UNITAS CONSULTANCY A GLOBAL CAPITAL PARTNERS GROUP COMPANY Q2 2017 Dubai: Commercial Intentions This document is provided by Unitas Consultancy solely for the use by its clients. No part of it may be circulated, quoted, or reproduced for distribution outside the organization without prior written approval.
Executive Summary Since the inception of freehold and expansion of freezone areas supply in the commercial real estate space has risen by more than 650%; 1.3m to 9.6m square meter (in monitored areas). Whilst this growth rate is expected to moderate, the absolute numbers are expected to ratchet higher at a similar trajectory with the development of new business districts such as Dubai South. An examination of rental growth rates across jurisdictions in various communities in the freehold and leasehold commercial space reveals that Business Bay, JLT, and Barsha Heights have outperformed Trade Center (SZR) and Deira by more than a factor of 2 in the last 5 years. The different growth rates can be attributed towards the fact that the former are located in freehold areas, compared to the DED jurisdiction. In prices (measured by median listed prices) JLT office space has outperformed the other communities such as Business Bay, DSO, and Barsha Heights. An analysis of the commercial real estate transactions reveals that since the peak in 2013, activity has declined by more than 50%. However, interestingly during the same period the mortgage to sales ratio has increased by more than 5 times. This increase (similar to the residential space) indicates the rise of end user activity. A closer look into buying patterns shows a shift in preference for smaller offices. In 2010, 21% of office sales were below 1000 sqft, whereas in 2016 this has nearly doubled. This is inline with the mandate of Dubai SME to foster an entrepreneurial culture and develop a competitive SME culture within the emirate. The creation of freehold areas have been one of the key factors in stimulating commerce within Dubai. This is reflected in the growth of both the supply of free zone office space along with company formation. Over the last 5 years DMCC has grown an incredible 283% in registered companies, whereas DED formations have grown by 34%. In order to cater to this demand office supply in free zone areas have accelerated. In 2002, 94% of the commercial supply in monitored areas were under the DED jurisdiction. However, by the end of 2016 both jurisdictions contribute equally to the supply. Given the growth of the SME space that has been witnessed, it appears as if investors have gravitated towards purchasing smaller offices and have increased leverage as a way of capitalizing on rents. We opine that the preference for smaller offices will continue, and the continued growth of business districts like Business Bay and Dubai South will be replete with offerings of smaller offices.
Content 01 Dubai Commercial Supply Analysis 02 Growth Rates of Prices and Rents in the Commercial Market 03 An Examinational of Commercial Transactional Activity 04 A look in the DED and Free zones
Dubai Commercial Supply Analysis If statistics are boring, then you ve got the wrong numbers Edward R Tufte
SQM Million Dubai Office Supply (1979 2016) Dubai Office Supply (1979 2016) 10 9 8 7 6 5 4 3 2 Creation of Freehold 1-1979 1980 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Reidin The above graph shows the growth of office space in Dubai from 1979 to 2016. The major boom in commercial infrastructure took place in 2002 after the creation of freehold and the growth of free-zone areas. Since 2002, commercial areas in Dubai has grown by 648%; 1.3m to 9.6m square meter.
SQM Thousand Dubai Office Supply Completion Rates Office Completion Rate (2014 2016) 1,400 1,200 Expected Realized Completion Rate 140% 120% 1,000 100% 800 80% 600 60% 400 40% 200 20% 0 Source: Reidin 2014 2015 2016 0% A realization of supply analysis in the commercial space reveals that the completion rate in 2015 and 2016 has been below 50%, similar to the trend that has been witnessed in the residential space. In 2014, realized supply exceeded what was estimated by analysts, indicating yet again the flaw in analyst estimates that did not account for the backlog of projects coming to completion. This is a trend that is expected to continue in the years ahead.
SQM Thousand Dubai Office Pipeline Supply (2017 2018) Office Supply (2017-2018) 800 700 600 500 400 300 200 100-2017 2018 Source: Reidin Dubai developers are expected to hand over 0.75 million square meter of commercial space in 2017 and 0.45 million in 2018. These supply figures will likely be lower given the historical trend; however we expect realization rates to ratchet higher in 2019 and 2020 as an increasing number of projects come to completion.
Growth Rates of Prices and Rents in the Commercial Market If you can t feed a team with two pizzas, it s too large. Jeff Bezos
Price Analysis in the Commercial Space in the 2 nd Cycle (2012-2016) Office Price Growth Rates* (2012 2016) by Category 80% 70% 60% 50% 56% 72% 52% 55% Freehold and Freezone Freehold and DED 40% 38% 30% 20% 10% 0% Dubai JLT DSO Business Bay Barsha Heights Source: Reidin *Price Growths are based off median listed prices The above graph reveals the price growth (using data from median listed prices) of various commercial districts from 2012 to 2016. JLT has incurred the highest growth rates followed by Business Bay, DSO and Barsha Heights. From the above analysis, it appears as if investors as well as end-users preferred freezones, although it is a multivariate function of supply and infrastructure growth as well.
Rental Analysis in the Commercial Space in the 2 nd Cycle (2012-2016) Office Rental Growth Rates (2012 2016) by Category 60% 50% 49% 52% 49% Freehold and Freezone Freehold and DED 40% Leasehold and DED 30% 24% 20% 19% 10% 13% 0% Dubai JLT Business Bay Barsha Heights Deira Trade Centre (SZR) Source: Reidin An examination of rental growth rates in the second cycle, reveals that Business Bay, JLT, and Barsha Heights have had superior growth rates relative to Trade Center (SZR) and Deira. The different growth rates can be attributed towards the fact that the former are located in freehold areas, compared to leasehold areas. Rental rates in freehold areas have risen more than twice to those in the lease hold areas. The growth rates of rentals indicate a continued preference for not only the freehold areas but specifically freezones as well, indicating a continuing shift towards these districts on the part of companies.
An Examinational of Commercial Transactional Activity If you can t explain it simply, you don t understand it well enough Albert Einstein
Dubai Office Transactions (2010 2016) Office Transactions (2010 2016) Mortgage to Sales (2010 2016) 4500 4000 3500 3000 2500 2000 1500 60% 50% 40% 30% 20% 1000 500 10% 0 2010 2011 2012 2013 2014 2015 2016 0% 2010 2011 2012 2013 2014 2015 2016 Source: Reidin The above graph shows the city wide transactions of Dubai offices from 2010 to 2016. From its peak in 2013 transactional activity has declined by 54%. The decline in activity has been witnessed in the residential space as well, although by a lesser extent. We also witness an increase in mortgage activity over the last few years in the commercial space (5x).The trend of increasing mortgages has been due not only to investors capitalizing on the higher rental yields, but also, similar to the residential space, an indicator of rising activity by end users, indicating that the market has become less speculative.
Dubai Office Transactions by Size Office Transactions by Size (2010, 2013 & 2016) 21% 34% 39% 2010 2013 2016 66% 61% 79% Above 1000 Sqft Below 1000 Sqft Source: Reidin A dissection of the transactional activity by size reveals a shift in preference for smaller size offices. In 2010, 21% of office sales were below 1000 sq/ft, whereas in 2016 this has nearly doubled. This attests to the growth of smaller businesses and startups within the emirate.
Dubai Office Transactions by Size JLT Commercial Transactions by Size (2010-2016) Business Bay Commercial Transactions by Size (2010-2016) 100% 100% 90% 80% 23% 33% 26% 29% 28% 28% 42% 90% 80% 26% 30% 34% 37% 37% 37% 38% 70% 70% 60% 60% 50% 50% 40% 30% 77% 67% 74% 71% 72% 72% 58% 40% 30% 74% 70% 66% 63% 63% 63% 62% 20% 20% 10% 10% 0% Source: Reidin 2010 2011 2012 2013 2014 2015 2016 Above 1000 sqft Below 1000 sqft 0% 2010 2011 2012 2013 2014 2015 2016 Above 1000 sqft Below 1000 sqft A closer look into JLT and Business Bay attests to the growing demand of smaller office spaces which is inline with the mandate of Dubai to foster an entrepreneurial culture and develop a competitive SME culture within the city. From 2010, office transactions for below 1000 sqft space have increase from 23% to 42% in JLT and 26% to 38% in Business Bay.
A look in the DED and Freezones Human progress is neither automatic nor inevitable... Every step toward the goal of justice requires sacrifice, suffering, and struggle; the tireless exertions and passionate concern of dedicated individuals Martin Luther King, Jr.
SQM Million Dubai Office Supply by Jurisdiction Office Supply by Jurisdiction (1979-2016) 6 Ded Freezone 5 4 3 2 1 0 1979 1980 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Reidin A closer look into the growth rates of supply of office space by jurisdiction reveals that freezones have had higher growth rates than the DED jurisdiction. In 2002, 94% of the commercial supply in monitored areas were under the DED jurisdiction. However, by the end of 2016 both jurisdictions contribute equally to the supply. Given the projected rise of Dubai South, we opine that the scales will further tilt in favor of freezones in the coming years.
Explosion of Free zones Company Registrations Growth by Jurisdiction (2011 2016) 300% 250% 253% 200% 186% 150% 100% 94% 50% 34% 0% DMCC DSO DIFC DED Source: GCP Over the last 5 years growth rates in company formations in freezones have exceeded those of DED. DMCC located in the freehold area of JLT has experienced the highest growth rate increasing more than 250% in 5 years. We expect the growth trajectory of freezones licenses to continue as Dubai cements its status as regional hub for business and trade activity.
Upcoming Supply by Jurisdiction Office Supply by Jurisdiction (2017-2018) 17% 83% DED Freezone Source: Reidin An analysis of the upcoming supply by jurisdiction reveals that 83% is allocated towards the DED jurisdiction and balance towards free zones. However, we expect this ratio to shift towards new free zones as new developments in the pipeline get announced in areas such as Dubai South - Commercial City.
Conclusions Dubai Commercial Supply Analysis Growth Rates of Prices and Rents in the Commercial Market Since the inception of freehold and expansion of freezone areas supply in the commercial real estate space has risen by more than 650%; 1.3m to 9.6m square meter The major boom in commercial infrastructure took place in 2002 after the creation of freehold and the growth of free-zone areas. Since 2002, commercial areas in Dubai has grown by 648%; 1.3m to 9.6m square meter. Dubai commercial realty is expected to add over 1.2 million square meter of office space n the next two years. These supply figures will likely be lower given the historical trend; however we expect realization rates to ratchet higher in 2019 and 2020 as an increasing number of projects come to completion. An analysis of price action (measured by listed prices) in the office space reveals that since 2012, citywide rates have increased by 66%. JLT has incurred the highest growth rates followed by Business Bay, DSO and Barsha Heights In the rental space a community-wise analysis reveals that Business Bay, JLT, and Barsha Heights have outperformed Trade Center (SZR) and Deira by more than a factor of 2 in the last 5 years. The different growth rates can be attributed towards the fact that the former are located in freehold areas, compared to the DED jurisdiction An Examinational of Commercial Transactional Activity A look in the DED and Free zones A dissection of the transactional activity by size reveals a shift in preference for smaller size offices. In 2010, 21% of office sales were below 1000 sqft, whereas in 2016 this has nearly doubled Over the last 5 years transactional activity in smaller offices space (below 1,000 sqft) has increased from 21% to 39%. Given the growth of the SME space that has been witnessed, it appears as if investors have gravitated towards purchasing smaller offices and have increased leverage as a way of capitalizing on rents. We opine that the preference for smaller offices will continue, and the continued growth of business districts like Business Bay and Dubai South will be replete with offerings of smaller offices. In 2002, 94% of the commercial supply in monitored areas were under the DED jurisdiction. However, by the end of 2016 both jurisdictions contribute equally to the supply. An analysis of the upcoming supply by jurisdiction reveals that 83% is allocated towards the DED jurisdiction and balance towards free zones. However, we expect this ratio to shift towards new free zones as new developments in the pipeline get announced in areas such as Dubai South - Commercial City.
Dubai: Commercial Intentions GCP believes in in-depth planning and discipline as a mechanism to identify and exploit market discrepancy and capitalize on diversified revenue streams. Our purpose is to manage, direct, and create wealth for our clients. GCP is the author for these research reports REIDIN.com is the leading real estate information company focusing on emerging markets. REIDIN.com offers intelligent and user-friendly online information solutions helping professionals access relevant data and information in a timely and cost effective basis. Reidin is the data provider for these research reports Indigo Icon, 1708 Jumeirah Lake Towers, PO Box 500231 Dubai, United Arab Emirates Concord Tower, No: 2304, Dubai Media City, PO Box 333929 Dubai, United Arab Emirates Tel. +971 4 447 72 20 Fax. +9714 447 72 21 Tel. +971 4 277 68 35 Fax. +971 4 360 47 88 www.globalcappartners.com info@gcp-properties.com www.reidin.com info@reidin.com
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