Sowwah Island cannot avoid the cut-throat rental market

Sowwah Island is entering a cut-throat numbers game as office landlords in Abu Dhabi try to hold the line on falling rental rates.

Rates for Grade A office space in the capital have dropped 51 per cent since 2008, from Dh3,800 (US$1,034) a square metre to Dh1,850 at the end of the second quarter, according to Jones Lang LaSalle, the property consultancy.

Asking rents on Sowwah remain at more than Dh2,000 a sq metre, agents say, at the top end of the scale but competitive with the other Grade A buildings in Abu Dhabi.

But tenants interested in taking large amounts of space are demanding deals, with rates going as low as Dh1,400 a sq metre, even in top-quality buildings. Developers seeking rents above Dh2,000 "are at risk of being left with empty floors, in a market where prices are set to soften further", the property investment company Cluttons noted in a recent report.

Companies willing to commit to large space for a lengthy lease can dictate better terms.

The French engineering company Technip paid Dh1,250 a sq metre earlier this year when it leased an entire building in the Danet complex on the capital's Airport Road for five years - taking 20,300 sq metres of space.

But such big-spending companies are a challenge to find. "Anticipated growth in occupier demand has so far failed to materialise," in large part because of the continued global economic uncertainty, CB Richard Ellis (CBRE), the property company, noted in its recent report. "Landlords will have to remain competitive," says Matthew Green, the head of research and consultancy for CBRE.

Lower quality office buildings are baring the brunt of the competition, agents says. Rents are falling closer to Dh1,000 a sq metre.

Landlords on Sowwah and in the other new buildings are trying to maintain their rental rates, but offering tenants other concessionssuch as periods when no rent is charged, different payment schemes and assistance in customising the space for the tenant.

"There is a lot of oversupply already factored into rents," says David Dudley, the head of the Abu Dhabi office for Jones Lang LaSalle. "Grade A will not get too much lower."

More than 1.2 million sq metres of space is scheduled to be handed over by the end of 2013, a 50 per cent increase over current levels. Vacancy rates stand at 11.5 per cent in the capital, but that is expected to increase as more towers come on line, Jones Lang LaSalle says.

More than 45 per cent of office space is empty in Dubai. But falling rents will make Abu Dhabi more competitive with Dubai, agents say.

"As rents come more in line with Dubai rents, UAE occupiers will increase their allocation to Abu Dhabi," Mr Dudley says.

kbrass@thenational.ae