rental Growth - Q4 2015 vs Q4 2014
GRAPH 7
-6% -4% -2% 0% 2% 4% 6% 8%
Downtown
DIFC
SZR
DIC
Tecom C
JLT
Bur Dubai
Deira
DHCC
Business Bay
The secondary locations saw marginally
higher rents even though sale prices
continue to decline indicating a rising
yield and declining investor interest in
favour of more established locations.
However, in these secondary locations,
investors may find long term investment
opportunity in fundamentally superior
properties such as Almas Tower in JLT.
Given regional uncertainty arising from
hydrocarbon price movements,
landlords will need to be particularly
flexible in 2016, increasingly offering
fit-outs, rent-free periods and other
incentives to protect both rate and
occupancy levels. With Expo 2020-re-
lated businesses increasingly seeking
office space and supply growth in Dubai
moderating, it is likely that the market’s
internal dynamics will drive stabilisation
through 2016 and a bounce in oil prices,
when it comes, will support further
growth thereafter.
Dubai Office Average Transaction Prices (2014-2015)
Source: Core Savills Research
Tecom C Downtown Business Bay DIFCJLTSecondaryPrime
2%
7%
1%
4%
-4%
-4%
3%
7%
-1%
-0%

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