Dubai's office rental market is forecast to improve in the second half of this year in prime locations, after average rents across the emirate fell 4.5 per cent in the year to the end of June, according to a new report.
Average rents for prime property in areas including the Dubai International Financial Centre (DIFC) increased 1.3 per cent in the second quarter, according to property consultancy Knight Frank.
Demand in such areas picked up due to to limited new supply, the free zone status of these locations, and the quality of infrastructure.
"High occupancy in prime markets will continue to support rents, which supports our view that prime rents will rise further this year," said Knight Frank in its Dubai Office Review for the second quarter.
"The delivery of additional Grade A stock will offset any potential upside in rental values. In the citywide sector we expected pockets of outperformance to be sustained due to limited availability of good quality stock in preferred locations, however, on average rental value[s] are expected to continue to fall marginally."
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Dubai's property market has been hit by the economic slowdown in the UAE, jobs cuts and the strong US dollar, which has dented appetite for buying real estate because of the dirham's link to the greenback.
In the office market, rents are two-tiered with prime areas and Grade A (or highest quality) property generally outperforming secondary markets.
For example, vacancies in theDIFC, the emirate's financial free zone, remained low at 1 per cent at the end of the second quarter.
DIFC plans to open its Dh1 billion Gate Avenue extension in the first half of next year, which will add 600,000 square feet to its total area, as the emirate's financial centre prepares to add more companies to its roster.
The expansion of DIFC through Gate Avenue, and the Dh180 million Exchange Building is part of the free zone's second phase strategy, of doubling registered financial firms by 2024 from 2014 numbers.
"However even within these prime locations, for periphery offerings (DIFC Phase II) absorption rates remains low," said Knight Frank.
"Although, as the master plan is finalised we expect this absorption rate to steadily increase as the 'core' expands. This trend may be further heightened with the move towards mixed-use developments which encourage urban living by linking business, cultural and lifestyle environments."
Meanwhile, rents in Grade A markets, which include Downtown Burj Dubai, Sheikh Zayed Road and Trade Centre District, fell 4.4 per cent year-on-year in the second quarter on high supply and low demand.
Main locations in Grade A markets, including Internet City, Media City and Knowledge Park, have also enjoyed low vacancy rates ranging between 2 per cent to 3 per cent, helping to maintain rents at stable levels.
But supply continued to outstrip demand in Business Bay, raising the pressure on rents.
Knight Frank is not the only consultancy to highlight the fragmented nature of Dubai's property market.
Average rents in Dubai's Central Business District increased 1.3 per cent year-on-year in the second quarter to Dh1,947 per square meter, according to JLL.
While the prime office market has remained stable over the past year in terms of vacancies and rents, the market has suffered from lower demand, with companies looking for cheaper locations or putting off decisions to rent space.
Overall the market is grappling with increased supply with around 33,000 sqm of space completed in the second quarter, bringing the total stock to around 8.7 million sqm, JLL said.
Another 190,000 square meters of office space is due for completion in the second half of this year, but some deliveries could be pushed to next year, the broker said.