Small business gets new lease of life

Analysis Small companies benefit from rents that have fallen by more than half in some locations.

The sharp declines in traditional office rents makes temporary space look less competitive, even for start-up companies.

When David Binnie was looking for an office last year, there was little to choose from. Today the market has radically changed as small companies such as his, which were forced to rent temporary space, benefit from rents that have fallen by more than half in some locations. Serviced office companies that rent desk space by the week have gained from the global downturn in most office locations around the world but that trend is not being played out in the Emirates. The sharp declines in traditional office rents makes temporary space look less competitive, even for start-up companies.

"A year ago there was not a lot of ready to move in non-serviced permanent space," says Mr Binnie, the general manager of Hydrogene Energy International who rents a space at a Regus business centre in Abu Dhabi. "There is definitely more about now." In Dubai, the serviced office sector is emerging as one of the latest casualties in a property downturn that has left a quarter of Dubai office space empty, according to Jones Lang LaSalle.

The broker estimates rents in Dubai fell 25 per cent in the second quarter compared to the previous three months. That followed a drop of 45 per cent in the first quarter. About 185,800 square metres of new office space came on to the market between April and June in the emirate. As a result, prices in serviced offices have fallen too. "The rates of serviced offices have dropped dramatically," says Matthew Hammond, the head of agency at Jones Lang LaSalle in Dubai. "But they remain much more expensive than permanent space.

"At the moment, a company like Regus or Servcorp, which are the major players, would rent space at between Dh4,000 (US$1,089) and Dh7,000 per desk per month. A year and a half ago they went up to Dh12,000." Serviced offices are a kind of "plug and play" alternative to traditional office accommodation. Instead of committing to a long-term lease, a company can choose to pay a monthly rate for fitted-out space and additional services such as a phone, internet, furniture, a receptionist and secretarial services.

Typical tenants are start-up companies and entrepreneurs that need flexibility, or companies that need to establish short-term project arms. "The market has definitely been affected, " says Leila Boukili, a senior consultant at Instant Offices, which is the leading broker for serviced offices worldwide. "In previous years a lot of the centres were fully booked. About a year and a half ago, we had problems placing clients but this is no longer the case."

The completion of large amounts of new office space in recent months is opening up accommodation options for many companies that did not exist less than a year ago. "Now the market has become very competitive," confirms Ahmad Saysali, the head of investment at the consultancy CB Richard Ellis in Dubai. "Landlords are giving more incentives, whereas before they did not really care. In some cases we have even seen landlords participating in fit-out works."

Demand for serviced office space in Abu Dhabi is faring better than in neighbouring Dubai, according to analysts, because there are fewer new buildings entering the market. "In Abu Dhabi, the vacancy rate is much lower than in Dubai," says Mr Hammond. Stephane Carre de Malberg, the local business centre manager for Regus, says: "The crisis has not hurt Abu Dhabi that much. The market remains strong.".

Regus, based in the UK, was the first serviced-office provider in the capital when it arrived in October 2006. It manages two centres in Abu Dhabi encompassing 5,000 sq metres. In Dubai since 2001, Regus has five centres covering 8,500 sq metres. The capital's demand, Mrs Carre says, is boosted by companies in Dubai which are looking at a move to Abu Dhabi. Mrs Boukili confirms that view of the market's strength. "Between February and April, most of the deals in the UAE were closed in Abu Dhabi. There was very little activity in Dubai," she says.

The glut of new space in some locations has been compounded by tenants subletting accommodation that they no longer require as a result of the economic slowdown. "This is a recent phenomenon in Dubai," says Jones Lang's Mr Hammond. "Some companies have leased too much space, thinking that the growth they were having in 2005 to 2008 was going to continue and it did not. So rather than paying too much rent and service charge on space they don't use, they sublet it."

This type of quality space is more likely to lure new tenants away from serviced offices, mainly because of the substantial cost discount. Typical office leases are much shorter in the UAE than in many other global office locations such as London, where commercial tenants often sign up to 30-year terms. Standard leases in the Emirates for standard office space are generally between one and three years, making them a more viable alternative to serviced offices for many small companies.

But despite the troubles facing local serviced office operators, some new players have entered the market in recent months. Last month the Dubai-based investment company Reef Real Estate Investment launched a branch of R-Serviced Offices, initially using four floors in one of its developed towers within the Dubai Multi Commodities Centre free zone. R-Serviced Offices management believes that the financial crisis drive growth for this market.

"There is a strong demand for serviced offices amid the economic downturn," says Ian Lloyd, the chief executive of the company. "The target clients are also expatriates who have been retrenched and want to stay inside the UAE and set up a business. Because we are inside a free zone, they don't need to have a local partner and we offer visas and licences." Mr Lloyd insists the industry has a future despite the addition of so much new office space to the market in recent months.

"Companies are not tied to long leases and do not incur service charges. You can save on furniture, fittings, staffing and recruitment cost. "Also, I think office rents will still come down. So why commit into a lease that is going to be long term if you can get it cheaper in 12 months?" Mr Lloyd's company has also been approached by a number of developers in recent weeks that are also considering converting their vacant developments into serviced office locations.

That can only be good news for business people such as David Binnie, who will be looking forward to a bigger range of accommodation options than they might have thought possible a year ago. [e-mail]