Market looks for proper valuation and mortgage boost

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A lack of accurate property valuations, delayed handovers, a mortgage shortage and the absence of comprehensive rental contracts are some of the major challenges faced by the UAE's commercial sector, say real estate experts.

"There are challenges for commercial properties in the UAE with respect to valuation and lending for borrowers," said Michael Lunjevich, a partner at Hadef & Partners. "Furthermore the provisions of rental contracts are not explicit with respect to payment terms.

"Other issues include build quality, delayed handover, foot-fall for retail, and infrastructure and roads for Business Bay projects. And the office sector may be hit by the flow of strata offices, which may not meet the market demand dynamics."

Need for authentic data
Lunjevich called for more clarity over whether projects in Dubai were cancelled or put on hold.

"The market needs clarity on what is and isn't going to move ahead. Supply and demand figures vary between analysts. Better analysis and data would bring back confidence in the commercial real estate sector," he said.

Porush Jhunjhunwala, Manager, Commercial Leasing, at Better Homes, said: "The uncertainty in the market caused by the lack of available debt financing, potential oversupply and quantifying end-user demand are some of the challenges in the commercial sector."

Better Homes says Dh100 billion has been invested in Dubai's commercial real estate sector over the past five years.

Sana Kapadia, Vice-President, Equity Research, at EFG-Hermes, said: "Limited feasibility analysis in terms of demand and supply demographics has been accentuated in the commercial sector as businesses curb their expansion and upgrade plans in light of the weaker economic picture."

Oversupply vs demand
Harbor Real Estate Managing Director Mohanad Alwadiya said: "The shortage of class A space in Abu Dhabi has resulted in a more restrained price correction compared to the Dubai market, which is expected to witness a wave of supply in 2010.

"The oversupply and decline in commercial demand and activity must be arrested in order to secure a healthy and sustainable commercial property sector.

"Once over-priced, now opportunistic, the commercial segment continues to struggle with the most activity being generated by commercial clients relocating premises to avail themselves of cheaper lease rates and relocation opportunities that offer them better facilities and premium space.

"Being heavily dependent on the economic recovery and resulting commercial activity, a turnaround in this segment is unlikely before Q2 of 2010."

Alwadiya said the vacancy levels in Dubai ranged around 30 per cent and this figure is expected to go up further due to the slowdown in the business sector and the expected additional supply from developments in Jumeirah Lake Towers (JLT), Business Bay and Dubai International Financial CentreDubai International Financial Centre (DIFCDIFC), which are due for completion in 2010. In Abu Dhabi the vacancy levels hover around six per cent to 10 per cent.

Michael Grant, Commercial Property Manager at LLJ PropertyLLJ Property, said: "Over the last few years, the commercial office market in Abu Dhabi has suffered from a shortage of office space, particularly quality space with parking.

"Next year will see the completion of a number of new buildings finished to international standards, though parking will remain an issue for the majority of new towers, particularly in the Corniche area, as they have only a limited number of spaces.

"However, because of the global financial crisis the principal challenge in Abu Dhabi will be matching major corporates' need for quality of consolidated offices with their budgets, and cost will be the principal driver," said Grant,

Ancillary retail space
He said the master developers and local developers are striving hard to provide quality commercial space in Abu Dhabi to meet the requirements of international corporates in terms of providing good-size shell and core floor plates.

"However, plot sizes are often restrictive. What the master plan projects will no doubt benefit from is their ability to provide ancillary retail space for eating, shopping, banking, health and fitness. Corporates look for such facilities in order to reduce desk time and enhance quality of working environment," said Grant.

Nicholas Maclean, Managing Director of CB Richard Ellis (CBRE), Middle East, said: "The supply situation in Dubai commercial market is very fragmented with strong demand coming from our international corporate clients for buildings either within DIFCDIFC or in respect of buildings in single ownership in onshore locations. We have experienced almost no demand for strata title buildings."

CB Richard Ellis has seen a significant upturn in the activity of its global corporate clients in the GCC and a majority of this demand is concentrated in the UAE, with Dubai taking the lion's share of the activity.

Jhunjhunwala said a number of companies had opened offices in Dubai and many more were exploring the market. "As an example, Yahoo has recently moved its Middle East headquarters to Dubai."

He said the quality of finish of a unit depends upon the landlord's target market where the developer would like to position his property. It varies from project to project. "Dubai has a number of completed prime commercial projects and is striving to establish quality commercial real estate," he said.

Grant said new companies were being set up in the capital not only in the oil and gas sector but also in the technology and energy sectors to support Masdar City.

Harbor Real Estate has seen demand from new companies in the legal, research and financial auditing sectors.

"Many of these companies are taking advantage of the current economic situation to cater for the increasing demand for such services," said Alwadiya. "Most of these new businesses are benefiting from the bargains and reduced set-up costs the current market offers."

According to Better Homes, yields in Dubai's commercial sector are currently between six and eight per cent, depending on the project location.

Positive initiatives
Alwadiya said rental rates across the emirate, with the exception of phase one of DIFCDIFC, had witnessed a sharp drop of more than 50 per cent compared with the last quarter of 2008.

"Additional declines are expected as more supply starts entering the market in 2010. Having said that, it is encouraging to see the government implement a number of initiatives to support the commercial sector such as the freeze or reduction in the cost of fees and charges on business entities in Dubai,'' he said.

He said: "The second initiative is the Dubai Chamber of Commerce and IndustryDubai Chamber of Commerce and Industry's call for an end to the current sponsorship system for foreign companies wishing to set up business in Dubai. The vision of having free entry for companies with few or no barriers is a grand one and, if approved by the Executive Council, will provide a major boost towards establishing Dubai as an accessible and competitive place to do business.

"Such initiatives will have a positive impact on the performance of commercial real estate sector in Dubai."

Maclean said the commercial market offered opportunities that the residential equivalent did not.

"It is generally easier to manage property from a landlord's perspective and the end-users tend to be more sophisticated and experienced in negotiating," he said. "The lot size of potential investment assets is normally larger so with the exception of some suites that have been sold under strata title, the commercial sector has tended to exclude a large proportion of the speculator and investor element, which dominated the residential market over the last three to four years."

Dubai preferred destination
Abu Dhabi and Dubai are the best-positioned markets in the region to attract more long-term foreign investors in the commercial real estate sector over the next two to three years.

Grant said: "Abu Dhabi is undoubtedly the most commercially active emirate at present with its master plan looking ahead to 2030, which should ensure a thriving commercial realty sector."

Alwadiya said Dubai remained an attractive business hub for companies.

"Companies can benefit from the excellent reduced prices and newly handed over quality projects to maximise their return on investment and reduce their overheads."

Ronald Hinchey, Director of Cluttons, said: "As property prices in Dubai become more affordable the emirate continues to be the preferred destination in terms of quality of lifestyle, though in terms of new business opportunities Abu Dhabi seems to be leading the field in the UAE."

By Anjana Kumar

© Emirates Business 24/7 2009