Top realty agency chiefs on the near-term future of commercial property at the financial center.

With two million square feet of commercial space to be delivered by third-party developers in the Dubai International Financial Centre (DIFC), serious competition between property owners is expected to ensue, leading to downward pressure on rentals.

That is the near-term prediction of two top real estate experts.

“The new space coming on in DIFC is unlikely to depress prices elsewhere in Dubai, but it will of course impact prices in the DIFC as owners try and compete to lease their units,” Charles Neil, CEO of Landmark Properties, told Emirates 24|7.

Matt Hammond, Head of Agency- Middle East and North Africa, Jones Lang LaSalle, says: “DIFC has experienced relatively low levels of vacancy to date, but the additional supply onto the DIFC market is likely to have a negative impact on vacancy rates and, therefore, rents moving forward.”

DIFC said recently approximately two million square feet of commercial office space is expected to be handed over by third-party developers in the next 18 to 24 months. In December 2010, DIFC announced a new pricing structure that would offer its tenants over 50 per cent in discounts with the rents starting from $44 or Dh160 per square feet to a maximum of $76 or Dh280 per square feet in 2011.

Excerpts from the interview:

What kind of impact will additional space in DIFC have on the commercial market across Dubai?

Neil: DIFC is unique type of free zone with quite separate rules and regulations to the rest of the UAE and operates its own “micro economy”, which is not necessarily connected to the rest of the UAE economy.

Commercial space in DIFC is not easily accessible to companies from other CBDs or Dubai in general unless they undergo a rigorous licencing process. As such the new space coming on in DIFC is unlikely to depress prices elsewhere in Dubai, but it will of course impact on prices in the DIFC as owners try and compete to lease their units. Hammond: Demand and supply dynamics shape the market in each of the free zones and in on shore areas. DIFC has experienced relatively low levels of vacancy to date but the additional supply onto the DIFC market is likely to have a negative impact on vacancy rates and, therefore, rents moving forward.

Do you expect further decline in rents across CBDs?

Neil: Yes, with approximately 15 million square feet of commercial space expected to come on to the market in 2011 and 2012 we expect commercial prices and rentals to come down further in prime areas and for Grade A buildings, and in the non-CBD areas by even more. There were some big falls last year so there is a limit that rents can come down to. Capital values will have to fall further though so as to maintain appropriate yields.

Hammond: Again, until demand and supply are in balance, there will continue to be downward pressure on rents and this situation is likely to remain predominant over the short and medium term moving forward throughout all locations in Dubai.

Do you expect a migration of companies from other CBDs to DIFC, which is well regulated?

Neil: No, because the cost of licencing and registration is higher than anywhere else in Dubai, there are more laws to comply with and DIFC are generally more restrictive on who they let in. Financial entities have to be approved by the DFSA and have to meet international standards. With commercial companies not licenced by the DFSA, these companies have to have a purpose for moving in to the DIFC, i.e. they are there to service the financial sector or the DIFC community or set up in order to take advantage of the advanced legal and judicial framework.

Hammond: Whilst rents have been discounted at DIFC, they are still significantly higher than on-shore locations in the CBD. In addition, much of the new supply within DIFC will be presented in a shell and core condition – without exception, tenants are seeking the most cost efficient rental profile together with space that offers a minimum capital expenditure scenario and that generally means the space must be fitted out. Further, moving from other CBD areas in Dubai to the DIFC will require a change in the particular structure of the company.

In terms of the appeal of DIFC versus other CBD’s within the Middle East, DIFC already has the majority of international financial and professional businesses albeit many in a representative form only. Rather than attracting new bodies, DIFC should try to appeal to these companies to expand their operations within the DIFC. In short, I do not expect a major migration of additional tenants to the DIFC due to cost and the fact many are already there.

Should DIFC work to limit supply into the market?

Neil: The buildings coming up in the DIFC are being developed by independent sub-developers to whom the DIFC sold land to at the start of the project. It would, therefore, be a commercial decision for those developers as to how they will phase in delivery of their projects. Hammond: It is likely to be very difficult to limit supply onto the market as the majority of the buildings within DIFC are already significantly advanced in the development process. Rather than being able to limit their eventual release onto the market, the authority may offer the sub-developers the ability to offer their space on-shore although this section of the market is also significantly over supplied.

Do you believe the new pricing strategy by DIFC will help it to attract more companies in 2011?

Neil: The pricing strategy will certainly help financial institutions and non-financial entities, and retail outlets to set up in the DIFC. The DIFC does command a premium over other areas of Dubai because of the nature of the businesses that operate within it and the facilities and quality it has to offer. The DIFC’s benchmarks are different, it is competing against other international financial centres, and it is primarily trying to attract financial institutions and entice them away from centres like London, Singapore and Hong Kong.

Hammond: DIFC is still an expensive option in Dubai when compared to other on-shore locations. However, lower prices will not harm the leasing strategy of the authority.