cluttons.com

Dubai, Spring 2016

OFFICE MARKET BULLETIN Rents stay flat in 2015 Stability in office rents in most of Dubai’s main markets persisted throughout 2015. 13 of our 22 submarkets witnessed no change in starting rents in the last 12 months, and 7 witnessed an increase. The highest rents rises were recorded in Dubai Design District (D3), where free-zone and non-free-zone rents rose by a meteoric 67% and 44% respectively, due to the special terms early occupiers were given when D3 was established. Only two submarkets saw lower limit rents decrease over the 12 months of 2015: JLT (-13%) and Sheikh Zayed Road (-13%). Strong demand sustaining rents Continued high demand has been a major factor in ensuring this stability, with notable deals to both major international and domestic occupiers taking place. However, in the face of a softening global economic backdrop, occupiers remain cost conscious and budget driven, with the key word for many being ‘prudence’. Landlords, by contrast, appear to be slow to react to the cooling market, with many reluctant to move on asking prices and others demonstrating a lack of flexibility for lease terms at renewal. The emerging gulf between market reality and landlords’ expectations is a concern, particularly for a market that is starting to show signs of maturity. Occupiers increasingly cost conscious This disconnect is further galvanising a trend of occupier drift to submarkets that are perceived to offer better value for money, such as Business Bay. International occupiers continue to be attracted by

free-zone areas, with the Dubai Trade Centre District amongst the most active submarkets in Q4 2015. For example, oilfield services company Schlumberger took 62,000 sq ft over three floors in the first completed building at the Dubai Trade Centre District in November 2015. Indeed, developers are accommodating strong occupier demand in free-zones, as further towers go under construction. In DIFC, for example, ICD Brookfield have broken ground on their AED 3.7 billion, 54-storey, over 1m sq ft tower, ICD Brookfield Place. Fragmented markets In this report we present heat maps demonstrating the entry level rents across Dubai’s main office submarkets, along with an analysis of micro-market trends that often exist within the city’s uniquely fragmented market. Key deals Deal type

Scheme/ location

Occupier type

Lease renewal and expansion

Emirates Towers, Sheikh Zayed Road

Major US technology company

New lease and merger consolidation project

Index Tower, DIFC (free-zone)

International executive recruitment company

Relocation in DMCC

Reef Tower, JLT (free-zone)

Major US motorbike brand

Lease acquisition and expansion

Dubai Healthcare City (free-zone)

Leading US biotechnology company

Source: Cluttons

Cluttons Dubai Office Market Outlook, Spring 2016

New Dubai

1 E11

3 2 4

AED 171+ AED 151-170 AED 101-150 AED 81-100 AED 71-80 AED 60-70 AED Sub 60

5 Lower limit (AED psf)

1. Dubai Marina 2. JLT* 3. Tecom DIC/DMC/DKV* 4. Tecom 5. Al Barsha

E11

90 70 165 75 65

12 month % change

0% -13% 10% 7% 0%

*Free-zone. Indicative map, not to scale. Colours represent lower limit. Source: Cluttons

The strongest performing submarket during 2015 was Tecom DIC/ DMC/ DKV. As a whole, this submarket experienced a 10% rise in lower limit rents to AED 165 psf, while upper limit rents rose 13% to AED 225 psf. Companies tend to be attracted to this free-zone submarket because of its established reputation, building quality, amenities and the presence of other high profile international corporate occupiers in this area. By contrast, JLT has seen both lower and upper limit rents fall over the past 12 months, by 13% and 10% respectively to AED 70 psf and AED 180 psf. This fall is largely due to an increased number of commercial buildings entering the market in the last 12 –18 months, including the Mazaya Business Avenue development. These towers compete in a market which is arguably oversupplied with a majority of Grade B space. Moreover the attractive lease rates that were offered by MBA’s strata owners to attract occupiers undercut rents in the rest of JLT resulting in a lowering of the average rental level in this sub-market.

JLT

Upper limit (AED psf)

160 180 225 100 110

E11

12 month % change

0% -10% 13% 11% 10%

Cluttons Dubai Office Market Outlook, Spring 2016

Old Dubai

2

1

E11

E11

AED 171+ AED 151-170 AED 101-150 AED 81-100 AED 71-80 AED 60-70 AED Sub 60

E66

Lower limit (AED psf)

1. Bur Dubai 2. Deira 3. Garhoud 4. DAFZA*

60 60 80 160

3

4

12 month % change

Upper limit (AED psf)

20% 0% 7% 0%

140 120 110 180

12 month % change

-7% 0% 16% 0%

*Free-zone. Indicative map, not to scale. Colours represent lower limit. Source: Cluttons

Deira

Old Dubai remains a hub for local businesses, with a steady stream of demand coming through over 2015. The continued popularity of the Old Dubai market is reflected in the rise in rents in markets like Bur Dubai and Garhoud. Bur Dubai registered a 20% rise in lower limit rents to AED 60 psf, while upper limit rents moved in by 7% to settle at AED 140 psf at the end of last year. The narrowing rental band is reflective of the market’s gradual maturing process, however it is also hinting at the achievement of a potential ceiling in upper limit rents. With the majority of stock comprised of older buildings, there is a growing opportunity for landlords to undertake refurbishment in order to help drive rents higher. The refurbishment case is probably stronger in a submarket like Deira, where upper limit rents (AED 120 psf) now lag behind those in Bur Dubai. The rapid rise in rents in Garhoud over the past one to two years reflects the gradual completion of higher quality stock in the area, which not only commands higher entry level rents than Deira and Bur Dubai, but has also seen a steady level of take up, despite more affordable options elsewhere in Dubai.

Cluttons Dubai Office Market Outlook, Spring 2016

Central Dubai

E11

4 5&6

3 1

2

AED 171+ AED 151-170 AED 101-150 AED 81-100 AED 71-80 AED 60-70 AED Sub 60

E66

7&8 Lower limit (AED psf)

1. Business Bay 2. Downtown Dubai 3. DIFC* 4. Sheikh Zayed Road (Trade Centre) 5. Dubai Trade Centre District (DTCD) free-zone** 6. Dubai Trade Centre District (DTCD) non-free-zone** 7. Dubai Design District (D3) free-zone* 8. Dubai Design District (D3) non-free-zone

E11

70 120 175 100 190 170 150 130

12 month % change

0% 0% 0% -13% 0% 0% 67% 44%

Upper limit (AED psf)

140 200 350 300 200 180 165 150

12 month % change

0% -13% 8% 36% 0% 0% 38% 25%

*Free-zone. **Established Q2 2015. Indicative map, not to scale. Colours represent lower limit. = Colours represent free-zone rents. Source: Cluttons

Both of the new free-zones launched in the past 18 months, DTCD and D3, offer opportunities for both DED licensed and freezone occupiers within the same development. Central Dubai has become the focus of many occupiers and developers, particularly as it has long suffered from a demand-supply imbalance in the face of rising requirement levels. Whilst rents have plateaued in the more affordable Business Bay area, Dubai Design District’s lower and upper limit free-zone rents have registered a 67% and 28% rise respectively since its launch, pushing them to between AED 150 psf and AED 165 psf. As outlined above, this sharp rise was underpinned by the gradual fading of favourable terms offered to initial occupiers. DTCD is the latest free-zone district to be launched and has one of the highest quoting entry rental levels in Dubai at AED 190 psf. This Grade A development is single owned and operated and therefore there is little disparity in the lower and upper rental levels. Going forward, we expect more companies to be attracted here. Strong take-up of phase 1 bodes well for phases 2 and 3, which are due to come on stream in the next two years.

Sheikh Zayed Road

Cluttons Dubai Office Market Outlook, Spring 2016

Dubai fringe

NEW DUBAI

1

2

CENTRAL DUBAI

OLD DUBAI

3

AED 171+ AED 151-170 AED 101-150 AED 81-100 AED 71-80 AED 60-70 AED Sub 60

4 5 Lower limit (AED psf)

1. Dubai South* 2. Dubai Investments Park 3. IMPZ* 4. Dubai Studio City* 5. Dubai Silicon Oasis*

75 40 60 140 45

12 month % change

0% 0% 0% 8% 0%

Upper limit (AED psf)

100 70 70 160 140

12 month % change

0% 0% 0% 7% 56%

*Free-zone. Indicative map, not to scale. Colours represent lower limit. Source: Cluttons

Globally, fringe locations are always the first to see the effects of a flattening market and Dubai Fringe is no exception. Three of the five submarkets registered no change in lower or upper limit rents over 2015, reflecting a stabilisation in requirements for peripheral office space. Dubai South, which will eventually house the largest airport in the world, Al Maktoum International, in addition to the neighbouring World Expo 2020 site, is positioning itself as a significant destination in its own right. At present available office space is limited to the Business Park, however in the longer term, Dubai South is set to become a significant mixed use development with a range of commercial office opportunities. The current variation in lower level and top rents in Dubai South is fairly slim due to all of the available office stock being within a single Grade A office park development, however this is in stark contrast to Dubai Silicon Oasis. This free-zone is comprised of both Grade A stock, developed by the DSO Authority itself, and

what is perceived to be lower grade, privately owned Strata stock. The steep hike here in upper limit rents to AED 140 psf, which represents a 56% jump, is largely the result of the completion of several new high quality schemes such as Technohub Building 1, which includes The Dubai Technology Entrepreneurship Centre (DTEC). A further 60,000 sq ft is due to complete in Building 2. The increase in the number of companies operating out of DSO, from 1,064 in 2014 to 1,187 in the first half of 2015, is further evidence of DSO’s success and demand from occupiers.

For further details contact Faisal Durrani Head of research +44 (0) 20 7647 7166 [email protected] Zoe Farrell Research analyst – commercial +44 (0) 20 7647 7192 [email protected] Murray Strang Head of commercial investment and agency +971 (0)4 365 7725 [email protected] Paula Walshe Head of international corporate services +971 (0)4 365 7700 [email protected]

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