Commercial property project delays in Gulf fuel demand

01 October 2009

With commercial real estate schemes across the Gulf put on hold because of the global economic slowdown, good quality office space is in short supply

From the half-finished office towers on Dubai’s Sheikh Zayed road to the hundreds of other Gulf construction projects that, according to regional projects tracker MEED Projects-CMI, are on hold around the Gulf, the evidence of the region’s real estate slump is clear.

“Generally speaking, we have seen a softening of demand throughout the region over the past nine months as occupiers reassess their spatial needs for the coming three to five years,” says Edd Brookes, director at UK-based real estate adviser DTZ.

“Prices peaked in most sectors around July 2008. Since then, supply has started to exceed demand in the prime property sectors, particularly in the commercial and residential markets, and we have witnessed rental decreases of 15-30 per cent over the past nine months.”

Delaying delivery

Against this backdrop, it is surprising to hear reports that demand for commercial accommodation still outstrips supply in some GCC cities.

“The irony of the situation at the moment is that the global slump that has clearly affected developers here has in some cases delayed the delivery of urgently needed stock,” says Nicholas MacLean, managing director for the Middle East at US real estate adviser CB Richard Ellis (CBRE).

“The stock that was scheduled to come into the market in several cities over the past six to nine months has been delayed, so the frustration at the moment is that there is little space of the best quality and in the best locations.”

“A lot of companies want to be located in downtown Abu Dhabi but it is tough to find office space”

Kenneth Lim, consultant, Jurong International

Another frustration for developers is that they have exactly the kind of projects the market needs, but not the finance to build them.

“The problem is not the stock but the avail-ability of liquidity,” says MacLean. “There are lots of schemes or components of schemes that have been cancelled, but those developers focused on office space in the best locations still have the understanding that demand will pick up when the economies recover. Developers are still intending to deliver office stock, they just don’t have the financial facilities to be able to do it at the moment.”

In Dubai, CBRE has two clients seeking more than 50,000 square feet of good quality accommodation in onshore locations. “We can’t satisfy either of those,” says MacLean.

The organisations in question also considered taking space in Manama or Abu Dhabi but came across the same problem.

Other professionals agree that finding good quality space in Abu Dhabi is difficult. “There are not enough new buildings in Abu Dhabi to cater for the demand in the market,” says Kenneth Lim, regional business development director at Singapore-based consultant Jurong International. “A lot of companies want to be located in downtown Abu Dhabi but it is tough to find office space. For example, the ABN Amro building has had 100 per cent occupancy since 2002. Immediately somebody moves out, somebody else moves in.”

According to Lim, the only space available is in industrial and new areas. “At present, looking for space in Abu Dhabi is very difficult,” he says. “The only way to find office space is in industrial areas, in Mussafah, Zayed City or Khalifa A.”

Gulf office space

  • 20 per cent - Average vacancy rate for Dubai office blocks in June 2009
  • 675,000 sq m - Planned office space in Doha
  • $844 sq m - Current average rent for grade-A office space in Abu Dhabi

sq m=square metres

Sources: Colliers International; DTZ

But there is more availability on the horizon in Abu Dhabi. Although the bulk of new stock is not expected to be ready for 18 months, some schemes are finding their way to market. “The first quality, grade A space is being delivered,” says Stephen Flanagan, a senior surveyor at DTZ. “More is in the supply pipeline, with major schemes set to complete by 2011.”

According to US real estate consultant Colliers International, 875,000 sq m of space are under construction in the emirate. Major schemes include Sowwah Square, Central Market and Reem Island.

The effect of this, combined with the overall fall in demand, will be a migration of businesses from the poor-quality premises they have previously been forced to take. In Abu Dhabi, Doha and Riyadh, businesses often use apartments and villas as offices, owing to the lack of choice. Tenants are now seeking better premises. Car parking, electrical connections and better management of their buildings are top of their want lists.

“Occupiers want to move from older, tired buildings to newer accommodation, for which there is a pent-up demand because of the lack of delivery,” says MacLean.

In terms of rental depreciation, it appears to be the secondary market that has suffered most in the region. Falls of as much as 50 per cent have been reported in Dubai. “But there is still some way to go in districts outside the most attractive locations,” says MacLean. “When supply recovers, we will see a bottoming out of rents. Rents in poor locations have increased much more than they ought to have. The difference in rents between the best and worst locations is not great, but it will increase when we come out of this recession.”

In other words, the market is maturing as cooling demand leads to the adjustment of rents that were unsustainably high. New supply is also providing better-quality space for business. This is particularly true in Doha.

Two-level market

“We are seeing layering in Doha,” says Mark Proudley, associate director and senior surveyor for Qatar at DTZ. “A two-level market is developing. Buildings designed and built for the high end of the market will generate premium rents and other buildings will suffer from vacancies.”

According to DTZ, enquiries for space have begun to pick up. “Demand had dropped off but we are starting to see it come back,” says Proudley. “New enquiries are most actively driven by the financial services sector, which is showing growth. Some of the established banks are expanding their operations.”

But the statistics show that businesses are now more conservative when it comes to taking on space. In the second quarter of 2009, DTZ had nearly 79 per cent more enquiries than in the same period in 2008. But the space required was less than half that needed in the previous year, at 44,080 sq m compared with nearly 100,000 sq m in the second quarter of 2008.

Fresh supply

The good news for potential tenants is that a wealth of new supply is scheduled to come to market in Qatar over the next two years. In West Bay’s Diplomatic District, the current 46 tower blocks will be joined by a further 10 by the end of 2009, adding 275,000 sq m of commercial space. “A further 17 towers are under construction and due for completion in 2011, which will add another 450,000 sq m of space,” says Proudley.

This means that if all projects are delivered on time, the commercial space in this area will double over the next two years, taking the total to 1.4 million sq m.

So is Doha taking business from Dubai? To some extent, a trend towards renting office space in Doha is discernible, as businesses in Dubai look for alternative premises and expand their client base beyond the UAE. But most of Doha’s demand is local. “Ministries and government bodies account for up to 60 per cent of the demand,” says Proudley.

The energy sector is the second major driver, thanks to initiatives such as Energy City. The financial service sector is also expanding.

“The Qatar Financial Centre (QFC) has been promoting financial companies to develop into larger players,” says Proudley. “Some of the established banks are now growing their operations.”

But with Qatar’s commercial space set to double by 2011, some analysts question whether the demand exists to sustain it.

“Questions are being raised about who is going to occupy the new capacity,” says MacLean. “Qatar has been very successful at attracting oil companies and educational institutions, but there has been no great flurry of general businesses wanting to come into the Gulf. Doha is not a primary point of entry.”

Despite the marketing progress made by the QFC, MacLean says Dubai and Abu Dhabi will remain the main centres of financial activity for the region. “The Dubai International Financial Centre [DIFC] provides the arbitration and regulatory framework that businesses are looking for,” he says. “I don’t think QFC and its supporting infrastructure are big enough to satisfy potential demand for a GCC-wide centre. The DIFC probably is.”

“In Doha, buildings designed for the high end of the market will generate premium rental levels”

Mark Proudley, associate director, DTZ

One city that has no worries about an excess of supply is Riyadh. Despite being the financial centre of the GCC’s largest economy, the city has less commercial office space than any other major city in the region – just 669,413 sq m and only a further 187,535 sq m under construction. “Saudi Arabia’s focus is on industrial developments rather than private sector, commercial buildings,” says Lim.

But this could change as the kingdom continues its reform agenda and seeks to attract more international businesses. “Saudi Arabia remains a place of great opportunity, if business could be done more easily and right of entry was made easier than at present,” says MacLean.

For now, companies are continuing to make the most of opportunities in the region as space becomes cheaper in Dubai and better quality accommodation comes to market in Doha.

Throughout the region, rental prices are holding up in prime locations but continue to fall in secondary areas and for lower-quality stock.

“The impact of these market dynamics is the development of a maturing, two-tier real estate market with ever-present vacancy and greater choice for tenants,” says Proudley. “So it is important that future developments deliver products that meet market requirements.”

For their part, many developers know what the market wants, but some simply cannot afford to deliver. For those that can press on with good quality schemes in prime locations, the clients are waiting.

Rental slump hits outsourcing plans

One side-effect of the plunging rental values in the GCC is that non-GCC locations in Arab states where governments had been working to create outsourcing centres are also being hit.

“If you look at the potential office markets in Amman and Cairo, they had specific strategies to create back-office locations and support GCC cities,” says Nicholas MacLean, managing director for the Middle East at US real estate adviser CB Richard Ellis. “I think the impact on those cities is going to be very significant because pricing in the UAE has come down so much.”

Egypt and Jordan have been extremely successful with their strategies of becoming outsourcing hubs, and this year made it into the top 10 in US consultant AT Kearney’s Global Services Location Index 2009, which monitors the appeal of locations as outsourcing centres according to financial attractiveness, the availability of people skills and the business environment.

Thanks to a growth in the IT sector, Egypt has climbed six places from number 13 in 2007 to number 6. US firms such as IBM and EDS have been joined by Saudi and Kuwaiti companies such as Saudisoft and Kuwait ITS. According to the report, the improvement of telecoms services allows Egypt to provide support services to more of the region.

“Local Egyptian systems integrators sell more services into Gulf markets, supplying much of the development work from their home offices,” says the report.

Jordan has also attracted a series of IT firms and currently sits at number 9 in the index, up from 14 in 2007. But India and the Philippines continue to lead the market, meeting more than 50 per cent of the world’s outsourcing demands. AT Kearney does not expect this predominance to change in the short term.

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