Commercial property shortage looms over Dubai

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“If you build it, they will come” was the guiding principle of Dubai economic strategy for many years.

It paid off too, with unprecedented levels of growth, especially since the emirate emerged so well from the Covid-19 pandemic.

Dubai policy-makers put in place a raft of forward-looking strategies to ensure it would bounce back quickly from the economic effects of the pandemic. Long-term visas, remote working arrangements for foreigners and changes to corporate infrastructure all persuaded people to flock to Dubai, as a safe haven in troubled economic times.

That trend continued after Russia’s invasion of Ukraine, when Dubai’s open neutrality attracted those from both sides seeking to escape the conflict.

The result is the current upturn in the emirate. Many residents – myself included – say they have never experienced a busier time.

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But there are a couple of clouds casting a shadow over that picture of rampaging prosperity.

One that has been well documented is the situation in the residential property market. Inflation in apartment, townhouse and villa prices, for purchase and rent, has hit near-decade highs, according to a recent analysis from consultancy CBRE. That is a double-edged sword. Bad news for new buyers or renters, good news for landlords and investors.

Developers seem to be running to catch up with demand, bringing forward new residential off-plan projects and selling out fast, as the recent scramble for new Nakheel property showed.

Potentially more worrying are the trends in commercial real estate. A recent analysis by Allsopp & Allsopp identified a lack of new commercial building or handover to tenants, with a mere 130 commercial office units sold off-plan.

Compare this with the 60,000 residential sales registered at the Dubai Land Department this year, or with the 30,000 new companies on the books of the Dubai Chamber of Commerce, or the 52 percent increase in golden visas for entrepreneurs.

Allsopp reports that its commercial teams have seen a 30 percent rise in demand for office space and an increase in rental rates of as much as 300 percent.

Commercial tenants nearing the end of their leases are facing a painful choice: pay up or move out of prime commercial zones to more affordable accommodation on the desert outskirts, where it will be more difficult to attract talent. 

Meanwhile, the population of the emirate continues to increase at up to 1.6 percent per year. Allsopp says 100,000 new resident visas were issued in the first half of 2023.

“They” are certainly coming, but Dubai doesn’t seem to be building it fast enough to accommodate them.

Satisfying demand

The situation does not appear to be reaching crisis proportions yet, but if new commercial supply is not built quickly enough to satisfy surging demand, it has the capacity to hurt Dubai’s enviable rankings on global competitiveness tables.

These days, old hands in the city are on a constant watch for “black swans”. Those who have lived through previous rounds of the economic cycle know that there is often something out there – unforeseen and unknown – that can act as the pin to prick the bubble.

The classic example is the Dubai World sukuk in 2009, which threw the emirate into meltdown just as the rest of the world appeared to be dragging its way out of the worst of the global financial crisis.

It is hard to see what it could be this time round. A number of geopolitical and global economic factors, ranging from the war in Ukraine to the Chinese economy and an unexpected change in Indian demand, could affect the Dubai economy.

It is in the nature of black swans that you can’t identify them until they are directly overhead.

Policy-makers in the emirate will also point to the undoubted fact that debt levels have ameliorated significantly since 2009, even taking into account the leverage of government-related enterprises.

Could commercial property be the black swan?

As things stand, I doubt it. But this is a threat that needs to be headed off quickly by a new round of commercial office development if Dubai is not to become a victim of its own success.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He also acts as a consultant to the Ministry of Energy of Saudi Arabia