Abu Dhabi prime office space vulnerable to oil prices

23 April 2015

Demand remains heavily concentrated on top-end of market, while secondary space demand remains stable

  • Prime office rents have increased 3 per cent over the quarter
  • Hydrocarbons industry will dictate how office market fares in 2016
  • Overall rents in Abu Dhabi commercial sector have stagnated in first quarter

Abu Dhabi’s office market remains very dependent on the hydrocarbons industry, with oil companies dominating top-end office space in the capital. However, as the oil sector continues to suffer at the hands of falling global prices, the emirate’s main oil companies, many of which are state-owned, may begin to scale down operations.

Analysts have projected that if crude prices remain low, with the capital unable to fully diversify its economy, 2016 may be a year in which the hydrocarbons industry dictates how rates fare in the office market.

While prime office rents have increased by 3 per cent over the first quarter this year after remaining flat throughout 2014, activity has been lop-sided as demand remains heavily concentrated at the top-end of the market.

Demand for secondary office space is stable but limited, compared with top-end commercial spaces such as the World Trade Centre, Nation Tower and International Tower, which all saw their rents increase by 8-13 per cent in the final quarter of 2014.

Speaking on the sidelines of property exhibition Cityscape Abu Dhabi, Faisal Durrani, international research and business development manager at UK real estate firm Cluttons, said the Abu Dhabi market is experiencing a period of subdued growth. “This is a natural cycle and something the market actually needs,” he said. “Many of the top-end office units are taken up by oil companies, and if they scale down their operations, we may see a change in that segment.”

Abu Dhabi Global Market Square, the new financial freezone under development, has already started offering units for lease on the open market, at AED3,700 a square metre. It is expected to attract financial institutions looking to enter the Abu Dhabi market. Although this will give the high-end office sector an alternative market segment away from oil companies to attract, it is too early to say whether this will have a positive impact on occupancy and rates.

“But for now, it is our view that with the limited amount of Grade A space and demand persisting, rents are likely to hold steady in our central scenario, with almost no movement in rents at the top end of the market expected this year,” said Durrani.

Overall, rents in the Abu Dhabi commercial sector have stagnated in the first quarter of 2015, according to a report by US real estate consultancy CBRE, but there is a marked contrast between rates in primary and secondary locations.

Average rentals for secondary office space were AED1,125 a square metre a year (sq m/y) in the first quarter, which is a 2 per cent fall on the fourth quarter of 2014, while prime office rentals are now at AED1,900 a sq m/y.

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