Developers of commercial offices in Dubai increasingly need to have pre-lease deals and occupiers signed up before construction work begins to secure funding, according to Cluttons.
“I think now if you were to go to a bank and say: ‘our plan is to buy this land, build a building and then secure tenants’, it’s not a solid enough story,” said Murray Strang, the head of commercial investment and agency at Cluttons.
Funders are also more likely to ask for background checks to be undertaken on tenants to gauge the strength of any covenant agreed.
“You need to justify the end user and the specification of the building so that it is flexible enough that if that corporate tenant runs into problems, there is an alternative use for the building.”
This is having an effect on the type of office towers being developed, with unusual designs less favoured than regular-shaped buildings offering standard floorplates that are preferred by international occupiers.
Faisal Durrani, Cluttons’ head of research, said: “Ordinary, boxy towers with efficient, large floorplates are what’s in demand at the moment and I think we are likely to see more of that going forward.”
Mr Strang said that few developers look to build such towers without bank or equity funding, and as liquidity for real estate projects tightens, banks have “definitely had to take a closer look at what they are investing in.
“I think it’s safe to say that we have seen funding of development cut back a little and speculative development has to be very well documented and sold to the bank before they are happy to lend on these types of developments in Dubai.
“All of that now needs to be taken into account, whereas in the last five to 10 years in Dubai buildings have very much been thrown up with a wait-and-see approach.”
Despite this, Mr Durrani said that it would be rash to think that Dubai has seen the last of its spectacular, eye-catching, commercial towers.
“We’ve just seen Dubai Municipality come out with a population projection for 2030 of five million – that’s doubling the population in the next 14 years. Clearly, Dubai’s development story isn’t over yet. We will see larger projects coming through to house the growing population and growing economy. I don’t think we’re done in terms of iconic buildings.”
Cluttons’ new office market report divides the city into four zones – Central Dubai (DIFC, Downtown, Business Bay, Sheikh Zayed Road etc), New Dubai (JLT, Marina, Media City, Al Barsha), Old Dubai (Bur Dubai, Deira) and Dubai Fringe (inland areas such as Dubai South, IMPZ, Silicon Oasis, Dubai Investments Park).
The area which had the biggest decline in rents during the year was the JLT community, where entry-level rents have dropped by 13 per cent to Dh70 per square foot because of new stock coming on to the market. In central Dubai, Sheikh Zayed Road also had a 13 per cent decline in lower-level rents to Dh100 per sq ft.
Space within the new Dubai Design District (D3) has jumped by 67 per cent for entry-level rents to Dh170 per sq ft but this was because early adopters who took space first were offered significant discounts for pre-lets to be secured. The new Dubai Trade Centre District also has one of the highest entry-level price points for rents in Dubai at Dh190 per sq ft.
Elsewhere in central Dubai, rents in Business Bay remain almost as cheap as parts of Bur Dubai and Deira at Dh70 per sq ft, encouraging many companies to relocate.
According to figures by Core UAE, an associate of Savills, Dubai had 8.4 million sq metres of offices by the end of 2015. About 28 per cent of this was in prime areas such as DIFC, Downtown Dubai, Sheikh Zayed Road, Dubai Media City and Dubai Intenet City. More than half, 51 per cent, was in secondary areas including Business Bay, Deira, Bur Dubai, Healthcare City, Tecom and Jumeirah Lake Towers.
The company predicts that the pipeline of primary and secondary space will grow by 7 per cent in 2016.
David Godchaux, the chief executive, said: “The growth in supply is likely to be most significant in Business Bay over the next few years. Given the rapid growth in supply, office-sector sale prices and rentals in this area remain under slight downward pressure, at least in the short term.”
He added: “Across the Dubai office market, landlords will need to be particularly flexible in 2016, increasingly offering fit-outs, rent-free periods and other incentives to protect both rate and occupancy levels.”
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