According to a study by CB Richard Ellis, prime office space in Dubai costs as much as $943.67 per sq metre per year, making it more expensive than New York and Singapore, and there seems to be no let up in sight. In addition, reports released in July suggest that a 25% rent hike in Dubai’s free zones is imminent.
The UAE’s well-publicised inflation problem is perpetuating the increase. Also, record oil prices have doubly encouraged price hikes – first, by increasing the spending power of individuals and governments in the region, and second, by jacking up the prices on most goods – from petrol to produce – due to increased oil-related transportation or production costs.
In early 2006, Standard Chartered estimated inflation in the country was 6.5% for 2005, and predicted a fall to 5% for 2006. The UAE central bank produced similar numbers, saying that this is in line with regional inflation levels, which they estimate at 6-7%. Other analysts, however, have said UAE inflation levels could be as high as 15%.
Besides inflation, the other problem is the chronic shortage of business space in Dubai. At the moment, businesses are scrapping for the small available space while they wait for key business developments like the $54bn Business Bay development or the 800-tower Commercial City, neither of which will be ready before 2007.
The housing market also is cramped, partly from shortages, but also from a lack of middle-class housing, which the big developers have yet to produce in large numbers. There are between 150,000 and 250,000 houses due on the market in the coming years, but most of these are focusing on the luxury end – such as villas on the offshore Palm Islands or tower apartments in the Burj Dubai.
With costs for non-CEOs pressuring employers, some are re-thinking their position in Dubai. Those that were originally attracted to the city for its money-saving benefits – no taxes and good infrastructure – or for its convenience as a regional hub have already started to leave.
Media firms have already confirmed they are in the process of moving out of Dubai, while well-known international companies have privately admitted that if costs do not drop soon, they may reassess their position.
Some companies are looking elsewhere in the UAE, and they have found some solace in the northern emirates free zones, which offer lower prices and often more service.
Consequently, many zones have seen their business increase exponentially in the last few years. The Sharjah Airport International Free (SAIF) Zone, formed in 1995 to service the airline industry, has grown from 89 companies in 2000 to 1900 in 2005, while Ras al-Khaimah Free Trade Zone (RAKFTZ), located in the northern-most emirate, has watched its customers climb from 30 companies in 2000 to 1500 in 2005.
In 2004, Ajman Free Zone finished a Dh50m ($13.61m) complex to add room for an additional 500 companies, and is now building a 16-floor office tower, scheduled to be completed by 2007.
Lower costs are a major pull. Compared with the Jebel Ali Free Zone (JAFZ), Dubai’s largest free zone, office space per square metre in SAIF and RAKFTZ is 42% and 50% cheaper, respectively. According to Morison Menon, a consulting and auditing firm in Dubai, plots of land in JAFZ cost $5.45 per sq metre, while it costs $2.73 per sq metre in SAIF Zone, $3.27 per sq metre in RAKFTZ and $2.73 per sq metre in Ajman Free Zone.
“There is a lot of spill-over from Dubai that comes here and says, ‘We don’t want to pay the price of Dubai it is too expensive, too congested’,” said Oussama el-Omari, CEO of RAKFTZ.
To strengthen their position, and to keep their current clients happy, several free zones in the northern emirates have tried to limit increases in rent and services despite the inflationary pressures.
“With costs literally rising three to four times in other emirates, we have maintained equilibrium to ensure our clients are protected from the situation of superfluous inflation,” said Sheikh Mohammed bin Abdullah al-Nuaimi, director general of Ajman Free Zone.
But some insist that, even with price hikes, Dubai remains the first choice of many companies. “Interest levels are as good as ever. Dubai is still the preferred location,” said Pushpakaran Parambath, associate partner at Morison Menon.
Although companies continue to come to Dubai for the zero taxes and the ease of setting up a business, the number one attraction is the brand value – there is an international prestige with having an office in Dubai – even if it costs 30-40% more. The other emirates, according to Parambath, do not have that recognition yet.
The fact is that some companies will always be better suited for Dubai, while others might benefit from offerings in the northern emirates. Even if the high prices are driving out some companies, there are plenty more waiting to take their place.
“Definitely there is enough interest [for all the zones],” assures Parambath, “We get an average of 2-3 inquiries per day from companies looking to set up in the UAE.”
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