The changing dynamics of the Middle East’s real-estate market are creating new opportunities for businesses and residential customers. Aside from being able to acquire space at prices that in some cases are more than 100 per cent lower than at the peak in the third quarter of 2008, firms are also looking to upgrade the quality of the facilities they rent.

One way to incentivise businesses to move in to new facilities is through the licensing regime

Martin Cooper, DTZ

Markets are increasingly stratifying as the most popular and highest quality spaces remain in strong demand. In Dubai, for example, where vacancy rates are considered to average around 40 per cent, some areas remain fully occupied and rents have not softened. “The 40 per cent vacancy rate can be misleading,” says Martin Cooper, head of consulting Middle East at real-estate firm DTZ. “There are two markets emerging. In Dubai, there is the DIFC [Dubai International Finance Centre] and Sheikh Zayed Road where prices are holding up and then there is everywhere else.”

Market supply for office space in the GCC

Office space let by the DIFC is still priced at about $90 a square metre, compared with a city average of $38 a sq m. In the same location, office space owned by private developers – which, according to consultancy CB Richard Ellis, accounts for some 39 per cent – can be obtained at $60 a sq m.

An increasing number of businesses are expected to use lower cost centres such as Dubai and Manama

In addition to a general fall-off in demand in Dubai, new office stock is increasing market supply by 5 per cent a year, which is likely to see further price drops and more competition to retain clients. Property consultant Landmark Advisory – a division of Dubai’s Landmark Properties – forecasts that vacancy rates will hit 53 per cent in 2011 and peak at 58 per cent in 2014.

On the residential side, vacancy rates in Dubai are also on the rise and oversupply is predicted to peak in 2012 at 25-28 per cent. Sale prices are falling faster than rents, which is leading to higher margins for landlords.

“As prices are falling faster than rents, this is pushing up yields,” says Jesse Downs, director of research & advisory services at Landmark Advisory. “This is positive for the market as higher yields are required to attract investors wary of the weak market fundamentals and perceived downside risk. At the moment, financing remains limited, meaning investors continue to dictate market trends.”

In Abu Dhabi, the effects of the downturn have been much less dramatic and the emirate is still the most expensive on average for office and residential space. The market’s traditional undersupply meant that demand is proven rather than speculative and so vacancy rates remain low at 3-5 per cent. However, new office and residential stock is arriving on Abu Dhabi island and prices for both sales and leases are falling – even if landlords are reluctant to acknowledge this. 

“Over the next 12-36 months major schemes will deliver, putting downward pressure on rents. This partly sets the residential tone too, but there is extreme reluctance from landlords to reduce rents. There is an issue here with a wide gap and the standoff is not being addressed, which is translating into low transaction volumes. Landlords need to lower their expectations,” says Cooper.

Transaction volumes that have been recorded by organisations such as Landmark Advisory show that rental prices fell sharply in the second quarter of 2010 from the first.

“These declines are supply driven following new on-island deliveries such as Khalidiyah Palace, Al-Aryam Tower, Silver and Wave Tower,” explains Downs. “Static sales prices and declining rents have resulted in further yields compression; currently at 5.1 per cent and we anticipate that yields will continue to compress in the short term.”

Gulf office space trends

A similar trend has been observed in Abu Dhabi’s office market with rents falling 10 per cent in the second quarter. Again lower quality space is the hardest hit and stratification is also expected as higher-quality stock comes into the market.

Falling prices have also hit Bahrain. Rents have dropped by 15-20 per cent, making Manama one of the region’s cheapest cities to both work and live in. “A lot of the supply and demand went to financial services businesses and real estate-related services and this market has contracted sharply. Bahrain is now significantly cheaper,” says Cooper. This, along with the influx of new office space, has seen vacancy rates rise from 5 per cent to 10 per cent over the past 12 months. DTZ estimates that the city has more than 630,000 sq m of office space, compared with less than 200,000 sq m in 2000. 

Within the GCC, Manama is a low-cost option for business and it also compares well with Cairo or Amman. Its strategic location near Saudi Arabia gives it a further advantage over other lower cost centres. Its economic links with Saudi Arabia have provided some protection from the downturn and overall gross domestic product (GDP) is forecast to grow by 3.9 per cent in 2010.

Saudi Arabia, meanwhile, has remained a growth story. Businesses still report finding good quality office space challenging and rents have not fallen.

“There remains high domestic demand. Office space in Riyadh has held at SR1,900 a sq m a year and in Jeddah at SR1,100-1,200 a sq m a year,” says Cooper. This still compares favourably with Dubai, Abu Dhabi and Doha. The increase in high-quality space coming to market over the next few years, combined with the kingdom’s business-friendly environment, should see international demand continue to grow.

Serviced offices in the Middle East

As the kingdom’s housing shortage remains acute, residential rates remain largely stable. The long-awaited mortgage law has yet to be approved and finance options remain limited.

Outside the GCC, prices are much lower in cities such as Cairo and Amman. Egypt, in particular, is successfully attracting more international business thanks to government efforts to establish the country as an IT and technology hub. Living and working in Cairo is significantly cheaper than in other regional capitals, especially if businesses operate from satellite cities. Newly emerging business parks, such as Capital Business District and Westown, are set to prompt businesses to move from residential properties in inner city Cairo to satellite cities on the periphery of the city, where rents are lower and traffic is less. This trend is not limited to Cairo and in some states governments are actively pushing firms to move from residential buildings into new office buildings.

It is understood that commercial licences in Doha are not being renewed for firms operating from villas. DTZ says this is commonplace.

“Clearly regulations vary from state to state, but one way to incentivise businesses to move in to new facilities is through the licensing regime. We are seeing this in Qatar, Bahrain and Abu Dhabi,” says Cooper.

Another regional trend is for businesses to take up serviced offices. These fully fitted out and equipped facilities reduce capital outlay and provide flexibility, especially for firms entering new markets. Leading serviced office providers, such as Luxembourg-based Regus, are increasing their presence in the region driven by customer demand. It currently operates in nine Middle East and North Africa (Mena) cities and opened its latest venture in Oman in July. In August it expanded its premises in Egypt and Saudi Arabia.

“We have opened and are expanding our centres in these locations in order to answer our clients’ demands. We are receiving permanent and increasing demands for our flexible workspace solutions in the region from companies that want either to explore new markets or set up their businesses,” says Joanne Bushell, vice-president for Mena at Regus.

Flexible office space solutions in the Middle East

DTZ and other property consultants confirm increasing demand for such space. “Companies are showing a real interest for our solutions because it offers them the flexibility they need to face any situation linked to their businesses’ growth.

With the cost linked to workspaces representing 5-10 per cent of a company’s turnover, corporations are increasingly looking at office space requirements as a strategic component of their business plan and are examining which requirements can be outsourced,” says Bushell.

Although international demand is a key driver of the property sector, the markets that have fared the best throughout the downturn are those with strong domestic requirements, such as Cairo, Kuwait and Riyadh. Yet, these are still cheaper than Abu Dhabi, Doha and Dubai.

Rates have fallen considerably in Manama and in Dubai the best deals are yet to come. Prices are also falling in Abu Dhabi and by the end of 2010 it may no longer be the most expensive place to rent property in the region. Additional supply coming on the market will ensure prices continue to fall.

The proximity of the major cities of the Gulf means that an increasing number of businesses are expected to use lower-cost centres, such as Dubai and Manama as their base and commute to other cities. Outside the GCC, Cairo will continue to be an attractive option as the quality and availability of commercial and residential space improves in the satellite cities.