Overall, the commercial office real estate market remained steady across the GCC in 2015, but looked at individually, the market in the various major cities in the region performed at different levels.
In Dubai, the most preferred city in the MENA region for corporate occupiers, the commercial office market remained steady despite low oil prices. In Abu Dhabi, vacancies were minimal in grade A buildings, but the demand for office space was subdued due to decline in oil prices. The office real estate sector in Jeddah and Riyadh showed continued growth momentum in 2015 with occupancy levels expected to improve, while Manama’s office market saw an increasing shift from dated buildings to newer developments, which offer better facilities.
The weakest market was Kuwait, where occupancy rates in 2015 improved for offices located in the capital. In Doha, whose office real estate is traditionally dominated by the public sector, falling oil prices resulted in less demand for new office acquisitions, so the office market had to rely on the private sector, predominantly more interested in smaller office spaces which are in short supply, thus dictating premium rents.
“The recent fall in oil prices has resulted in many Qatari institutions revising their budgets, which has had an impact on demand for new offices,” says Jack Tooley from real estate company DTZ Qatar. “The result has been a significant drop in leasing activity from previous years, with no commercial leases in excess of 3,000 square metres agreed in Q3, 2015. The majority of lease transactions in Doha in 2015 were related to smaller office suites of less than 250 sq. m. In order to replace the demand that was previously generated by government related activity, a significant increase in private sector activity will be required,” adds Tooley.
Domination of West Bay
According to DTZ report, ‘Public sector restructuring – impacts on real estate demand’, covering the third quarter of 2015, there is around 1.7 million sq. m of purpose built office space in West Bay, which represents approximately over 40 percent of the supply of purpose built office accommodation in Doha. In the report, DTZ estimates around 65 percent of office space in West Bay is occupied or leased either by government or hydrocarbon related companies.
“Over the last 18 months, with the fall in oil prices, we have seen a significant reduction in demand from both companies already located in Doha and also new companies entering the market. We estimate there is approximately 300,000 sq. m of office accommodation likely to come to the market in West Bay and Lusail in the next 12 months which will increase levels of supply and is likely to put downward pressure on rental levels. A combination of increased supply in the main commercial areas of Doha and the reduction in demand, we expect the supply of new office stock to outstrip demand going forward,” says Tooley describing the present situation in Doha.
In the report, DTZ estimates that despite a reduced level of new office lettings in 2015, there are around 130,000 sq. m of vacant offices available to rent in West Bay which represents approximately 8 percent of total supply, and that, according to DTZ, results in stable rental levels being maintained in that area. West Bay has the highest amount of grade A offices in Doha, with an average size of 600 sq. m, with rents varying from USD 44 to USD 77 per sq. m per month.
Tooley explains that in general, corporate occupiers seek grade A properties in the West Bay area, although there are a number of properties in other commercial locations such as C Ring Road and Airport Road which provide a high specification of accommodation at lower rental levels. Office rental levels for these parts of Doha are typically between USD 33 and USD 50 per sq. m per month.
“The buildings in West Bay which are multi let to international corporate occupiers and have low vacancy rates tend to be built to internationally recognised standards such as Middle East Council for Offices specifications,” says Tooley, adding office sales in Doha are low. “There is little in the way of sales of office buildings in Doha. The only Tower which has been traded recently is Palm Tower where individual floors or units are sold under a strata ownership,” says Tooley.
Higher prices in Doha
When comparing the office real estate markets in Doha and Dubai, experts from global commercial real estate company Colliers International, Ian Albert and Peter H. Bibby underline that in terms of rental rates, year-over-year growth rates witnessed in Doha reached 5 percent (2014 – 2015), compared to 2.5 percent witnessed in Dubai during the same period. “Prices are subjective to location, accessibility, synergy (master planning) and build quality,” states Colliers Regional Director for MENA, Ian Albert.
Peter H. Bibby, Colliers country manager and director for Qatar adds that developments with better build quality, location, accessibility and single ownership will witness stronger performance than the overall market. “Activity across other GCC markets however, currently remains subdued within the commercial sector when compared to the UAE,” opines Albert.
Comparing the prices of prime office spaces in Doha and Dubai, Colliers’ experts observe the average sale price for a prime office space in Dubai is approximately USD 4,000 per sq. m. Downtown Dubai sale prices are almost double the Dubai average at around USD 7,900 per sq. m, followed by the Dubai International Financial Centre (DIFC) at approximately USD 5,440 per sq. m, while the sale in freehold office market in Doha is restricted, they say.
According to Albert and Bibby, the average annual rental rates for prime office space across Dubai is around USD 354 per sq. m. DIFC charges the highest rental rates within Dubai at approximately USD 653 per sq. m per annum, followed by Downtown at around USD 500 per sq. m. “In an attempt to attract tenants and increasing occupancy levels, landlords are shifting towards applying fit-outs on their shell and core properties while commanding a slight increase in rates,” say the Colliers experts, adding the average annual rental rates for prime office space in Doha is higher than Dubai at approximately USD 502.75 (QR 1,830) per sq. m, while in Dubai the price is around USD 502.32 (AED 1,845) per sq. m per annum.
Comparing rental rates amongst different locations within Doha, West Bay has the highest average annual rental rate at USD 687 per sq. m, as it is considered the city’s new central business district. Due to the availability of grade A buildings, C Ring Road and Lusail City rent at USD 544 and USD 527 per sq. m a year respectively, say the Colliers experts.
In their opinion despite the fact that Dubai and Doha’s office markets are currently oversupplied, demand for quality or prime office space, such as in the DIFC or Downtown Dubai and West Bay or Diplomatic District in Doha, have not witnessed significant declines. “These areas are operating at high occupancy levels, signalling tenant preference for location, layout, parking spaces and quality. Therefore, the supply of prime office spaces in Dubai and Doha are not likely to outstrip demand,” they add.
In Dubai, DIFC remains the key attractive location for corporate tenants. And like in Doha, in Dubai there is demand for smaller offices – at present the majority of demand from international occupiers is for smaller or flexible office space, ranging between 50 sq. m to 100 sq. m.
Talking about the future trends of the office real estate market in the GCC, Colliers regional director for MENA region says given the current economic outlook Colliers has witnessed an overall subdued office market. “Although there are limited ‘new’ tenants in the market, there is an active internal relocation of tenants looking for better quality offices at competitive prices. Location, accessibility and developments within good masterplans will continue to outperform less competitive developments,” says Albert.
Faisal Durrani, head of research at international property consultant, Cluttons, says the office rental market across the GCC very much depends on how the global economic story plays out. “With challenges ahead for China and the EU, and with commodity prices unlikely to stage a comeback in the near term, the global economy is now expected to grow by a downwardly revised 3.1 percent, the slowest pace since 2009, according to the IMF forecasts. And this is likely to have ramifications on overall demand levels,” says Durrani. Talking about the future office market in Dubai, he says Cluttons expects take up activity will continue to experience a slowdown.
“While deals are expected to continue, the volume of requirements is likely to shrink over the next 12 months due to the macroeconomic factors outlined above. This coupled with the robust pipeline of stock expected to come to market over the next 12 to 18 months suggests that rents are likely to remain flat for the most part, with some markets such as Jumeirah Lakes Towers (JLT) being challenged by cheaper alternatives in nearby Al Barsha.
In addition, cooling land values in some submarkets such as Business Bay has improved the financial viability of some previously stalled projects, which are now seeing a resumption in construction activity. This will further boost the city’s supply pipeline, particularly in the grade B category,” he says.
Further away from Doha or Dubai, according to Durrani, both Muscat and Manama have seen a steady rate of requirements for office space throughout 2015, with Manama in particular seeing a resumption in activity from international occupiers already present in the Kingdom. “This resumption in activity is a direct result of the widespread re-emergence of social stability across Bahrain.
The country’s appeal has also been boosted by being voted as the fourth best country for expats to live world-wide, and the top destination among Gulf Countries by HSBC. This group now accounts for approximately 25 percent of office space deals in the Kingdom, which is in turn helping to support residential property demand,” Durrani describes the situation in Bahrain.
He says the recent increased activity in the office market is welcomed. “However the performance of the global economy is likely to filter through to Bahrain in the form of reduced business activity in the near term and may lead into a period of consolidation of space for this segment of the market.”
Philip Paul, head of Cluttons in Oman reveals the most attractive areas in Muscat for corporate occupiers: “The traditional central business district is no longer a preferred location, the poor infrastructure, congested roads and poor building quality has resulted in an exodus to the west.
Developers have responded to the shortage of grade A buildings and there are now a number of high quality grade A buildings such as Beach 1, Al Rowaq, and Al Asallah Towers in the central areas. There is set to be a new business park at the conference and exhibition centre. The preferred locations are therefore the central areas such as Shatti Al Qurm, through to the Airport Heights area that will be home to the new conference and exhibition centre,” he says.
Talking about Oman, Durrani says the current stability in office rents is unlikely to persist should global economic conditions continue to deteriorate. “With the IMF’s downward revision to global growth, it is increasingly likely that multinational businesses in the Sultanate will rein in expansion plans, or enter a period of consolidation, which may expose the office market to a period of oversupply.
While the likelihood of this scenario playing out in quick succession is unlikely, it does mean that we are forecasting slight to moderate declines in office rents over the next 12 months in the region of 3 to 4 percent, particularly as new schemes initiated over the past 12 to18 months designed to capitalise on the demand for high quality space at the top end of the market starts to complete.
“Furthermore, the ability of the government to sustain the high level of infrastructure spending may be dented if there are any further oil price shocks, or a reduction in requirements from China, Oman’s largest oil export market, whose economy is already showing signs of faltering,” he concludes.
Room to grow
The commercial real estate market in Qatar is expected to remain stable, despite the impact caused by lower global hydrocarbon prices
By Khadiza Begum, Doha
Qatar’s economy has continued to demonstrate excellent rates of year-on-year growth despite the global slowdown in the hydrocarbon sector in recent years, primarily because it continues to launch new projects in other, different sectors that are both creating space for and driving a boom in the commercial real estate market. Qatar’s office market is still in its initial stages of development, and that growth is expected to remain stable over the coming years, according to Al Asmakh Real Estate Development Company.
Office sector overview
Doha’s office sector has witnessed significant growth and dramatic developments in both location and infrastructure since the year 2000. Government initiatives that were undertaken with the express intention of moving their public departments to West Bay have led the market’s attention towards this area, resulting in a huge expansion there. Aside from government organisations, West Bay contains the vast majority of Grade A commercial space in Qatar, with an average size of 600 sq. m or above utilised by large local and international companies.
Emad Ali, marketing manager at Qmobile Middle East says: “Most of the governmental organisations and companies are located here. West Bay is now primarily a business destination, and our kind of company in particular needs to have a vibrant business atmosphere, so that we can sell our services more effectively. Additionally, we also learn a lot from surrounding businesses, and for this reason we could not find an area better than this one. We are surrounded by all kinds of companies, which creates a positive and conducive atmosphere.”
The other main areas providing commercial office space are in the Grand Hamad Street, the C and D Ring Roads, Al Saad, Salwa Road and the Airport Road. Grand Hamad Street is now widely recognised as the home of banking. The C and D Ring Roads provide plenty of B grade space, with an average size of around 310 sq. m. For reasons of scale, small to medium-sized corporations and private holding companies tend to opt for the spaces provided on the C and D Ring Roads.
Many business owners are satisfied with the space and nature of the facilities that are provided there. Resi C. Jose, accountant at Millenium Chauffeuring tells BQ: “Our office is located at the C Ring Road, which is very suitable for our business, since the airport is very near [given the proximity of business hotels], a major plus point for our car rental operation.”
Barwa Commercial Avenue, located on the Industrial Area Street, is the latest entrant into the office and retail segment, offering various sizes of offices for a diverse range of business activities. A lot of companies are presently moving to Barwa Commercial Avenue, and according to Al Asmakh Real Estate Development Company (AREDC), Barwa Commercial Avenue targets customers that want to have their establishments within the Industrial Area or other areas on the outskirts of Doha. However, due to the massive size of the project and location, it is anticipated that occupancy rate will initially be on the low side.
According to a recent Rental Rate Survey Report, conducted in March 2015 by AREDC, rental rates in the upper floor offices in West Bay have become significantly higher than anywhere else specifically because of the premier quality of the buildings themselves. The monthly rental rate ranges between QR 200 to QR 250 per sq. m. The advantage of their location becomes clear when it is noted that the average monthly rental rate in downtown Doha is QR 150 per sq.m.
Average monthly rental rates on the C Ring Road, which links old Doha to the West Bay area, are around QR 170 per sq. m. At other locations such as the D Ring Road, Salwa Road and the Old Airport, monthly rental rates average between QR 120 to QR 165 per sq. m. Office space at the Barwa Commercial Avenue project would cost a business or organisation QR 80 to QR 110 per sq. m per month.
New Industrial Area and Barwa Commercial Avenue are upcoming venues for businesses to conduct their activities. General Manager of DTZ Qatar, Edd Brookes, tells BQ: “Industrial manufacturing or stage companies in the New Industrial Area are better organised. However, the Old Industrial Area is undergoing substantial new infrastructure (road) improvement.”
Land value in New Industrial Area is QR 250 to QR 350 per sq. ft. and Barwa Commercial avenue is priced at QR 475 per sq. ft., according to Brookes. “Barwa Commercial Avenue has retail space with offices above. The rents are competitive for showroom use,” he says.
Companies are able to hold long leaseholds only from the government normally. “The lease specifies the type of use; any construction on the land can be used for. The leases tend to be for terms of 25 or 35 years,” Brookes explains.
There is little doubt in the office development sector that rental rates have increasingly grown higher in recent years, but there is also an awareness that, as with any developing business sector, getting the right balance between supply and demand is particularly relative. The fast growing expansion of supply may impact present occupancy in previously popular locations. Ali says: “Our current rent is obviously very high, as we are paying QR 40,000 plus per month for around 300 sq. m.” Jose also takes note of the issue of increasing rents and points out: “Although existing facilities are satisfactory, the rent is too high, and because of this we are currently looking for another place with a lower price.”
In terms of annual gross yield, office buildings in Al Sadd and on the C Ring Road can provide an annual return of up to 8 percent. Buildings of similar sizes and specifications located on the D Ring Road and the Airport Road can yield a gross return of up to 7 percent per year. Given this, the Advisory Council proposed to the cabinet the percentage by which owners of commercial spaces can increase rent annually should be reduced.
They go on to suggest strongly that the Cabinet’s decision (Number 8 of 2015) which allows shop and office owners to increase their rent annually by a fixed percentage, should be countermanded. The Advisory Council warns that, once the validity of the Cabinet decision is established as a precedent, the legal validity of all rent contracts signed under its current auspices will also automatically be extended.
As far as Qatar is concerned, as long as there is space for work, there is also space for future growth in the office development sector. The economy is projected to grow by 6.5 percent per year for the next two years, and according to the Ministry of Development Planning and Statistics; real economic growth, despite lower oil prices, was expected to remain strong in 2015 on the back of vigour in the non-hydrocarbon economy and that is set to carry through to 2016 and 2017.