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Jul 30 2009

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Property Insight from Dubai: Q2 2009 MarketView

• Dubai real estate market endured another difficult quarter with minimum sales activity and further evidence of weak sales levels across all sectors.

• Despite continued negativity, price declines are beginning to slow with cautious optimism that market bottom could be called before year end.

• Greater transactional emphasis directed towards 'ready to move in' properties.

'Ready to move in'

• Investors/owners preferred to lease their properties rather than offering for sale due to prevailing low property prices and long waiting time to dispose.

• Leasing options becoming more popular in order to cover mortgage.

• Premiums achieved remain low

• Few opted for below market lease rates in order attract quality tenants for longer lease period with pre-agree annual increments

Office Market

Office Space

• Available office space is currently outstripping demand as new completions add further pressure to existing stock.

• Several projects previously expected to enter the market during H1 of 2009 are now pushed being further back as developers halt and slow construction.

A significant volume of upcoming stock is located in the Business Bay development.

• The slowdown in business activity has caused a major drop-off in required office space.

Demand over past 6 months predominantly for smaller sized office units ranging from 95-230 m², as compared to 400 m² + prior to the downturn.

• Excess space from older buildings steadily emerging over the last six months as companies downsize in light of current market conditions.

Fewer cases of pre-leased office space have also been noted during this period.

• Of those companies currently in the market for space, it can be noted that new companies and companies formerly operating out of business centres are typically searching for fitted-out space emerging from older buildings as this drastically reduces setup costs.

Premiums paid for such office space still remain low, compared to fitting out a new space.

Lease Rates

• Lease in secondary locations continue to show downward trend

New office locations such as Dubai Silicon Oasis , JLT, TECOM witnessed a further drop in lease rates.

Typically buildings with multiple-ownership are being most affected.

• Prime lease rates - mainly DIFC district - remained stable during H1.

• However, lease rates within district from private developers with multiple ownership currently being leased in range of AED4,036 - AED4,300 m2/annum.

Office Stock

• Commercial office stock stood at 4.5m² as for end H1 2009

Stock rose from 3.7m², an addition of 0.8m² (22% year on year).

New supply reflected a quarterly increase of close to 4% - a noticeable reduction on previous quarters.

• The majority of supply emerged from newer developments such as JLT, Al Barsha, TECOM , Dubai Silicon Oasis and to some extent existing business locations of Deira, Al Garhoud and Jebel Ali Freezone.

• Much of the existing office space in the Dubai International Financial Centre was from the DIFC Authority with office space from private developers emerging in the form of Liberty House.

• New supply coupled with low demand has led to drop in office lease rates of notable extent.

• Secondary locations in Al Barsha which previously demanded lease rates of AED 3,230 /m² in Q3 2008 have now dropped to AED 1,615/m² - a 50% drop in a 9 month period.

• Vacancy rates within newer locations remain high as compared to older office districts.

Residential Market

Lease Rates

• The exodus of the expatriate workforce, along with new stock entry, has resulted in a sharp drop in lease rates for residential apartments across all property mix.

Traditional locations of Bur Dubai, Deira & Karama (which previously had high occupancy ratios) have seen emergence of vacant apartments in older & newer buildings.

• Among non-Freehold locations [illustrated in figure], the worst affected are the newer residential districts of Al Barsha and Al Nahda.

1 bedroom apartment in Al Barsha is currently available for lease in the range of AED60-65,000 as compared to a high of AED 90-100,000 in Q2 2008 (up to 40% drop).

During the last 9 months, many new buildings entered the market resulting in a hefty drop in lease rates.

Falling levels provided an option for existing tenants to move to higher denomination apartments at the rate of their existing units.

• Declining lease rates and movement of existing tenants has forced landlords to opt for incentives.

• The most prominent being payment terms of 6 to 12 cheques.

• Lower sale and lease rates in Freehold locations has also resulted in landlords offering tenants below market rates with payment options of full a year's rent in advance, a win-win option for both tenant and the landlord.

Law

Major talking points (Q2) were amendments to Law No 13 and the announcement of Visa's for real estate investors by the Federal Government.

Amendment of Law No 13

Amendments are related in the event the Purchaser defaults on the payment terms as stated in the purchase agreement:

• If at least 80% of the project is completed, then the Developer may keep the full amounts;

• If at least 60% of the project is completed , then deduction is 40% of the purchase price;

• If the developer has commenced the construction but did not reach 60%, then a deduction of 25% applies;

• If construction has not yet commenced for reasons beyond the Developer's control, then the Developer can deduct up to 30% of the total amounts paid by the Purchaser.

Visa for Property Owners

• UAE Government issued a law in May 2009 pertaining to the issuance of six months, multiple entry residence visas for property owners/investors in the UAE.
  
• Under new law, the value of the completed property should have a minimum value of AED 1,000,000 and owners should have a fixed income of not less than AED 10,000 p/month.
  
• However the visa does not give the property owner/investor the specific right to work inside the UAE.

Outlook

• The lease rates for both the residential and commercial properties are likely to see a further drop over the remainder of the year.

• However decline will be marginal as compared to the drop since H1 2009.
  

• Expected much of the pressure on lease & occupancy rates will be on the emerging new residential development s of Dubai Silicon Oasis , International Media Production Zone...

• In commercial office market sector, office stock will see a further & substantial increase over the next 6 months with many projects in the latter stages of completion.

• Of this stock the majority will be from the newer business areas of JLT, Al Barsha, TECOM ... with more limited supply from the DIFC area.

• Business Bay development will see the emergence of considerable new office supply during the remainder of the year as infrastructure issues ease and developers begin the long awaited handover of new units.

• Impact of new supply is likely to see further increase in competition between landlords, resulting in greater incentives for tenants.
  

• It is worthy of note that lease rates in Business Bay towers which are nearing completion are currently being quoted in the range of AED 1,615 to 1,884/ m².

• This is a substantial discount from the current prime sales rates within the DIFC , a reflection of both its emerging status as an office location and the current levels of development and infrastructure within the wider Business Bay development.

• Outlook for H2 remains negative but importantly forecast levels of decline are notably less than already experienced during H1.
  
• A period of minimal negative growth over the next 3-6 months could see some stability achieved and the market bottom called before year end.

-Ends-

Further press information
Matt Green is available for comment and interview.

The full report can be sent on demand. Please contact Tom Watterson (momentum) on +971 4 390 1630 / +971 56 605 2854 for further details.

Disclaimer 2009 CB Richard Ellis
Information herein has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to independently confirm its accuracy and completeness. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the market. This information is designed exclusively for use by CB Richard Ellis clients, and cannot be reproduced without prior written permission of CB Richard Ellis.

© Copyright 2009 CB Richard Ellis.

Contact:
Tom Watterson
+ 971 (4) 390 1630

© Press Release 2009

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