on point - JLL MENA_Dubai City Profile... · Dubai City Proﬁle – October 2010 on. point All sectors of the Dubai market remain in the downturn phase of the cycle, with the likelihood

Dubai City Profile – October 2010

on.point

All sectors of the Dubai market remain in the downturn phase ofthe cycle, with the likelihood of continued falls in average pricesand rentals over the rest of 2010. However, the pace of declinehas eased from that seen in 2009 as the market moves closer tothe bottom of the current cycle.

Demand has increased in most sectors of the market compared tothat experienced in 2009, the timing of any recovery has beenextended due to excess supply. The office market has seenincreased tenant demand and positive net absorption in 2010,while hotel demand has also increased over 2009 levels as themarket has become more competitive.

The market has moved into a third phase of the downturn. Havingpassed through the initial demand side shock resulting from theglobal financial crisis in 2008 and the subsequent debt problemsfacing Dubai World in 2009, this year has been characterised byan increasing oversupply in some sectors of the market. Thisexcess supply is dampening sentiment and delaying the timing ofany general market recovery.

Despite further short term pressure on pricing, there remainsinterest among investors in securing high quality and securelyleased real estate in Dubai. The significant re-pricing that hasoccurred over the past two years is stimulating renewed demandfrom both occupiers and investors who recognise that Dubai remainsthe most competitive business environment in the MENA region.

Dubai – Sharpening theCompetitive Edge

Property Markets

Although the wider economic trend seems to have improved significantly,many micro economic problems continue to face the local real estate market.The market is generally oversupplied although there are selective pockets ofundersupply in certain property types. Tight liquidity condition and high costof borrowing continues to make it difficult for developers to complete projects.High maintenance and service fees are also affecting net returns for investors.

The much anticipated Strata Title law will help solve some of these issues,although many of these will continue to plague the market for a while. With no strong impetus from foreign investors due to more attractively priced properties and faster capital appreciation in the rest of the world, we expect to see a continued decline in rentals and values in both theresidential and office markets over the remainder of 2010 exacerbated bysignificant levels of new supply entering the market. Investor interest iscurrently limited to prime Grade A commercial buildings with strong blue chiptenants and attractively priced hotel properties.

Although capital values have declined to a level that is attracting interestamong institutional investors, investment activity remains subdued due to a shortage of suitably priced institutional grade properties in Dubai and the lack of available financing. With the rate of decline in both values andrentals remaining well below those experienced in 2009, all sectors of themarket remain in the late downturn stage of the property cycle.

on.point • Dubai City Profile • October 2010 2

Turning of the Tide

After the sharp decline in the UAE economy in 2009 due to the globalfinancial crisis, 2010 is turning out to be a better year overall. The UAEeconomy is poised to register a 2.3% growth this year on the back ofstronger oil prices and improving commerce and tourism sectors. Althoughthere is a lack of reliable GDP forecasts available at the emirate level, it wouldappear that the Dubai economy should also record gradual growth in 2010.

One of the main reasons for the decline in economic activity in the UAE wasthe sharp fall in oil prices in 2008/2009. Oil prices have since recovered toaverage in the mid-70s a barrel for the first eight months of 2010. Thisshould provide the federal government with a comfortable surplus for 2010which will filter down through more liquidity in the local market. This has alsohelped the UAE maintain its high sovereign rating, boosting investors’confidence toward the long term prospects of the country.

With strong growth from Asia and the return of growth in Europe and theUSA, global trade volumes have improved in the first half of 2010. This hashelped Dubai in non-oil trade to increase 18% to USD 76.3 billion in the firsthalf of 2010 compared to USD 64.9 billion over the same period in 2009.Dubai International Airport has also announced a record 26.9 millionpassenger movements in the first seven months of 2010, a 16% increaseover the same period in 2009. The Department of Tourism and CommerceMarketing (DTCM) has announced that guest numbers in Dubai hotelsincreased by 9% to 4.2 million over the first half of 2010, partly due to morecompetitive pricing by hotel operators.

The hard work undertaken by the UAE to improve its financial infrastructureand regulation has culminated in its promotion to an emerging market statusin September 2010 by the FTSE. With this new status, it is expected that thelocal equity market will attract more foreign investment and provide localcompanies with greater access to international funds.

Although we expect debt restructuring to take up the rest of 2010 and thefirst half of 2011, the recent announcement that Dubai World has reached asettlement with its major creditors will definitely boost market confidence andimprove the local bond market. It is hoped that the completion of the DubaiWorld debt restructuring exercise will establish a standard for resolving the debtproblems of other Dubai Government linked entities, such as Dubai Holding.

In the last three months, analysts have cautioned the market about theincreasing possibilities of a 'double dip' or second global recession whichwould have a significantly negative impact upon Dubai given its links to theglobal trade network. Barring any adverse turn to the global economicsituation, Dubai seems set for a gradual recovery, albeit a slow one. Whilethere remain challenges ahead, 2010 should prove a more positive year forthe local economy than 2009.

Key Statistics

Indicator 2009 2010F

UAE

Population (millions) 5.1 5.2

Population Growth (Y-o-Y) 6.3% 2.4%

Nominal GDP per capita (USD) 41,600 45,600

Real GDP Growth (Y-o-Y) -3.0% 2.3%

Inflation (p.a.) 1.6% 0.9%

Exchange Rate (USD : AED) 3.67 3.67

Dubai

Population (millions) 1.52 1.49

Population Growth (Y-o-Y) -8% -2%

GDP per capita (USD) 44,900 46,900

Source: Various F: Forecast

Note: The property clock is a way of locating the relative position of the different sectors within their short-termprime rental cycles. Asset classes can move around the clock at different speeds and directions. Hotels position onthe clock represents the RevPAR rather than rents which is calculated as Occupancy x A

Economic and Demographic Overview


1.30

1.35

1.40

1.45

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1.55

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Dubai Population

Source: Historic Data – Dubai Statistics CentreF: Forecasts – UBS

Dubai Property Clock

Source: Jones Lang LaSalle, Q3 2010

Rental GrowthSlowing Rents Falling

RetailOffice

ResidentialHotel

Rental GrowthAccelerating

Rents BottomingOut

Single Ownership vs. Strata Title

There has been a significant influx of new Strata Title office space onto themarket over the past six months, particularly in locations such as JumeirahLake Towers (JLT) and Business Bay. This contrasts with the ownership ofoffices in the CBD where less than 10% of the stock is held under StrataTitle ownership.

These new locations have not attracted strong demand as many largerMNCs prefer the increased certainty of dealing with a single landlord ratherthan the additional risks associated with multiple ownership structures. Theadvantages of single ownership premises include:-

• Higher quality property and facility management

• Uncertainties surrounding operation of new Strata Law in Dubai

• Greater confidence in major developers/single owners

International Quality vs. Secondary Quality Space

Another common trend in markets offering greater tenant choice is a ‘flightto quality’ and this is being seen in Dubai, with a number of major corporatesupgrading to better quality premises without increasing their occupancy costs.

In addition to the physical quality of the premises (floor to ceiling heights,quality of common areas, floor plate size and configuration, car parkingratios, lift capacities and speeds, etc), tenants are also taking greater accountof ‘softer’ (non-physical) issues such as the quality of management and thereputation of the owner.

Shell and Core vs. Category A Space

A further dimension to the Dubai office market relates to the condition in whichpremises are handed over to tenants. There are two major such conditions:-

Shell and Core. Concrete floors and no ceilings – allowing tenants greaterflexibility to fit out space to their own requirements. This space has typicallybeen preferred by legal and banking firms as it allows for greater security tobe incorporated. It was also the preferred form of delivery by landlords priorto 2008 as it reduced their costs.

Category A Space. The developer hands over the space in a more completestate usually including raised floors and suspended ceilings with integratedlighting. The advantage of this format is that it reduces the fit-out costs totenants as the space is largely ‘ready for immediate occupation’. It alsoprovides tenants with a clearer idea of what their space will look like.

The majority of demand is currently for space delivered with a Category Afinish. Second hand space benefiting from a previous tenant’s fit-out hasproven to be even more attractive to tenants.

Summary

As the market has become more competitive (cheaper) from a tenant’sperspective, the overall volume of leasing activity has increased. Dubairemains the preferred location within the MENA region for many internationaloccupiers and as occupancy costs continue to decline, this interest hasresulted in an increase in the number of leasing transactions taking place.

While conditions are expected to move further in favour of tenants over thenext six months, it is important to recognise the Dubai market is far fromuniform, operating as it does as a series of relatively discrete sub-markets,each driven by its own distinct drivers.

The Dubai office market continues to move in favour of tenants as increasedsupply has driven rents down and vacancies up across the market. For thefirst time, tenants now have a wide selection of competing buildings fromwhich to choose. This is leading to an increasingly polarised or ‘two tiermarket’ displaying a number of different dimensions.

Freezone vs. Non-Freezone

The Dubai office market operates as two quite distinct markets, reflecting thedifferent trading models and licensing structures that operate betweenonshore and offshore operations. The details of their trading structure hasan important influence upon where firms seek to locate, with many firmsoperating both onshore and offshore operations in Dubai, which of necessityrequire two separate locations.

The majority of multinational companies (MNCs) have traditionally sought anoffshore license, with the main advantages including:-

• 100% foreign ownership (the MNC retains its existing ownership structure)

• Guaranteed tax free status for 50 years

• Visa benefits

While more multinationals are now questioning the advantages of obtainingan offshore license and weighing up whether this is really worth theadditional rental costs that are typically commanded within freezonelocations, demand remains strongest within freezones. The two most soughtafter freezones are currently the Dubai International Financial Centre (DIFC)for financial and professional service firms and the area of ‘New Dubai’including Internet City, Media City and Knowledge Village, (commonlyreferred to as TECOM), which is developing as the preferred location fornon-financial organisations.

The preference for offshore companies is reflected in higher rentals for DIFCand TECOM over surrounding office projects for onshore companies.

Core vs. Peripheral Locations

A typical characteristic of markets with increased choice for tenants is thatcompanies attach a premium for core or central locations, with the pricegradient between core and peripheral locations increasing. This trend iscurrently occurring in Dubai with many companies expressing a desire to belocated along the central Sheikh Zayed Road corridor (between the TradeCentre and Downtown), despite the higher rental rates in this area. As rentalshave declined significantly in the Central Business District (CBD), a numberof tenants which were previously priced out of this area are now returning.

The continued preference for space along the SZR corridor, rather than incheaper peripheral and less established locations reflects the rigid pricenature of demand for office space in Dubai. Real estate costs typicallyaccount for only between 10% and 15% of total costs and some occupiersare therefore willing to pay the premium involved in leasing better quality andbetter located premises.

The corollary of this price inelasticity of demand is that dropping theoccupancy cost produces a relatively small increase in demand. Thereremains little or no demand for poor quality or poorly located space howevercheap the price. While increasing incentives may make one specific buildingmore attractive than another, there are still projects for which it is difficult toattract tenants at any price.

Increasing choice for tenants within Dubai’s two tier office market

on.point • Dubai City Profile • October 2010 4 on.point • Dubai City Profile • October 2010 5

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Barsha (Non Freezone)DIFC (Freezone)

Financial CBD New Dubai

SZR (Non Freezone)TECOM (Freezone)


Dubai Office Rents

Financial CBD

TECOM

Source: Jones Lang LaSalle, Google Maps

Impact of new regulations on residential service charges


The Dubai government has reacted to increased dissatisfaction with theopacity and level of residential service charges and concerns with the ongoingmanagement of completed residential projects, with a new announcementthat the registration of all jointly-owned properties and the establishment ofOwners’ Associations must be completed by October 13, 2010.

In theory, the establishment of Owners’ Associations should ultimately drivedown service charges and increase the quality of management. However, theextent to which these potential benefits will flow through to owners will relyheavily on further clarification from the government, and the readiness ofhomeowners to assume additional responsibilities.

Variation in Service Charges

The significant variation between service fees being charged across differentdevelopments and the problem of identifying exactly how these fees arebeing calculated and the money spent, has created increased frustrationamong property owners. This has prompted many to seek greater clarity andtransparency from developers as the current lack of transparency has furtherfuelled the general perception of high service charges and poor quality services.

Service charges for completed residential properties in Dubai currently rangefrom AED 8 per sq ft to AED 20 per sq ft, with no real defined process forthe calculation of such charges.

Residential Service Charges (AED/sq ft)

Jumeirah Lake Towers 8 to 14

Dubai Marina 10 to 14

Palm Jumeirah 10 to 12

Discovery Gardens 12 to 16

Downtown Burj Dubai 17 to 20

Source: Investment Boutique

The uncertainty and dissatisfaction in this area is further compounded by thefact that different investors in the same project have very different opinionswith regard to the level (and therefore the cost) of maintenance and upkeepof common areas. In many projects, there is a growing gap between what isexpected by investors and what is actually being delivered.

The Law

Procedures to regulate the ongoing management of the increasingly largestock of residential units were first introduced in Law 27 on the Ownershipof Jointly Owned Properties in the Emirate of Dubai (the so-called StrataLaw) in November 2007. The Strata Law aims to regulate propertymanagement in a way that is consistent with other more mature anddeveloped markets.

Although this was intended for implementation in early 2008, regulations fromthe Dubai Land Department and the Real Estate Regulatory Authority (RERA)remain outstanding and this has created something of a ‘stand-off’ period forthe past two years. However, as of October 13, 2010 these regulations areexpected to be fully ratified with all jointly owned properties and Owners’Associations being approved and registered by both government bodies.

One important consequence of these new regulations is that the originaldeveloper will no longer be responsible for the maintenance and upkeep of completed property. Instead, homeowners will automatically become part of an Owners’ Associations which will assume responsibility for allproperty maintenance issues. The regulations include the option for theOwners’ Associations to select a third party to take over their managementresponsibilities. Several firms including Emaar Community Management (themaintenance unit of Emaar), have already obtained licenses from RERA todo just that.

At present, service charges have to be approved by RERA in order to ensureappropriate charges are being levied on owners in a sufficiently transparentand open manner. RERA’s involvement maybe an interim measure that mayno longer be required once the Strata Law is enforced and operational.

Will this actually work?

In theory, Strata Law No. 27 should provide greater confidence in the Dubaireal estate market, as investors are afforded the opportunity to protect,organise and manage their respective properties. Additionally, it should createmore transparency as service charges will be determined via a budget thatis decided by the majority of owners as they see fit, and is therefore largelywithin their control.

In practice, the law is likely to be easier to implement in relation to villaprojects, where there are fewer common areas to maintain. There remainssignificant uncertainty as to how the legislation will operate in respect ofprojects where no clear demarcation between buildings and significantcommon areas like gyms, walkways, and gardens exist, as is the case withmany mixed-use developments such as Burj Khalifa and Discovery Gardens.The question of how the cost of maintaining common areas will be sharedwhen different real estate components are involved remains unclear anduncertain at this stage.

Given the lack of clarity on the law itself and the way in which it will beenforced, handing over the authority for important decisions on the ongoingstandard and cost of maintenance to individuals who are either reluctant, ordo not actually want them, may further complicate the reality.

Following the completion of Phase 1 in March 2011, no major expansion tohandling capacity is expected in the short term. Any further expansion islikely to happen only after 2014 assuming that construction and fulfillinginternational certification will require 2-3 years for runway construction and3-4 years for mega passenger terminal. Therefore, major expansion of cargohandling capacity is expected sometime after 2014 and passenger servicesfrom 2015 onwards.

The initial focus of the new airport has always been on freight, with the abilityto transfer goods between AMIA and from the nearby Jebel Ali Port withoutneeding to clear customs. This is likely to generate more demand forindustrial/warehousing units within the DWC area. Development of such unitshas been sporadic to date, with current demand being largely accommodatedwithin surrounding industrial areas such as JAFZA, Dubai Investment Park(DIP) and Dubai Industrial City. As the freight tonnage through AMIA increases,there will be increased opportunity for the development of more Grade Alogistics facilities in the area surrounding the new airport in the medium term.

The requirement for housing to support AMIA will initially be relatively low.Existing labour accommodation in the Jebel Ali and DIP area and upcomingprojects within a 15 minute drive from AMIA are likely to be sufficient to accommodate those involved in the construction and operation of the initial freight facilities of AMIA. Developments such as Dubai Marina, DIP,Dubai Sport City, Jumeirah Village and Discovery Gardens will be the main beneficiaries from any influx of staff working in DWC in the medium to long term.

CargoTerminals

Runways

PassengerTerminal

PropertyRequirement

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2023

2024

Hotels and Commercial Properties

Mid-income Housing

Requirements for warehousing/logistics properties

Temporary Mega Terminal 1 Mega Terminal 2 Other SmallerTerminals

Run-way 1 Runways 2 & 3 Runways 4 & 5

First CargoTerminal

Expansion expected in various stages with duration tied tocargo handling requirements

Likely Timeline for Expansion of AMIA andAssociated Real Estate Requirement

Source: Jones Lang LaSalle

Unlike the fanfare surrounding the opening of the Dubai Metro last summer,the opening of the new Al Maktoum International Airport (AMIA) on June 27,2010 was a relatively subdued one. It does however represent an importantmilestone in the ultimate development of Dubai’s proposed aerotropolis –Dubai World Central (DWC).

The development of major airport related real estate (aerotropolis) inevitablytakes place over the long term and the vision for DWC has alwaysrecognised this. It is expected that the development will generally include twomajor phases.

• Phase 1 consists of a 4km runway capable of handling the A380s cargohandling capacity of 250,000 tonnes a year which can be increased to600,000 over a short period; a temporary passenger terminal that canhandle 9 million passengers a year. This phase is expected to be completedby March 2011.

• Phase 2 will include a further 4 runways, 2 passenger terminals capableof handling 120 million passengers and a cargo handling capacity of 12million tonnes. The timeframe for Phase 2 has not been released but it islikely to be beyond 2020.

The level of real estate development within DWC to date has been relativelylimited. This small number of developments in and around the DWC area canbe attributed to the following factors:

• low demand and oversupply in almost all major property types in Dubai

• tight credit environment

• uncertainly with regard to the pace of expansion of AMIA particularly inrelation to passenger services

• concerns over the viability of running Dubai International (DXB) and AMIAconcurrently in the post financial crisis era

No firm date has been provided for the completion of Phase 2, as thegovernment is reconsidering the best strategy of phasing in the new airportand also on the viability of running two mega airports concurrently. Theinfrastructure has also not been put in place to ensure the secured free flowof goods and passengers between the two airports.

Real Estate Development Surrounding AMIA

Short to Medium Term (1-5 years)

Real estate development within DWC has been minimal to date. So far fivecompanies have signed up with the Logistics City (including Ehrhardt +Partner Solution and pharmaceutical logistics specialist Hellmann CaliparHealthcare Logistics). DWC has not announced any companies that willoperate out of the Aviation City and there is currently no construction activityin the Residential City.

While no confirmed dates have been provided by the Dubai Government, arough estimate of the phased completion for AMIA and the demand forproperty is estimated in the diagram. This timeline assumes the governmentwill be able to successfully finance the development and that the runwaysand terminals will be built in phases.

DXB

Passenger Volume in 2009 (million) 40.9

Cargo Volume in 2009 (million tonnes) 1.9

Source: Dubai Airport Authority

Dubai World Central – the long term is looking longer

Al Maktoum Dubai Airport Capacity International Airport (AMIA) AMIA Dubai International (DXB)*

Phase 1 Phase 2 Total

Runways 1 4 2 7

No. of Passenger Terminal 1 (Temporary) 3 4 7

Passenger Handling Capacity (million) 9 151 80 240

Cargo Handling Capacity (million tons) 0.25 11.75 2.1 14.1

Timeline March 2011 2020 2012 -

Based on announcements made; final figures might differ as the government changes its strategy in the future. *Includes planned extension.Source: Dubai Airport Authority

Long term

As the airport heads towards full completion and the land transportinfrastructure is improved, it is likely to draw non-aviation related businessesto the area. This will drive demand for a wider range of property typessometime nearer to 2020. As the airport increases its worker numbers andnew businesses set up in the area, the working population in and around theairport will stimulate demand for more housing within DWC. Given the currentsupply of high-income housing in the ‘New Dubai’ area, the initial requirementfor housing is likely to be focused primarily on the medium and medium tolow income segments. These workers are more sensitive to travel cost andare likely to require residences nearer to their work place. The planned DWCResidential City would therefore be expected to take off sometime after 2015.

With an expected increase in aircraft servicing and logistics companiesmoving to DWC in the medium to long term, other ancillary companies arelikely to require premises close to their client base. We would envisagedemand for lower density business parks and commercial buildings to housethese companies.

As passenger numbers through AMIA increase between 2015 and 2020, newhotels will also be required to support the airport and the growing businesscommunity it is likely to generate. Exhibition and conference facilities areanother natural growth area given their requirement for large land parcelsclose to major airports.

Conclusion

With the government still fine tuning its strategy for the future operation ofDubai’s two major airports, the pace of development within DWC is likely tobe relatively limited for the time being. However, with DXB cargo handlingcapacity nearing its limit, we would expect more cargo airlines (especiallythose without passenger services) to shift their operation to AMIA. This willlead to demand for quality warehousing and logistics facilities in the next fiveyears although demand is only likely to pick up significantly after 2011.

The extent of demand for other property types is not as certain as that forwarehousing and logistics properties at present. Investment in the DWC areais only expected to increase substantially once the government firms up itsaviation strategy. The advantages of gradually phasing in AMIA is that itprovides the government with the opportunity to reassess the proposedmaster plan and aviation strategy to suit the new post 2008 financial crisisera and allow the market sufficient time to absorb the current oversupplyacross most property types.


Is there a future for Budget Hotels in Dubai?


Key Findings

• The Dubai hotel market has been dominated by luxury product to date(above 60% of the stock is 4/5 star grading).

• Over the first nine months of 2010, the market has broadened with sixadditional ‘budget hotels’ being completed (with a total of 1,780 rooms).

• The budget hotel sector in Dubai is facing three potential challenges: - Investment cost- Economies of scale- Performance

• Despite current problems, the budget sector will mature into anincreasingly important sector of the Dubai market.

• This is a positive change, as it will broaden the attraction of Dubai andopen up the market to new sectors of demand that were previouslybeing priced out of the market.

Background

The question of ‘what is a budget or economy hotel?’ has often been askedin relation to the Dubai market in recent years. Where does it start in thescale of the hospitality offering and where does it end? (i.e. when do budgetor economy hotels enter into the mid scale area). This distinction has beenblurred with the completion of a number of branded budget hotels on onehand and the introduction of more streamlined concepts within luxury hotelson the other.

The Dubai hotel market has traditionally focused on the luxury or upscalesector (above 60% of the current stock is classified as luxury/upscale).Recently, Dubai has experienced the introduction of branded budget brandssuch as Ibis by Accor, Express by Holiday Inn, Premier Inn and Easy Hotels.More home grown brands such as Centro by Rotana and Citymax have alsoentered this sector, that had previously been largely unbranded and operatingunder the radar.

The branded budget market segment had been largely non-existent in Dubaiprior to the financial correction of 2008, which greatly increased the appealof budget and economy hotels. This resulted in the completion of nineprojects with 2,700 rooms over the past two years, increasing the budgethotel stock by 175%. This sector is better aligned with the more costconscious mindset and has been perceived as the next investmentopportunity in the hospitality sector.

Performance

It is always difficult to assess the true performance of new hotels until they experience stabilised trading conditions (which may take 2-3 years after opening).

The budget hotel market segment suffered in 2009 as a combined result ofthe economic downturn and the opening of new properties. Tradingperformance analysis shows average daily rates around AED 275 over thelast year. In terms of occupancy rates, the budget hotel market segmentregistered slightly lower performances than the overall Dubai hotel market ataround 70%.

The three broad sets of challenges facing the budget hotel sector can beidentified thus:

Investment cost: In order to be profitable, budget hotels need to apply astringent cost model with low running and limited construction costs. Thesuccessful development of a budget hotel must comply with strictdevelopment guidelines (room size, public areas, food and beveragefacilities). The sector often uses modular buildings to maximise efficiency andminimise construction time.

Economies of scale: With more limited profit levels per key but potentiallyhigher profits per square meter than some mid-market options, a dominantfocus for budget operators is scale and coverage. Successful development inthe budget and economy sector will need to push more units into the samecity/area in order to create the opportunity for economies of scale.

Performance: The correction of average daily rates across all segments ofthe Dubai market has had an impact on budget hotels’ performance. In thelong term, budget hotels generally achieve relatively stable occupancy ratesacross both good and difficult economic periods. During periods of strongeconomic growth, they tend to profit from growing weekend and leisuredemand, while weak economic periods are often characterised by a growingnumber of business guests looking to cut costs.

Conclusion and Future Trends

The emergence of budget and economy hotels in Dubai will provide a reallife experiment to test the validity of some of the fundamental assumptionsunderpinning this sector of the market.

– Strength of the domestic business travel market

– Availability of sites at affordable land values

– Efficiency of operations and sales & marketing platforms

Budget and economy hotels might prove instrumental in activating a stillbarely emerging hotel asset transaction market. The potential for tradingbudget and economy hotels, in individual properties or in portfolios, is higherthan that of large full service hotels. They are of particular appeal toinvestors with the resources to close quick cash acquisitions that are part ofa hospitality or long-term real estate strategy.

Budget hotels will become an increasingly important component of the hoteloffering in Dubai over the next five years. This is a positive sign as it showsthe market is maturing and offering a greater range of product capable ofappealing to different sectors of demand.

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Growth of Budget Hotel Sector in Dubai

The recent sale of Building 5 in Emaar Square (at an estimated initial yield of8.8% in August 2010) signifies the first major sale in the Dubai office marketfor more than a year. This initial yield was below the market expected rate of10%, signifying continued interest among investors in securing well locatedoffice projects let on secure terms of major MNCs (HSBC have a 10 yearlease over the whole building). With the expected continued drop in rentalprices and more supply entering the market, only Prime Grade A buildingswith long-term blue chip tenants are expected to attract investors’ interest inthe coming months.

We have observed that the Dubai office market is becoming increasinglyfragmented in nature, operating as a number of quite distinct sub-markets.The most obvious distinction within this ‘two-tiered market’ is between thesingle landlord CBD segment versus Strata Title non-CBD office buildings.This distinction is reflected in an increasingly large gap in vacancies, withvacancy rates in the former registering 14% in Q3 2010, compared to amarket average of over 40%. The city-wide Strata Title vacancy rate isexpected to increase further in the coming months, as supply continues tooutstrip demand. By contrast, good quality, centrally located office spaceunder single ownership is expected to continue to enjoy relatively highoccupancy rates.

Market Outlook

Demand for office space is expected to increase in the coming year as rentalprices continue to decline and the global and local economies expand. Themarket is also anticipating the passing of a new, more flexible investment lawto spur demand for office space. However, this increase will be gradual atbest and supply is expected to outstrip demand. The market is thereforeexpected to continue to shift in favour of tenants over the next 12 months.Given the wider selection of properties from which to choose, occupiers willcontinue to be discriminatory when closing deals.

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Completed Stock Future SupplySource: Jones Lang LaSalle, Q3 2010

Future Supply Pipeline – Dubai Office Market

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Supply

The total stock of completed office space in Dubai amounted to around 51 million sq ft as at the end of Q3 2010, with completion of some 2 millionsq ft over the past quarter mainly in Jumeirah Lake Towers (JLT), BusinessBay, Sheikh Zayed Road and Dubai Investment Park. Our figures suggest anadditional 7 million sq ft is likely to be completed by year end, bringing totalstock to around 58 million sq ft.

The future development pipeline has been substantially reduced over the pastyear with many of the ‘mega-projects’ under the Dubai World Group such asDowntown Jebel Ali, Nakheel Tall Tower and Waterfront currently on holdpending the final settlement of the Dubai World debt issues. Most of thecommercial properties planned by Nakheel and Limitless are not expected tobe built for the time being as Nakheel plans to concentrate on finishing sixpriority projects, mainly residential developments.

While the proposed development pipeline has almost halved since the sametime last year, future supply remains significant with a further 24 million sq ftstill scheduled to be delivered before the end of 2012. However, as bankscontinue to be cautious about development loans, actual delivery might besomewhat lower. The majority of new supply is in Strata Title property innon-CBD areas such as Business Bay and JLT.

Demand

The return of growth in both the US and European economies has slowlyfiltered through to the UAE. Confidence is returning to the market at acautionary pace. Dubai is seeing more activity in the leasing market, ascompanies choose to upgrade to better locations and buildings. Althoughtenant demand has increased over the last 12 months, it is still very muchan occupier market. With the influx of new supply, landlords are providingadditional incentives such as rent free periods (in some cases, as much as12 months rent free on a 7 year lease) and fitting out allowances to attracttenants. As is the case in more mature markets, we are seeing landlordssealing longer lease terms of 3-5 years or more.

The majority of occupiers seeking office space are looking to relocate whileretaining a cash neutral position. Consequently the majority of demand is forwell located, fitted out space offered at reasonable rents. There is also anincreasing demand for large floor plate commercial space in the CBD area,which is currently in limited supply. There is little or no demand for poorerquality space in non-prime locations, with many such buildings likely toremain unoccupied in the near future.

Major Leasing Deals*

Name of Area TakenCompany Location Building sq ft

Deloitte DIFC Currency House 20,000

RBS SZR Park Place 12,000

Mastercard TECOM Dubai Internet City 11,000

Honeywell SZR Emaar Business Park 10,500

*Examples of recent deals negotiated by Jones Lang LaSalle

Performance

Although demand has increased over recent months, average rental priceshave continued to decrease across the Dubai market during Q3. Prime rentsoutside of DIFC currently stand at around AED 190 per sq ft per annum, adrop of 27% Y-o-Y.

Rental decreases have been higher for non-CBD areas and especially forStrata Title commercial buildings, where rents have declined by more than10% Q-on-Q. Rents for onshore locations are likely to decline further beforethe end of 2010 in the light of increased supply and limited demand in thissector of the market.

Capital values continue to decline across Dubai, especially in non-CBDareas. JLT and TECOM experienced Q-on-Q drops of 8% and 5%respectively. Prices in the DIFC and Burj Downtown area have been moreresilient to downward pressure with little change to prices over the last twoquarters. The level of actual transactions remains low and capital values aredifficult to determine in many areas.

Office Market



Asking vs. Achieved Prices

The gap between asking and achieved prices has continued to decrease toaround 10%, representing a narrower band than Q1 2010 when it stood ataround 15%. This provides a further indication that the market is stabilising.

Average asking prices for both villas and apartments have fallen an averageof 55% from the peak prices in Q3 2008, and are currently AED 884 per sq ft.Achieved sales prices are down by approximately 46% from the same period,to around AED 807 per sq ft. There are however relatively few transactionsoccurring, even at these reduced prices, with the summer/Ramadan periodof 2010 being exceptionally quiet in terms of sales activity.

While achieved sales prices have declined by around 9% from Q2 2010,average rentals have remained relatively stable, as the leasing marketremains active as people look for opportunities to upgrade to better locationsat more affordable prices.

700

900

1100

1300

1500

1700

1900

Q3 2010Q2 2010Q1 2010Q4 2009Q3 2009Q2 2009Q1 2009Q4 2008

Price

(AED

/psf

)

Average Asking Price Average Achieved Prices


Gap between Asking and Achieved Prices

The average rent for a typical two bedroom apartment in selected residentialareas remained virtually the same in Q3 2010, compared to a 22% declinein Q2 2010. Average apartment and villa rents declined by an average of 9%from Q3 2009 to Q3 2010, but were unchanged between Q2 and Q3 2010.

Market Outlook

Transactional activity has continued to decline in the Dubai residential market.Pricing has also declined, although the rate of decline has definitely easedand is more pronounced for higher-end product. However, as new supply isreleased into the market over the remainder of the quarter, there is likely tobe further downward pressure on prices for the rest of the year.

Dubai’s residential market continues to be more competitive with both buyersand tenants having a larger and more affordable variety of project choices.Landlords are aware of the supply overhang, and are now asking for morereasonable rental rates that are more in line with market conditions.

Some 9,000 more units are expected to be completed by the end of year.Even if these are not completed and handed over in time, Dubai’s residentialmarket continues to be oversupplied and prices are not expected to recoverbefore the second half of 2011 at the earliest.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Q3 2010Q2 2010Q1 2010Q4 2009Q3 2009

Annu

al R

ent (

AED)

Average Residential Rents

0%3% 0% 1%

Burj Dubai Downtown Dubai Marina International City Average

Source: Jones Lang LaSalle

Average Residential Rents (Q3 2009-Q3 2010)Supply

Approximately 35,000 new residential units are expected to be completedacross the Dubai market in 2010, followed by around 30,000 new units in2011, bringing the total residential stock across Dubai to around 337,000, ofwhich around 78% will comprise apartments and the remainder being villas. The majority of new supply in 2010 comprises units in Mirdiff, DIP andRas Al Khor.

As of September, approximately 27,000 units (around 78% of the expectedsupply for 2010) has been completed. A further 8,900 units are expected tobe completed in Q4 2010, although some of these projects are likely toexperience delays and be rolled over into 2011.

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

201120102009

306,142297,200

30,5578,942

273,000

Num

ber o

f Uni

ts

Completed Stock Future Supply


Residential Supply (2009-2011)

Demand

Demand for residential property in Dubai is still being driven by end-usersand long-term investors, with most speculators remaining out of the Dubaimarket completely. The majority of sales transactions are currently forcompleted units and demand for off-plan property is virtually non-existentgiven the number of project cancellations in the past several months.

Data from the Dubai Land Department reveals a 51% decrease intransactional volume between Q3 2009 and Q3 2010. A general easing oflending conditions is likely to result in an increase in sales activity in Q4, fromthe very low levels seen during the summer and Ramadan periods in 2010.Most potential investors and speculators are however continuing to adopt a‘wait and see’ approach and the level of transactions is therefore notexpected to return to the unsustainable levels experienced in 2007/2008.

While the level of sales activity remains subdued, the rental market remainsmore active, as Dubai continues to attract demand from Sharjah and theNorthern Emirates that had previously been priced out of the Dubai market.There also continues to be significant levels of trading up within the Dubaimarket as tenants take advantage of lower rentals to upgrade to larger unitsor better quality projects.

Performance

Our data suggests that asking prices for villas have continued to decline,while the average asking price for apartments has improved slightly over Q3.This suggests that while the overall market continues to face downwardpressure on pricing, the rate of decline has now slowed as the marketapproaches the bottom of the cycle. Another indication that the market isbottoming is that asking prices have increased slightly in some selectlocations in recent months.

Residential Market



Supply

As of Q3 2010, the total stock of retail malls across Dubai is a little over 26million sq ft (GLA). The only additional supply seen over the past quarter wasthe expansion of Mall of the Emirates as 40 new stores opened at thebeginning of September. The only major new mall to open in 2010 wasMirdiff City Centre (1.9 million sq ft) and there are no further major new mallsdue to complete over the remainder of the year.

Dubai has seen a rapid expansion of retail space over the past five years,with the level of gross lettable area (GLA) per head increasing from 10.5 sqft in 2006 to its current level of nearly 14 sq ft in 2010.

This period of rapid growth in retail space has now come to an end, with nomajor new malls expected until 2013 with the opening of Mall of Arabia,which may be subject to further delays as expansion plans by retailersremain cautious in the light of current market dynamics.

Currently, super regional malls consist of nearly 76% of total retail mallspace (GLA) in Dubai. This is exceptionally high by international standardsand is likely to decrease as we expect community-led retail concepts to formthe majority of the new supply pipeline.

10

15

20

25

30

35

2013201220112010

28282726

4

11

GLA

(sq

ft m

illion

)

Completed Stock Future Supply


Dubai Retail Supply (2010-2013)

Demand

Retail sales experienced a significant drop (around 30%) in 2009. 2010 isproving to be a more stable year in terms of retail spending, with total salesexpected to increase between 3-5% on an annual basis.

As the market has become more competitive, centre managers have becomeflexible and are now seeking to engage with tenants and to work together toenhance the attraction and performance of centres. This co-operativerelationship is a positive sign of a maturing market and is more in line withthe manager/tenant relationship achieved in successful centres overseas.

Another common theme of competitive retail markets is the divergence ofrentals within and between centres. Many retailers are taking advantage ofsofter market conditions to relocate to the strongest trading locations withincentres or to stronger performing centres. This has resulted in continueddemand for prime retail locations, while less prime locations are experiencingdifficulties attracting tenants.

Most retailers are currently focusing expansion plans on other locations withinthe MENA region, as their penetration rates are already high in Dubai. Thistrend is common among both value retailers (eg: Landmark Group) andluxury retailers (e.g. Louis Vuitton Moët Hennessy).

The Dubai market is polarising, with strong performance being recorded byboth value priced and luxury retailers, at the expense of mid-market brands.Despite decreased consumer spending and a general shift from luxury retail,the majority of the recent Mall of the Emirates expansion consists of higher-end stores and restaurants.

Concerns over job security, reduced income levels and the general caution inspending habits suggest a continuation of growth in value priced offerings inthe short term.

Retail Market

Performance

Estimated Rental Values (ERVs) declined over the first half of the year byover 20% to around AED 210 per sq ft. However, ERVs remained unchangedover Q3 2010 as the market has achieved price stabilisation.

Convenience centres (the smallest and most local level category of mall)have performed relatively better, experiencing the lowest decline (of around10%) since Q1 2010, whereas community centres (middle sized malls) haveexperienced the highest average rental decline (nearly 30%).

The majority of the major malls (excluding Mall of the Emirates) are nowexperiencing higher vacancies, averaging around 20%. Vacancies are beingwell disguised in these retail environments as vacant units are being used foradvertising or displays, with other units being leased on a seasonal ortemporary basis. Some malls have resorted to placing category B and Cbrands in prime locations and others have converted retail units to non-retailuses such as entertainment, games arcades, day care centres and music orlanguage schools.

Although vacancies have significantly risen in major malls over 2010, thelease rates have not yet adjusted to these new levels. Lease rates aretherefore expected to undergo further decline in 2011.

Market Outlook

Landlords are now coming to terms with market conditions and are increasingefforts to attract new retailers by offering more incentives such as rentalreductions, break clauses and rent-free periods. While average rents have notchanged over Q3 2010, we expect a further softening to occur over theremainder of the year as the market continues to adjust to higher vacancy levels.

The supply pipeline is likely to be dominated by convenience centres in theshort term, with the end of the era of mega malls in Dubai. The performanceof such convenience malls will be largely dependent on their access, the level of parking provided, the retail mix and their ability to create a distinctiveretail concept.

0

50

100

150

200

250

300

350

400

Q3 2010Q2 2010Q1 2010

Aver

age

Rent

(AED

/sq

ft)

Convenience Neighbourhood Community Regional Super Regional Boutique Average


Estimated Rental Value


Performance

Occupancy rates in the Dubai hotels market remained stable at between 82-85% between 2004 and 2007, before registering a decline in 2008 (79%)and most particularly in 2009 (72%). This decrease can be attributed to an increase in room supply coinciding with a period of reduced demand dueto the global economic slowdown. Currently, the hotel market is registering aslightly better performance compared to last year, with Year-To-Date (YTD)occupancies for July 2010 at 72%, compared to 68% for the same period last year.

Average room rates in Dubai showed significant increases until 2008,reaching an impressive USD 310 in 2008 with a CAGR of almost 18.6% overthe previous five years. Since then however, 2009 witnessed a significantdecline (of approximately 25%) to USD 234. This decline has continued into2010, with the current YTD ADR of USD 218 being 8.3% lower than in thesame period last year. The lower room rates reflect the strategy for hoteloperators to maintain occupancies through offering more competitive prices.

Market Outlook

The Dubai hotels market started showing signs of an impending slowdownin room yield from September 2008. This trend has continued over 2009 and2010. The recent credit crisis and contraction of room yield and earnings hasresulted in a significant number of projects being cancelled or delayed. Thereremains, however, a strong pipeline of committed supply that is expected toenter the market over the next two years.

While hotel night demand is expected to increase in 2010, with the mostrecent statistics published by DTCM suggesting growth of 9% in hotel guestsover the first half of the year, the continued strong increase in supply is likelyto offset this demand. Occupancies and room rates are therefore expectedto remain at around their current levels over the next 1-2 years.

Supply

According to the Department of Tourism Commerce and Commerce Marketing(DTCM) Dubai had a total of 511 hotel premises, offering around 42,400rooms as at January 2010. Hotel accommodation accounted for approximately70% of total accommodation supply, with the remaining 30% comprising ofhotel apartments, let on a casual, as well as a semi-permanent basis.

The hotel supply has subsequently increased to around 46,800 rooms withthe addition of almost 5,000 rooms during 2010 to date. Among the recentopenings have been Meydan (Jumeirah), Armani Burj Khalifa, Sofitel JumeirahBeach and most recently the Pullman at the Mall of the Emirates.

A number of hotels that were expected to open in the second half of 2010are now expected to be delayed and pushed back to 2011. As a consequence,only two projects are now expected to complete over the final quarter of2010, increasing total stock by 1,861 rooms to around 48,661 rooms. Thisreflects a reduction of about 10% from the previous estimates for 2010,indicating the impact of the recent credit crisis.

5-Star Upper Upscale 4-Star Upscale3-Star Midscale Other

Source: DTCM, Jones Lang LaSalle Hotels

Dubai Graded Hotel Room Supply

24%

13%

30%

33%

Major Openings in Q4 2010 (Branded Hotels)

Hotel Affiliation Star Rating Rooms

Ibn Battuta 4-StarGate Hotel Mövenpick Upscale 397

Ottoman Palace 5-Star(Jumeirah) Jumeirah Sup/Luxury 410

Citymax 3-StarBur Dubai Citymax Midscale 693

Staywell 4-StarPark Regis Hospitality Upscale 392

Total 1,892

Source : Jones Lang LaSalle Hotels

Going forward, we estimate the quality hotel supply to grow at an averagerate of approximately 13% over the next two years. This reflects a slowdownin supply compared to the past three years (2007-2010), during which thetotal stock of hotel rooms has increased by almost 50% or 16% per annum.

40,000

46,000

52,000

58,000

64,000

54,48148,66146,769

6,017

5,820

1,892

2012F2011F2010YTD

Num

ber o

f Key

s

Existing Supply Future Supply

Source: Jones Lang LaSalle Hotels

Hotel Room Supply, 2010-2012

Hotel Market

0

200

400

600

800

1,000

1,200

2010YTD2009YTD2009200820072006200520040

10

20

30

40

50

60

70

80

90

72%68%

72%

79%

84%83%84%86%

8008708601,1391,018889779577

ADR (AED) Occupancy (%)

Hotel Performance – Dubai (2004-YTD July 2010)

Source: STR BenchmarkNote: The graph shows the Year-To-Date hotel performance in Dubai until July 2010.

www.joneslanglasalle-mena.com

COPYRIGHT © Jones Lang LaSalle IP, INC. 2010

This publication is the sole property of Jones Lang LaSalle IP, Inc. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior writtenconsent of Jones Lang LaSalle IP, Inc. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warrantygiven, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Jones Lang LaSalle does not accept any liability in negligence orotherwise for any loss or damage suffered by any party resulting from reliance on this publication.

For more information on how Jones Lang LaSalle can assist you, please contact:

Matthew HammondAgency [email protected]

David MacadamRetail [email protected]

Authors:

Craig PlumbHead of Research – [email protected]

Nida MianSenior Market Intelligence [email protected]

Dubai

Emaar SquareBuilding 1, Office 403Sheikh Zayed RoadPO Box 214029Dubai, UAE

Tel: +971 4 426 6999Fax: +971 4 365 3260

Abu Dhabi

Al Niyadi Building10th Floor, Offices 1003/4Airport RoadPO Box 36788Abu Dhabi, UAE

Tel: +971 2 443 7772Fax: +971 2 443 7762

Riyadh

Abraj Atta’wuneyaSouth Tower, 18th FloorKing Fahd RoadRiyadh 11683Saudi Arabia

Tel: +966 1 218 0303Fax: +966 1 218 0308

Jeddah

Jameel SquareLevel 4 Suite 406Tahliya and Andalus StreetsJeddah 21511Saudi Arabia

Tel: +966 2 660 2555

Cairo

World Trade Centre19th Floor1191 Corniche el Nil StreetCairoEgypt

Tel: +2 02 25777 836Fax: +2 02 25777 839

Jones Lang LaSalle MENA Offices

Graham CouttsProperty & Asset Management [email protected]

Chiheb Ben-MahmoudHotels [email protected]

Tay Tai ChungResearch [email protected]

Dorris HazzenSenior Market Intelligence [email protected]

Amr ElnadyHospitality [email protected]

Documents

on point - JLL MENA_Dubai City Profile... · Dubai City Proﬁle – October 2010 on. point All sectors of the Dubai market remain in the downturn phase of the cycle, with the likelihood