Office oversupply hangs over GCC commercial realty
Posted on 07 March 2009 with no comments from readers
London commercial property has crashed over the past year, and New York is now on the brink, but the building boom of recent years in the GCC also mean that office developers are about to face a day of reckoning.
The focus of attention is usually GCC residential property and the upcoming supply. Yet there is equal concern about the $15.7 billion worth of office developments now in progress across the oil rich region.
New research from Dubai based Proleads highlights 156 office developments now underway, with 74 to be delivered this year and 82 in 2010.
Crash coming
Given the sudden downturn in the business outlook since the oil price collapse last summer, the commercial real estate market is a crash waiting to happen, and the highest concentration of projects, worth a total of $10.6 billion, is in the UAE.
Proleads reports that the UAE has 103 office projects with 50 due for completion in 2009 and 53 the following year. It is a lot of space for a market that economists at Standard Chartered Bank reckon could slip into recession, and with the UAE Central Bank forecasting growth in the low single figures.
UAE projects range from the high-rise towers of the Business Bay in Dubai to the towers in the Dubai International Financial Centre as well as the Highfield project in Ajman and the first new office towers in Abu Dhabi.
The upcoming supply does not look so daunting in neighboring countries. Saudi Arabia, with its much larger population base, has only 21 office projects worth $2.6 billion due for delivery in 2010, and Qatar has 11 projects worth $1.3 billion within the same time frame.
Abandon site?
So what options do office developers have in this climate? Early stage projects can be postponed or abandoned. Half-built schemes present a classic dilemma: whether to write off costs so far, or run up further costs in the hope of recouping the outlay later.
The problem is that this is also the classic formula for bankruptcy in commercial property. Even the deepest pockets can be challenged by an oversupplied market which takes a long time to recover, and banks in particular are not known for their patience in these circumstances.
Indeed, the decision over whether to carry on with construction is already often with the banks. Many developers have been reliant on bank loans for construction and those loans have been withdrawn, and contractors have shut down projects because of lack of payment.
How many completions?
Only government projects, or those belonging to the wealthiest families are likely to be completed because of the global financial crisis that has cut lines of credit that developers thought secure, and has brought a liquidity squeeze to the GCC as quickly as anywhere else.
Will 156 office projects really be delivered across the GCC over the next two years? Certainly not, the only room for debate is over how many will be completed at all; and from the sight of idle cranes hanging over most sites not very many will be delivered on time.
That will restrict the supply of new property to the office market and will, ironically enough, be a benefit to landlords in supporting rental prices, although the rental market will still be challenged enough by the general business climate with oil prices so low.
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