Abu Dhabi’s office market remains under pressure, reports say

Increasing supply and cheaper options make it a tenant-led sector

When investing in property, you only gain or lose on the value when you sell it. Christopher Pike / The National

Abu Dhabi’s office rental market remained under pressure in the first quarter of 2018 and is forecast to stay on the weaker side for the remainder of the year amid supply increases and tenants opting for cheaper options, according to new studies.

However, there were "tentative signs" of renewed market activity after a subdued market performance in 2017 as landlords concede to lowering rents and offering appealing incentives, consultancy Knight Frank said in its Abu Dhabi office market quarterly review released on Tuesday. As a result leasing rates have dropped significantly across all market sectors in the emirate.

“The short-to-medium term outlook for Abu Dhabi’s office market remains negative with further falls in rental rates expected over the coming year,” Taimur Khan, a senior analyst at Knight Frank said.

The UAE’s property market has faced headwinds as a slowdown in the past two years on the back of a three-year oil slump has weakened demand and dented sales and rental prices.

Within the commercial sector, Grade B and office buildings, majority of them being older establishments, continue to see downward pressure as corporate tenants consolidate their activities in either smaller or higher quality offices and choseattractive offers from landlords. The prime commercial sector, however, has remained relatively stable with only marginal dips in rents.

Prime office rents in the first three months of the year reached an average of Dh1,800 per square metres per annum, down 1.6 year-on-year. Grade A and citywide office space, however, witnessed steeper declines in rents of 8.2 per cent and 12.9 per cent, over the same time period, respectively. Grade A rents registered on average of Dh1,422 square metre per annum while the citywide rents were at Dh1,083, according to the report.

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Over the course of 2018 more than 195,000 square metres of stock is pencilled in to be delivered. However, Knight Frank said that in reality around 70,000 square metres is forecast to be handed over with the remainder likely to be pushed into the first half of 2019. A sizeable chunk of this new supply is not considered to be in prime category therefore its impact on the prime market is likely to be limited, according to Knight Frank.

Consultancy Asteco also said the capital’s commercial office market is in a contraction phase, with lower occupancy take-up by the public sector and oil and gas sector occupiers, which form the backbone of demand in the emirate.

“It is now a heavily tenant led market, with occupiers benefitting from a wide array of options, with landlords willing to offer much more flexibility in their leasing terms to secure tenancies and reduce the risk of long-term vacancy rates,” according to Asteco.

According to broker JLL Mena, mergers and acquisitions among government entities in the emirate, lower housing allowances and job cuts have led to consolidation in the commercial property sector.

"The period of consolidation in Abu Dhabi appears to be coming to an end and the office market should benefit from the growth (direct and indirect) generated by these newly formed entities," JLL said. "The price differentiation between Grade A and Grade B stock remains too great to trigger a significant 'flight to quality' but there have been indications that if the best buildings offer the right incentives then tenants do see an opportunity to upgrade."