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News Release

UAE

Many owners face shortfall between operating costs and service charges in the UAE office market

JLL MENA, the world's leading real estate investment and advisory firm, has released a new report titled


​​​​JLL MENA, the world's leading real estate investment and advisory firm, has released a new report titled, ‘Managing for Value – Operating Costs and Service Charges in the UAE Office Market’. In summary, it concludes that operating costs and service charges are becoming increasingly critical issues for both occupiers and owners. 

Commenting on the report, Graham Howat, Head of Property and Asset Management at JLL MENA​ said: “Unlike more mature markets, there is little correlation between the actual costs of operating buildings and the amount the owner can recover in service charges in the Dubai market. As a result, many owners are experiencing a shortfall between the level of costs incurred and their ability to recover these costs from occupiers. As the market matures, we expect to see the adoption of more transparent measures of operating costs and service charge arrangements.
 
The future looks promising with the continued move to a net rental model ensuring a greater level of disclosure of operating costs. Greater transparency will also result in closer partnership between building owners and occupiers as it will help reduce disputes and enhance the long term value of the asset. Widespread adoption of global best practices may take time as it’s a relatively new real estate market, but the UAE is definitely moving in the right direction.”
 
Key findings:
 
  • Occupiers are paying increased attention to service charges as they seek to achieve savings on their total occupancy costs in the UAE as in other markets globally.

  • Owners are paying increased attention to operating costs as they seek to maximise returns from their assets in the face of depressed market conditions.

  • Global best practise suggests that service charges should reflect actual operating costs. In Dubai, service charges are driven by market forces rather than true operating costs. Often these are below actual operating costs, leaving owners facing an operational deficit; and in a few instances higher than actual, leaving tenants paying for a level of service that they do not receive.

  • The majority of Grade A office buildings in Dubai are currently operated on a net model (net rent plus service charges), while many secondary buildings are still utilising a gross rental basis (a single charge including rent and service charges).

  • A major attraction of the net rental model is that it triggers a sharper focus on operating costs. This provides greater transparency that   can   assist   occupiers in reducing their total occupancy costs. Improved transparency is a win : win situation, offering benefits to both occupiers and building owners.

  • There is a significant variation in the level of operating costs and service charges among Grade A buildings in the Dubai market, reflecting different calculation methods and a wide range in the quality of services being offered.

  • The average service charge within Grade A office buildings in Dubai is around AED 33 per sq ft per annum. This compares relatively favourably with service charges in Grade A buildings in other leading global financial centres such as New York (AED 50), London (AED 59), Hong Kong (AED 68) and Tokyo (AED 90).

  • Given that office rents in Dubai are much lower than in other major global cities, the ratio of service charges to net rent (25% in Dubai) is above that in New York (24%), London (11%), Hong Kong (13%) and Tokyo (18%).

  • There is some difference between service charges for Grade A office buildings between Dubai and Abu Dhabi, with average in Dubai being 7–10% higher.

  • Cost effective management and transparent service charge arrangements are attractive to tenants, and provide landlords with an excellent opportunity to differentiate their building over others.

  • Further improvements in the transparency of how operating costs are calculated and recouped from tenants in the form of service charges are likely as office markets in the UAE mature over the next few years. This trend is to be welcomed by both occupiers and building owners.

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