Why commercial real estate is Dubai's biggest opportunity

Opinion: The industry has long been an attractive investment destination for both regional and international players
By Nick Maclean
Sat 09 Sep 2017 02:57 PM

Dubai has a reputation as a global real estate haven, having long been the focal point for investment into the Middle East. Residential property has traditionally been the asset class of choice, but that is changing as buyers look for commercial real estate.

Dubai’s prime office market has attracted much attention. Investors see well-located, high quality, well-let buildings, which are also the first points of entry to the region for new institutional investors.

One notable asset expected to raise the bar for commercial real estate is ICD Brookfield Place, featuring an office tower, food emporium and several fine-dining restaurants. It is a great example of a major international developer taking a long-term stake in Dubai, and is driving interest from occupiers today, despite a 2019 completion date.

It’s easy to see why the project is already a success. The prime office market has remained relatively resilient, with large requirements from global corporate occupiers, and an added base of local SMEs. This has resulted in average prime office rentals remaining unchanged for five straight quarters, showing market demand for large, efficient offices with the ability to accommodate occupiers over contiguous floors.

And while deal volumes are low compared with some international markets, there have been some high-profile investments during the first half of 2017, with sales of buildings in Emaar Square and Dubai Internet City, both of which are let to HSBC, as well as the sale of several industrial portfolios.

From an institutional perspective, the market still has a number of structural issues that prevent the creation of a more formalised investment market. Frustration among investors at the lack of available investment-grade product constrains activity, which therefore does not reflect true demand.

The long-term ‘hold’ mind-set of many regional investors, and some restrictive property ownership laws, have contributed to a level of illiquidity that is surprising given the scale and quality of the marketplace.

Investors face significant challenges in sourcing suitable product, driven by a reluctance of owners to see their prime assets as tradable. While assets do change hands, it is clear that many Middle East investors, landlords and owners are net buyers, seeking to grow portfolios.

Returning to the upsides, one of the biggest opportunities is the potential to grow a cross-border property capital market. If the relative illiquidity could be resolved, then the UAE would see a big increase capital inflows.

Dubai has cemented its position as the location for new entrants to the region, supported by its more advanced real estate regulations, comparative market maturity, the global corporate occupiers, the depth of its labour pool and transport infrastructure. Hence the market has witnessed some of its highest investment volumes so far in H1 2017.

At a time when Dubai’s office sector has a fragmented performance, it’s easy to lose sight of the bigger picture.

Yes, 2018 is likely to be another challenging year across all real estate assets, but we anticipate that investment markets will continue to grow across the region as governments eliminate barriers to market entry and promote foreign investment into real estate and other key sectors.

Nick Maclean, managing director, CBRE Middle East.

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