UAE- Rentals and commercial realty to soften next year

(MENAFN- Khaleej Times) If you're looking to invest in the UAE's commercial real estate, then hold on to your cash as demand will drop next year due to rising supply and softening demand, says a new survey.

According to Rics' latest survey, capital value and rent for the next year projects to be negative for the UAE commercial sector as the economy continues to adjust to lower oil prices and a reduction in crude output.

The findings of the UAE report show that sentiment in overall occupier market remains downbeat with demand falling for the 8-consecutive quarter across all sectors - office, industrial and retail - with 43 per cent reporting a contraction at the headline level.

The report also points to the steepest decline in demand for retail space, whilst availability of leasable space continues to rise across all sectors, it revealed.

Compared to second-quarter, rent expectations for next year deteriorated across all sub-sectors, with respondents anticipating a decline of around 4 per cent at all-sector level.

Andrew Love, partner and head of investment and commercial agency at Cavendish Maxwell, states that, generally speaking, values and rents are likely to remain flat but in terms of more specific areas and sectors, values and rents are likely to fall in offshore (free zone) industrial zones, but for onshore industrial zones capital and rental values could possibly increase.

He expects office sector to generally remain stable but will likely fall in secondary areas where there is greater oversupply, particularly for buildings which are of poor quality. But rent and capital of "Grade A" offices are likely to remain stable with some modest increases in better quality towers due to limited supply.

Rics said the average 3-year rental projections are slightly more upbeat. Commercial reale state is believed to be overpriced according to 55 per cent of respondents, up from 36 per cent in the previous quarter. Investment enquiries saw a further decline with a net balance of 36 per cent respondents noting a fall in overall demand at the headline level, Rics survey revealed.

Foreign investment enquiries also faced a sharp fall in Q3, with the decline spread evenly through all three sectors. A continuous steady stream, however, can be seen in the supply of properties for investment purposes, with prime asset values anticipated to remain firm, holding steady over the coming twelve months.

The current property cycle is viewed to be in a downturn phase by 45 per cent of respondents, while 25 per cent believe the market is approaching a floor.

Matthew Green, Head of Research & Consulting UAE, Strategic Advisory, CBRE Middle East noted that average prime office rentals now equate to Dh1,916/m2/annum.

However, whilst supply levels for Grade A accommodation are currently tight, the market is likely to see a shift as a more significant development pipeline is delivered from 2018, which is likely to lead to downward rental pressures as available supply levels start to increase.

He said secondary office rentals have continued to fall, declining by around 5 per cent year-on-year, reaching to an average of Dh1,000/m2/annum. This has been driven by the large volume of additional new supply delivered in locations such as Business Bay, Dubai Silicon Oasis and JLT, as well as softer economic conditions, which combined have driven rising vacancy rates and declining rentals, particularly within strata buildings, he added.

According to Green, demand for Grade A accommodation has been particularity strong for properties that can accommodate dual licensing options, across both onshore and free zone jurisdictions. However, demand for typical onshore buildings in the traditional business districts continues to soften, with rental deflation and evidence of greater flexibility in leasing terms being offered.

Love stated that Expo 2020 has stimulated growth, particularly for those industries involved in the construction side. However, the introduction of Value Added Tax (VAT) in January 2018 could have an adverse effect on market sentiment, particularly those dealing with commercial real estate which - unlike residential - will not be VAT exempt.

"It's difficult to tell just how large an impact like VAT will have, until the law becomes fully understood in practice. Initially, we believe that it will have some adverse impacts, but this should level out as businesses adjust and implement VAT systems," he added. -

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