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Dubai: The City is Built Upon it’s Commerce
Unitas Consultancy
This document is provided by Unitas Consultancy solely for the use by its clients. No part of it may be circulated, quoted, or reproduced for distribu@on outside the organiza@on without prior wriDen approval.
STRICTLY CONFIDENTIAL
Office No. 103, The Palladium, Plot No. C3, Jumeriah Lake Towers, Dubai, UAE, [email protected]
Q1 2013
Execu@ve Summary
• Commercial property price have empirically tended to follow residen@al real estate process with a lag in developed markets, implying that the later has been a leading indicator for the former. The surge in prices in Dubai’s residen@al market in 2012 insinuates that a hike in the office segment is expected in the following year. A price analysis indicates that similar trends are star@ng to be witnessed in the Jumeirah Lake Towers and the Business Bay community
• The demand drivers for office space has been white collared workers dominated by the professional and financial service sectors. Dubai’s steady rise in GDP from 2010 to 2012 has been the crux of the resurgence of the commercial property market.
• Dubai’s race to win the World Expo Bid for 2020, with its iconic design and massive infrastructure is expected to s@mulate downstream demand for projects, as well as generate a mul@plier effect created in upstream ancillary industries. The venue of the World Expo will be in Dubai World Central district, the center stage of which is the Al Maktoum Interna@onal airport, will lead to the crea@on of a worldwide logis@cs hub or Aerotropolis, as Dubai re-‐imagines the concept of a modern city.
• Another behemoth project is the announcement of the new Muhammad Bin Rashid City spawning an area of over one billion square feet. Both these mammoth projects will spark an infrastructure frenzy similar to the one witnessed in 2003-‐2008, thus ac@ng like a key catalyst, which is a cri@cal demand driver.
• The development of Free Zones have been pivotal in harbouring the influx of new businesses in the region, as reflected in the superior growth rates of business forma@on in these areas compared to on-‐shore Dubai. DMCC registered companies clocked an increase of 50% in the last year, compared to DED company growth rate of 15%.
Table of Contents
A) Follower the Leader: The Link Between Residen@al and Commercial Prices
B) Demand Drivers for the Commercial Property Market
C) The Construc@on Boom (2013-‐2021)
D) The Emergence of the Free Zone
E) The Outlook For 2013
Follow the Leader …
Life can only be understood backwards; but it must be lived forwards.”― Søren Kierkegaard
The Link Between Residen@al and Commercial Real Estate
A 12 year graphical representa@on of commercial and residen@al property price movements in the US real estate markets illustrates that residen@al price movements appear to be a leading indicator of commercial price fluctua@ons. The chart indicates that this intertwined rela@onship manifests itself with a lag period of between 6-‐9 months.
In the UK real estate markets, a similar symbio@c rela@onship is exhibited across a similar @me frame, lending credence to the hypothesis that house price rises are a strong predictor for office price growth
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Commerical
Residen@al
Jumeirah Lake Towers
Jumeirah Lake Towers and Business Bay Following the Same Trajectory ...
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Residen@al
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Prices Rise lag by 12 months Prices Rise lag by 12 months
Dubai’s residen@al and commercial real estate markets exhibits a similar rela@onship to that in the US and UK. In 2011, residen@al prices in Jumeirah Lake Towers and Business Bay reached an inflec@on point followed a gradual price recovery, as exhibited by the graphs above. In both cases, commercial prices in these areas underwent a gradual price increase commencing in the second half of 2012, as business ac@vity started to pick up across the city. In both cases, a lag period of approximately 12 months was witnessed between the inflec@on points of residen@al and commercial price movements. Given the con@nued price resurgence in the residen@al real estate segment, we opine that the upward trajectory of prices for the office space is likely to con@nue.
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Rental Trends Follow Similar PaDerns …
A similar lag effect has also been witnessed in the lease rates between residen@al and commercial real estate. In 2012, rental rates in the residen@al space registered a 17% increase, whereas commercial rental rates were s@ll in the stage of boDoming out given the overhang in supply in this space. A year later, the landscape indicates that prime office rental rates have already started witnessing a rise, with the overall office market expected to follow suit.
Source: Asteco
The Demand Drivers’ for the Office Market
“If you're going to be thinking anything, you might as well think big” – Donald Trump
Table of Contents
A) Follower the Leader: The Link Between Residen@al and Commercial Prices
B) Demand Drivers for the Commercial Property Market
C) The Construc@on Boom (2013-‐2021)
D) The Emergence of the Free Zone
E) Summary
The Demand Drivers’ for the Office Market
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35.0% Agriculture, Live Stock, and
Fishing
Mining and Quarrying
Manufacturing
Electricity
: Gas and
Water
Construc@o
n
Who
le Sale, Retail Trade
, and
Re
paring Services
Restaurants and Hotels
Transports, Storage, and
Co
mmun
ica@
ons
Real Estae and
Business
Service
Social and
Personal Services
Financial Corpo
ra@o
ns Sector
Governm
ent S
ervices Sector
Dom
es@c Services of Hou
se
Holds
Less: Impu
ted Ba
nk Service
2006 2007 2008 2009 2010 2011
Sector-‐Wise Break Down of % ContribuPon of Dubai’s GDP (2006-‐2011)
The demand drivers for office space is primarily derived from employment within certain sectors of the economy. According to Jones Lang LaSalle, in Dubai 69% of current office demand is coming from the Financial Sector and Professional Services. Other areas such as Health care, Telecoms, legal, and Engineering make-‐up the remaining 30%. A sector-‐wise break down of Dubai’s GDP indicates that construc@on, real estate and logis@cs have started to recover from the ‘crash’ in 2008, and are expected to account for a larger share in the overall economy in the coming years, especially as some of the mega scale projects (World Central, MBRC etc) come on stream. We expect this to be a primary catalyst for office demand.
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Dubai’s GDP (2010-‐2012)
The Dubai’s Steady Increase in GDP S@mulates Office Demand
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Jumeriah Lake Towers Business Bay / Downtown Dubai
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Number of Office Transac@ons (2010-‐2012)
The YOY growth of Dubai’s economy from 2010-‐2012 has been the pivotal factor in reviving the commercial market. This revival has been greatly accelerated due to exogenous factors, such as the Arab Spring. Dubai stands out like a ‘safe haven’ within this vola@le region, making it an aDrac@ve place to live and work. This can be reflected in the increase of demand for office space from 2011 to 2012. A granular analysis indicates the number of office transac@ons in JLT have increased by 30% and Business Bay by more than 100%.
A recent survey conducted by the Dubai Economic Department showed a posi@ve growth in companies’ overall performance in the beginning of 2013. There was an increase of 2.7 points in the Composite Business Confidence Index, along with 27% of companies expec@ng to hire new employees. This expansion of human capital in exis@ng businesses is a strong indicator for expected increase in demand for the office space
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Occupancy Rates on the Rise !
Awer four years of steadily increasing vacancy rates, largely dominated by Keynes’ “Dark Forces of Time and Ignorance” 2012 finally saw an inflec@on point being reached, as demand finally started to outstrip supply. Even though supply overhang issues remain, we opine that the vacancy rates are projected to decline steadily in 2013, as economic growth rates con@nue to accelerate. Vacancy rates are expected to fall below 20% by the start of 2014 especially in the free zone and prime office areas, as the rate of small business forma@on and MNC expansion gathers momentum. The recommencement of work on the Dubai Trade Centre district is a clear indicator of that as occupancy rates in this area are as high as 85%, and expected to cross 90% by next year.
Office Occupancy (2008-‐2012) Office Supply (2008-‐2012)
Table of Contents
A) Follower the Leader: The Link Between Residen@al and Commercial Prices
B) Demand Drivers for the Commercial Property Market
C) The Construc@on Boom (2013-‐2021)
D) The Emergence of Free Zones
E) Summary
The Construc@on Boom (2013 – 2021)
“If you build it, they will come” – Teddy Roosevelt
Hospitality
Construc@on
Demand
MBRC DWC
Construc@on Boom: Redux
Hotels Restaurants
Travel Agencies Clinics
Event Managements Serviced Apartments
Brokerage firms Maintenance
Property Management
Projects
Contrac@ng Engineering Architects
S@muli
Dubai’s investment in DWC and MBRC are expected to create a fiscal mul@plier effect as expenditure in developmental and infrastructure projects ratchets higher (currently 16% of overall GDP; expected to surpass 20% by 2014). This “Big Push” is expected to s@mulate demand drivers, as industries in real estate, tourism and logis@cs witness an influx of capital and human resources, similar to the one witnessed in 2005-‐2008. Over @me, we expect the trickle down effect to simulate more conven@onal sectors such as finance and professional services, as Dubai con@nues its march towards a @er one city.
Real Estate
Transporta@on Storage
Freight Forwarding Shipping
Logis@cs
Demand Drivers
Direct Impact
Trickle Down
GDP
FDI
Investmen
t
Government of Dubai
The Construc@on Sector will be the Focal Demand Driver for Offices …
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Construc@on
The revitaliza@on of Dubai World Central for the World Expo 2020 and the crea@on of the Muhammad Bin Rashid City will be the heart of the growth of the construc@on sector in the coming decade. These massive projects are expected to lead to an influx of white collared workers (i.e. architects, contractors, and engineers) to Dubai. The Government has allocated a budget of 4 billion USD for developing the infrastructure of the World Expo 2020 alone, crea@ng an an@cipated 280,000 jobs from 2013-‐2021. Moreover, the commencement of passenger flights from the new Al-‐Maktoum Interna@onal Airport from October 2013 will help revive the surrounding infrastructure, genera@ng a mul@plier effect in upstream secondary industries. The main beneficiaries of these projects will be the Real Estate, Logis@cs, and Tourism sectors, thus crea@ng a windfall of demand for both prime and city wide office space.
Contribu
@on of GDP
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Real Estate and Business Service
The Real Estate and Business Service Sector shares a symbio@c rela@onship with the construc@on sector. The incursion of new supply expected in the Mohammad Bin Zayed Road Corridor, will boost the Real estate sector. New property brokerage, management, and maintenance companies will be formed along with the growth of exis@ng companies, catapul@ng the sector towards an upward trajectory. The highest increase in DED licenses from 2011 to 2012 was in professional licenses, re-‐affirming the growth of SME’s.
Suppor@ng Infrastructure will Grow During the Construc@on Boom …
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Transports, Storage, and Communica@ons The crea@on of the Logis@cs City by Dubai elucidates the pivotal role this industry will have in the future. In order to manage, coordinate, and support Dubai’s construc@on boom the development of this sector is expected to accelerate. We can expect an increase in hiring of mid-‐level managers and support staff from exis@ng companies in order to keep up with Dubai’s growth trajectory. This will likely spark further interest of mul@-‐na@onal companies to set-‐up base in Dubai.
Contribu
@on of GDP
Contribu
@on of GDP
Table of Contents
A) Follower the Leader: The Link Between Residen@al and Commercial Prices
B) Demand Drivers for the Commercial Property Market
C) The Construc@on Boom (2013-‐2021)
D) The Emergence of Free Zones
E) Summary
The Emergence of Free-‐Zones…
“No price is too high to pay for the privilege of owning yourself" -‐ Friedrich Nietzsche
The Emergence of Free-‐Zones
Free Zone 2012 % of total
DMCC 5720 26%
DSO 994 4%
JAFZA 6812 31%
TECOM 4500 20%
DAFZA 1600 7%
DUCAMZ 1179 5%
Dubai Health Care City 180 1%
DIFC 912 4%
Dubai Techno Park 107 0%
Dubai Gold and Diamond Park 158 1%
Dubai Humanitarian City 57 0%
Total 22,219 100%
In 1985, Dubai introduced the concept of a Free Zone market by the crea@on of JAFZA (Jebal Ali Free Zone Area), which was the first @me companies had 100% ownership of their business without a sponsor. As Dubai becomes a global hub, expatriates businesses (both mul@na@onal and SMEs) are expected to incorporate and expand in these zones, given the plethora of choices that they have (there are 22 Free Zone Areas in Dubai, all which are inherently unique not only by the loca@on but also by the virtue of facili@es tailored to the types of business ac@vi@es). This is reflected in the growth rate of companies registered in 2012; DED 15% and DMCC 55%
Free Zones now account for 20 % of the total licenses issued in Dubai, but contribute to 33% of GDP, reflec@ng the importance that these zones have for the overall development of the city.
Marginal Demand for Offices @lted Towards Free Zones
Demand
Non-‐Free Zones
Free Zones
Supply
Free Zones
Non-‐Free
Zones Marginal Supply for Offices @lted Tow
ards Non-‐ Free Zones
Supply Dynamics Indicate Looming Scarcity in Free Zone Areas.…
Company forma@ons in Free Zones have grown at a higher rate compared to on-‐shore Dubai in the last few years, genera@ng demand for offices in these areas. Furthermore, a supply analysis indicates that the majority of new supply expected in Dubai is expected to be in non-‐free zone areas, predominantly Business Bay.
Supply metrics indicate that there are 5823 Office units under construc@on in Business Bay compared to 808 in JLT. The low levels of new supply introduced in the Free Zone markets coupled with their superior growth rate will be the catalyst in driving prices up in these areas.
Area Units Under-‐ConstrucPon
Business Bay 5,823
Area Units Under-‐ConstrucPon
JLT 808
% Growth in Companies
DED 15
Free Zone % Growth in Companies
DMCC 55
DAFZA 14
DSO 34
Free Zones Experience a Greater Price Rise
In 2012 ,DED registered companies witnessed an increase of 15% whilst DMCC company forma@on grew by 36%, thus genera@ng a greater demand for office space in the DMCC area. This is reflected in the price movements of JLT office space, when compared to free hold office demand in Business Bay (non free zone). Prices in the former have registered a growth of 15% (trough to peak), whereas in the laDer, prices are s@ll boDoming out (reflec@ng the supply overhang and infrastructure issues that con@nue to linger in this area).
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2010 2011 2012
JLT Business Bay
Price / AED SQFT Index (2010 – 2012)
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25%
30%
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DED JLT
2011
2012
% Δ of Companies Registered
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DMCC Fastest Growing Free Zone
Free Zone 2011 2012 % Δ
DMCC 3687 5720 +55
DSO 740 994 +34
DAFZA 1399 1600 +14
JAFZA 6362 6918 +9.5
DIFC 848 912 +8
On-‐Shore 2011 2012 % Δ
DED 113,461 130,349 +15
The growth in Free Zones clearly indicates a shiw in the outlook of developed economies about the Middle East as a lucra@ve market. Gautam SashiDal, Chief Opera@ng Officer, DMCC, said, "Over 94% of organisa@ons that chose to operate from the JLT Free Zone in 2012 are new to Dubai indica@ng a substan@al foreign direct investment contribu@on to the Emirate”. Dubai maintained its posi@on as the top Middle Eastern investment des@na@on for the third consecu@ve year, accoun@ng for 30 per cent of the direct foreign investment in the Middle East during the first nine months of the current year.
Above all Free Zones DMCC has experienced the greatest percentage of growth in 2012; a five-‐fold increase over the last 5 years. Whilst growth rates in this area have been stellar, other free zones have registered impressive growth rates as well, when compared to DED registered companies, affirming the hypothesis that free zones will con@nue to be a magnet for business forma@on in the emirate in the coming years.
Number of Licenses Registered
2010 2011 2012 2013 2014
Units (S) 5515 6420 8784 9984 9984
Licenses (D) 2687 3683 5720 7200 9000
Occupancy Rate 55 55 60 80 85
An analysis in the JLT area, indicates that by 2014 the occupancy levels are expected to touch 85% by 2014, given the rates at which business forma@on is occurring in the free zone. This is evidenced by the fact that in the first quarter of 2013 alone, 580 new companies were added to the roster of DMCC registered companies, indica@ng the market preference for DMCC as a mul@ purpose free zone, combined with its strategic loca@on on Sheikh Zayed Road and its choice of grade A office buildings.
We can already see a resurgence in prices in JLT in 2012. Its mix-‐used ac@vity status makes it aDrac@ve to a plethora of industries, encompassing professional services (which account for 30% of office demand). As business forma@on growth rates have increased, so has the demand for office space, both in terms of cash as well as mortgage transac@ons.
Price/Aed Sqw Index (2010-‐2012)
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105
2010 2011 2012
JLT
Forecast (2013-‐2014)
JLT to be Prime Beneficiary of the Rise of Commercial Prices …
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2009 2010 2011 2012
Mortgage Transac@ons
Overall Transac@ons
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2009 2010 2011 2012
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Table of Contents
A) Follower the Leader: The Link Between Residen@al and Commercial Prices
B) Demand Drivers for the Commercial Property Market
C) The Construc@on Boom (2013-‐2021)
D) The Emergence of Free Zones
E) Summary
Summary
“Most of people talk, we do things. They plan, we achieve. They hesitate, we move ahead. We are living proof that when human beings have the courage and commitment to transform a dream into reality, there is nothing that can stop them. Dubai is a living example of that.” -‐ HH General Sheikh Mohammed Bin Rashid Al Maktoum
Conclusions
Follow the Leader Demand Drivers for Offices
The Construc@on Boom Emergence of Free Zones
Keynes’ “dark forces of 5me and ignorance” are receding, paving the way for a clearer outlook in the office real estate market-‐ sunny days ahead!
• Commercial property price have empirically tended to follow residen@al real estate process with a lag in developed markets by 6-‐9 months
• Dubai’s residen@al and commercial real estate markets exhibits a similar rela@onship to that in the US and UK. In 2011, residen@al prices in Jumeirah Lake Towers and Business Bay reached an inflec@on point followed a gradual price recovery
• A similar lag effect has also been witnessed in the lease rates between residen@al and commercial real estate
• A sector-‐wise break down of Dubai’s GDP indicates that construc@on, real estate and logis@cs have started to recover from the ‘crash’ in 2008, and will be the primary catalyst for office demand
• Vacancy rates are expected to fall below 20% by the start of 2014 especially in the free zone and prime office areas, as the rate of small business forma@on and MNC expansion gathers momentum
• A granular analysis indicates the number of office transac@ons in JLT have increased by 30% and Business Bay by more than 100%.
• The growth in Free Zones clearly indicates a shiw in the outlook of developed economies about the Middle East as a lucra@ve market. They account for 20 % of the total licenses issued in Dubai, but contribute to 33% of GDP
• Above all Free Zones DMCC has experienced the greatest percentage of growth in 2012; a five-‐fold increase over the last 5 years
• An analysis in the JLT area, indicates that by 2014 the occupancy levels are expected to touch 85% by 2014, given the rates at which business forma@on is occurring in the free zone
The revitaliza5on of Dubai World Central for the World Expo 2020 and the crea5on of the Muhammad Bin Rashid City will be the heart of the growth of the construc5on sector in the coming decade.
• Dubai’s investment in DWC and MBRC are expected to create a fiscal mul@plier effect as expenditure in developmental and infrastructure projects ratchets higher (currently 16% of overall GDP; expected to surpass 20% by 2014)
• The main beneficiaries of these projects will be the Real Estate, Logis@cs, and Tourism sectors, thus crea@ng a windfall of demand for both prime and city wide office space.
• The commencement of passenger flights from the new Al-‐Maktoum Interna@onal Airport from October 2013 will help revive the surrounding infrastructure, genera@ng a mul@plier effect in upstream secondary industries
To Summarize
Purpose
To Manage, Direct, and Create wealth for the Clients
Philosophy
• Efficient capital alloca@on
• Rigorous analysis
• Timely execu@on
Strategy
Emphasize role of diversifica@on by leveraging exper@se of capital across Dubai in a conserva@ve yet opportuni@es manor
Values • No conflict of interest
• Client’s interests come first
• Transparency i s the key hallmark
Our Aspira@on and MoDo
“No barrier can withstand the strength of purpose” HH General Sheikh Mohammed Bin Rashid Al Maktoum The Ruler of Dubai and Prime Minister of UAE