Jun 17 2009

Office property owners hold on for stable returns

More office property owners are set to hold on to their completed assets rather than selling them so they can benefit from a long-term rental income stream, say real estate analysts.

The net rental yield for office space is currently around five to eight per cent and rents are expected to stabilise in the UAE for the sector, especially in Dubai, in the coming months.

"The return on investment (RoI) and the rental yield for office space cannot be separated," Robert Mckinnon, Managing Director, of Al Mal Capital, told Emirates Business. "The ROI is partially composed of the rental yield. Office rents are declining but so have asset prices - leaving yields in the high single digits. We should begin to see rents for office space beginning to stabilise in the next six to nine months.

"We have not seen a surge in new office space rents but we have seen companies looking to upgrade locations from some of the older areas of Dubai."

Vacancy levels for offices in Dubai are currently running at around 22 per cent depending on the area.

Robin Pugh, Director of Agency Services at Jones Lang LaSalle, said: "Investors are now more focused on rental yield then short-term capital gains. Vacancy levels have increased as new supply has entered the market over the past year.

"At the same time demand has been negatively impacted by the downturn in the global economy, which has made occupiers more cautious with many putting expansion and relocation plans on hold.

"Vacancy levels are averaging around 22 per cent with areas such as Tecom, Jumeirah Lake Towers (JLT) and Al Barsha witnessing the highest levels."

Pugh said that though the level of inquiries about renting office space was steadily increasing, a drop in interest was expected during the summer months. "Most of those who are moving are existing occupiers who are now able to consider moving into space that is more affordable because the rental levels for new space compare well with their existing rental liabilities."

Jose Murcia, Associate Director of Group Seven Properties, said vacancy levels for office in Dubai were high with JLT, Business Bay and Sheikh Zayed Road having the most spare space.

Pugh said most local and international companies would be increasingly looking to rent rather than buy office space.

"Local trading companies will continue to seek to purchase strata title space," he added. "Most companies with a short- to medium-term view are looking at rental options. Those with long-term plans will consider buying space given the relatively low prices.

"As the market matures there are likely to be two quite distinct groups of occupiers in the office market.

"Major corporates and most international companies will increasingly seek options to rent, while local trading companies will continue to purchase strata title space."

Murcia said there had recently been fluctuations in office prices in Dubai.

"We are not sure if we are buying at the right price now," he added.

"Prices are currently going through a lot of adjustment in the office market. It is not advisable for end-users to buy right now unless there is a very good deal.

"In Business Bay the RoI is around eight to nine per cent. A lot of people who have bought have been end-users. A lot of flipping happened but the flippers of the property will suffer in the long run."

Pugh said capital values in the office market have seen a marked decline over the past few months.

"Capital values have declined more dramatically than rentals, which has resulted in increasing yields," he added.

"Given the absence of recent transactions in sales, it is however very difficult to gauge exactly where either capital values or yields currently lie," said Pugh.

Pugh said office rents ranged from Dh80 per square feet at JLT to Dh400 per sq ft at DIFC . Sales prices ranged from Dh650 per sq ft at JLT to Dh2,000 per sq ft in prime sites in the Commercial Business District.

Murcia said rents in DIFC were around Dh400 per sq ft, and added: "Rents are expected to fall further beyond Dh350 per sq ft and sale prices within DIFC are around Dh2,000 per sq ft."

"Office space at the Burj Dubai was selling for around Dh6,000 to Dh7,000 per sq ft during the peak of 2008, but prices are currently around Dh4,500 to Dh5,000 per sq ft. People bought a lot of stock and are now willing to let it go at these prices."

Pugh said prime rental rates were now at comparable levels with other global office markets.

"We are yet to witness the increased incentives, such as rent-free periods at the beginning of leases, that are a common place in other office markets," he said.

"The significant decline in rentals in the Dubai market over the past six months has clearly been an advantage for occupiers and has increased the competitiveness of Dubai and strengthened its position as the leading business centre in the Middle East."

By Anjana Kumar

© Emirates Business 24/7 2009

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