Dubai’s office market upswing is no temporary blip

Dubai Tourism

It is astonishing how quickly things change.

As the end of 2019 approached, despondency was in the air, along with a pervasive feeling that recovery in Dubai’s real estate markets would be protracted.

Average office rents across the city had fallen every year since 2015. They were down around 20 to 25 percent in total – and all this was before Covid-19 shut Dubai and the world down.

Yet today, office market rents in Dubai are in rude health. As reported by AGBI, rents recorded double-digit growth in 2022.

Occupancy of Grade A space is at the highest level since 2015, with most set for completion in 2023 and 2024 pre-leased.

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All this raises some obvious questions: why were things previously so bad, why has the market turned around, and is the upturn sustainable?

Understanding the reasons for the downturn is central to explaining why the upturn is likely no temporary blip.

The second half of the last decade was a period of slower economic growth for the whole of the Gulf. As lower oil prices precipitated fiscal deficits, governments responded, quite appropriately, by controlling spending and increasing non-oil sources of revenue, such as by introducing VAT.

The UAE reduced general government spending from 50 percent of non-oil GDP in 2014 to 39 percent in 2019. Saudi Arabia cut its budget from 71 percent to 54 percent, according to the IMF.

The goal was to put government finances on a sustainable long-term footing. This has largely been achieved.

Unsurprisingly, however, implementing fiscal controls came with a toll: economic growth slowed. As the Gulf’s trade and business hub, the economy of Dubai was not immune.

Reduced growth

Slower economic growth in Dubai reflected reduced growth rates of the workforce and of new business formation.

According to the Ministry of Human Resources and Emiratisation, the number of registered businesses in Dubai grew at a compound average annual rate of 8 percent between 2011 and 2015.

Afterwards, between 2015 and 2019, the rate of growth fell to 2 percent. Against this macro backdrop, it is not surprising that commercial real estate markets suffered. That doesn’t factor in the 3 percent annual increase in office supply during these years.

Fast forward to the present, and rising rental values tell us that demand is strong. Across the UAE, the number of registered businesses grew by 7 percent in 2022 and by an additional 8.5 percent in 2023.

There were 20 percent more businesses in the UAE at the end of 2022 than in 2019. Likewise, private school enrolments point to a rapidly growing population.

According to KHDA data, between the 2014/15 academic year and the 2019/20 academic year, total private school enrolments compounded at an average rate of nearly 4 percent. In 2021/22 they were 5 percent higher than 2020/21 and grew by a further 13 percent in 2022/23.

In another 180-degree reversal, just as demand is now strong, so supply additions have slowed significantly. Their annual rate up to 2025 will likely be less than half what it was in the previous five years.

The very factors that pushed office rents down between 2015 and 2019 – namely, weak demand and relatively high supply additions – have reversed. Demand and supply dynamics clearly explain recent buoyancy in the market.

But will it last? The answer to this question revolves around the sustainability of stronger demand.

There are plenty of reasons to think so. Dubai has exited the Covid era with a much-enhanced reputation, as evidenced by positive global media coverage, and is clearly an attractive place to do business.

But this enhanced reputation is about far more than Dubai’s Covid response. It reflects the supply-side reforms that aimed to make the UAE more attractive to foreigners and foreign investment – among them, allowing 100 percent foreign ownership, enabling long-term visas, allowing non-married couples to cohabit, and introducing a Monday to Friday work week.

At a more fundamental level, though, Dubai, the UAE and the Gulf in general, are benefiting from its strong fiscal footing.

As a result of the measures of the last decade, the UAE (and Saudi Arabia) can generate healthy budget surpluses with oil selling at $75 to $80 a barrel.

Back in 2014, both countries posted deficits when oil prices were at this level. Just as the developed world is imposing austerity to rein in its deficits, Gulf countries now face zero fiscal headwinds. The dour economic mood in Europe contrasts starkly with Dubai’s optimism.

No one has a crystal ball, and no one should ever assume that Dubai (or anywhere else in the world for that matter) has permanently escaped the business cycle.

But in Dubai right now, the economic fundamentals are strong and increasing office rents demonstrate this. There is every reason to assume that this is no short-term blip.

Dr Christopher Payne is chief economist at Peninsula Real Estate