The Index tower on Dubai’s answer to Wall Street has 23 floors of empty offices out of the 25 it opened in 2011. A few hundred feet away, buildings controlled by the Dubai International Financial Centre are almost full.
The difference is ownership. The office space in the Index on Sheikh Zayed Road was sold in pieces to nine different investors under a system known as strata title, according to developer Union Properties PJSC (UPP), meaning potential tenants face the prospect of having multiple landlords. The DIFC buildings have one owner, making it easier to lease large amounts of space to individual companies.
Offices that were divided into smaller parts to speed up sales and fund development have vacancy rates stuck at levels seen at the height of Dubai’s real estate crisis even as homes, malls, hotels rebound. That’s unlikely to change unless the government can find a way to persuade multiple owners to act as one on leases, according to Nick Maclean, broker CBRE Group Inc.’s managing director for the Middle East.
“If all owners put their shares into a single structure and nominate one to negotiate and lease the whole building, that would solve the problem,” he said in an interview in Dubai. “But there has to be some compulsion to ensure that the majority of owners are not prejudiced by the lack of cooperation from one or two.”
Unattractive Option
Office buildings with strata title are proving unattractive to tenants that need large spaces, leading to vacancy rates that are higher than properties with one owner. The total vacancy rate for the city stands at about 43 percent, CBRE data showed. Of that, strata buildings are more than 50 percent empty, Maclean said.
Offices with one owner in the most attractive areas north of Sheikh Zayed Road have vacancy rates of about 12 percent, he said. Jones Lang LaSalle Inc. (JLL), another broker, says vacancies of single-owned buildings in the central business district, which includes the DIFC, are around 30 percent.
“The type of company that would look for a single ownership building wouldn’t even consider a strata building,” said Dana Williamson, head of agency for Jones Lang in the Middle East and North Africa. That means single owners of buildings mainly face competition for tenants from each other and not the market that includes strata properties, she said.
No Collaboration
A minority of owners can torpedo any leasing agreement, depriving other investors in the same tower or even the same floor of the ability to rent their offices and generate income, Maclean said. CBRE (CBG) has tried without success to convince individual owners in several commercial towers with low occupancies to rent in concert with their fellow investors.
“It’s nearly impossible,” he said. “They bought for capital growth and they’re just not interested in any collective action, partly because they are suspicious” of each other.
CBRE, working with law firms, has produced papers proposing legal changes that would help boost demand for strata buildings, Maclean said. Dubai’s Real Estate Regulatory Agency didn’t respond to questions about how the market is governed.
The shortcomings of strata title aren’t confined to existing buildings. As developers complete properties that were sold in advance, at least 58 percent of the commercial space being added in Dubai in the next three years will be offices held under strata ownership, according to CBRE. The majority will hit the market in 2016.
Asia Calling
“There are amazing buildings that are being delivered in Dubai,” said Alexis Waller, a partner at Clyde & Co. whose firm works with international companies moving to the city. “Super-quality new offices aren’t attracting the institutional investors or large-scale tenants because of the way they were subdivided.”
Funds and large investors from Malaysia and Hong Kong to Saudi Arabia and Kuwait have been scouting for commercial buildings, retail space, hotels and other property investments in Dubai since it won the rights to host the World Expo 2020 last month, Maclean said.
“The problem there is very little supply that fits the needs of institutional investors looking for stable and income-generating assets,” he said. The majority of such assets tend to be owned by the government or wealthy families with little need or desire to sell.
While the rate of tenants taking office space has picked up, vacancies remain high because of the new offices coming onto the market, Maclean said. Jones Lang also said the new supply is keeping the vacancy rate up.
Australian Model
Strata titles were first introduced in Australia in 1961 to help manage apartment blocks owned by various landlords. They divide a building horizontally, creating layers of ownership. The practice started in Dubai in 2007 with a law to govern ownership of jointly owned properties modeled on Australia, though the law wasn’t enforced until regulations were issued by the Real Estate Regulatory Agency in 2010.
“The principle of majority rights isn’t unusual,” Waller said. It exists in markets such as Singapore, where 80 percent of owners can force the minority to sell, she said. The government of New South Wales, Australia, is also considering a law that would allow 75 percent of a building’s owners to force a sale. Usually, such laws concern residential properties and deal with sales, not rentals, she said.
Legal issues arise “when you impose something on someone who bought a property,” Waller said. “They should decide how they want to use it within the applicable laws.”
Economic Surge
Dubai’s economy is headed for the fastest annual expansion in six years after growing 4.9 percent in the first half, according to government data. The rebound has been propelled by an improvement in the hospitality, tourism and retail industries. Home values climbed by an average of 18 percent through the third quarter compared with the previous year as the recovery spread beyond prime areas such as Downtown Dubai and the Palm Jumeirah artificial island, Jones Lang said in an Oct. 9 report.
The resurgence is prompting developers to ignore the total vacancy rate and start adding more space that will have a single owner.
“We are seeing some landlords being confident enough to push the button and build or restart projects put on hold after the crisis,” Jones Lang’s Williamson said.
Tecom Investments LLC, held by Dubai ruler Sheikh Mohammed Bin Rashid Al Maktoum, is constructing 10 office buildings with about 1.5 million square feet (140,000 square meters) of space, the company said by e-mail. The Dubai World Trade Centre is also proceeding with a plan to build an entire office district between Emirates Towers and the Dubai’s convention center.
New Ambitions
The state-owned Dubai Multi Commodities Centre plans to start building the world’s tallest commercial tower in 2015, the company said in November. DIFC, a tax-free business zone, is seeking investors for a plan to add buildings with a value of 15 billion dirhams ($4.1 billion) Executive Director Brett Schafer said in an October interview.
Dubai hasn’t seen many transactions involving single-owned office buildings “because there is a serious lack of institutional investment-grade product in Dubai,” Williamson said. “There are just not that many of them.”
The sheikhdom was 23rd in a ranking of the world’s most expensive office rents, with an average of about $93 per square foot a year, CBRE said in a Dec. 19 report. London’s West End district was first, unseating central Hong Kong, with rents of $259 per square foot.
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