Dubai homes lag offices in green initiatives

In the office sector, demand for Leed-certified Grade A buildings still largely outstrips supply in Dubai.

Despite its restrictive climate, the UAE is making big strides in its sustainability drive. The nation ranks among the top 10 countries to hold Leed (Leadership in Energy and Environment Design) certifications outside the United States, according to consultancy Core Savills. Meanwhile, Dubai ranks third among global cities with the highest number of green buildings (under both Leed and BREEAM).

Dubai has over 550 projects currently undertaking Leed certification. The market has seen a surge in certificate completions over the past five years, with 54 per cent of buildings being gold rated.

Government buildings are leading the trend with the Dubai Chamber of Commerce, Dewa buildings and many district cooling plants either certified or in the process of doing so. In the private sector, manufacturing and logistics operators form the majority of Leed-certified occupiers. Dubai also has the highest ratio of projects being certified with 81 per cent of in-progress projects across global cities.

However, Dubai's residential market is lagging behind the commercial market in adopting green initiatives due to factors largely favoured by investors and end-users.

There is a noticeable quality difference in build and finishing between older and new developments in Dubai's residential market.

David Godchaux, CEO of Core Savills, says: "This disparity represents a pocket of opportunity for landlords to upgrade their assets to higher standards by investing in refurbishments over and above their initial acquisition cost. However, there is a ceiling to how much a unit can be upgraded within a given location."

It could risk being priced out of its submarket. Excessive upgrades will not be valued by the market (tenants or buyers) in a similar degree; it will eventually reach a point where the more one spends on upgrading a unit, the less return (rent or price) it will incur, says a Core report.

For example, a large villa in The Springs when upgraded to a certain level competes well with a non-upgraded villa in The Meadows. Any further upgrades to the same unit will price it out of its submarket as it would then compete with an upgraded villa in The Meadows.

This is why landlords tend to upgrade basic quality and finishes first (kitchen, bathroom, floorings) as these factors are better valued by tenants and investors; additional green upgrades often push a unit's price out of its original market, making it very difficult to sell or lease.

Therefore, the Dubai residential market is unlikely to witness a significant shift towards green initiatives. Godchaux adds: "Until a large proportion of the market achieves these upgrades and reaches a higher level of uniform build and finish quality, we do not expect owners to replace basic upgrades with more sophisticated building improvements such as energy efficiency and sustainability."

Meanwhile, in the office sector, demand for Leed-certified Grade A buildings still largely outstrips supply. However, developers are working to address this gap.

Leed-certified stock only represents a fraction in a market where premium supply is already limited. Some firms are innovating by opting for Leed commercial interiors within non-certified office buildings - for example; Schlumberger, Bloomberg and Deutsche Bank. However, with the new supply pipeline of One Central, D3 and ICD Brookfield, this gap is being addressed.

According to the Core report, "despite buildings being built as per Leed guidelines, headline rents are still at par with other non-certified Grade A stock. Firstly, this can be explained by the fact that new developments are launching their initial phases at an attractive entry price point to achieve critical mass. Secondly, these green developments still compete with established and centrally located non-certified Grade A stock. While global corporate occupiers value sustainability, a larger section of demand is yet to quantify environmental and operational benefits over rental costs."

With Leed certification expected to become a norm rather than a feature in the Dubai office market, there will soon be downward pressure on rents across other Grade A stock within the vicinity.

- deepthi@khaleejtimes.com