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The Economic Drag of Real Estate

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Angus Taverner

Director- Global Affairs

Tag: Dubai economy UAE
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Recently, the well-known international firm of property consultants, Jones Lang LaSalle, published an assessment of Dubais commercial real estate sector office and commercial space, not including the residential element, which attracted widespread interest in the international media.  This interest arose because of the reports mordant conclusion that one of the ways that Dubai could cope with insufficient property demand would be to demolish some of its office blocks. 
In Jones Langs analysis, Dubais essential problem is over-supply with a growing number of buildings nearing completion with no prospective tenants and little likelihood of finding any until the economic malaise ends.  The analysis shows that office vacancy levels will rise to more than 50% in the near future if developers finish all construction projects underway.  This evidence of excess supply over demand is clearly having a detrimental effect on property yields.  Tenants are able to negotiate ever lower rents not just for new builds but also during rent reviews on existing property. 
In contrast to the optimistic mood set by news from the imminent conclusion of Dubai Worlds debt renegotiations and the successful recent sovereign bond sale, the Jones Lang report illustrates graphically the difficulties and challenges that beset Dubais real estate sector.  The highly visible evidence of unoccupied commercial space is likely to perpetuate the judgment that Dubais overall economy is still struggling. 
However, the headline figures and prospect of the imminent arrival of the demolition contractors wrecking ball that media have seized on mask more subtle variations in Dubais overall real estate picture. 
First, some signs exist that residential property prices and valuations have bottomed and brave investors are reaching into this sector of Dubais market.  Second, occupancy forecasts for Dubais main business areas also seem quietly optimistic with full occupancy forecast in Dubai International Finance Centre in 2011, and the TECOM area by 2014.  This leaves the problem of the outlying areas where Jones Langs worst predictions focused. 
Leaving aside the nuclear option of wide-scale demolition, the smartest move by the Dubai government would probably be to encourage new businesses to start and branches to open in the emirate by publicizing low rents and occupancy costs as well as ease of highway and mass transit access.  This was a tactic successfully adopted by the developers of Londons Canary Wharf in the early 1990s when it seemed that no-one would fill the echoing spaces of the newly built Docklands.  Today, commercial space in this part of London lets at a huge premium.

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