Dubai has been the Middle East’s business hub and an attractive destination for international investors since its doors were opened to foreign entrepreneurs. Thanks to its free-market economy and developed infrastructure, the emirate witnessed a continuous inflow of investors who chose to benefit from its appealing operating conditions and promising growth.
Although the high operating costs — including office rents and wages — did not keep new businesses from opening in Dubai, they were a concern for entrepreneurs who struggled in some cases to find a suitable office with affordable rent, or talented employees expecting reasonable salaries. With the international financial crisis hitting the region, these costs have now come down, making it less expensive for new entrepreneurs to settle in the emirate.
Office space
When starting a business in Dubai, finding a suitable place for office space is essential since it greatly affects the company’s customer base and operations. In the last few years, one of the main problems that new companies faced was the shortage of office space, since demand was on a steady increase while supply failed to keep pace.
“Definitely rents were very high before [the crisis began]. They were a huge component in the cost of a business, and one of the major factors when determining where to have your office space,” explains Camilla D’Abdo, general manager of D’pr/D’event.
The freehold areas witnessed a greater increase in rents mainly due to their attractiveness and strategic locations. Rose Marie Kilzi, leasing director for Great Properties, says “the rates are usually a bit more expensive [in the free zone] because the business owner is not required to have a local sponsor in order to operate the business. While this is a great incentive, it is a bit more expensive for business owners, especially when market prices — whether in the free zone or outside — are so expensive.” Kilzi also notes that in the last couple of years, rents doubled, while some locations “even saw hikes of about three times the original price.”
With the financial crisis in full swing, companies have begun downsizing or even closing down, while at the same time the supply of new offices continues to increase. These two effects have forced office rents to drop, making it less expensive for new businesses to settle in Dubai. Landmark Advisory, a real estate consultancy, announced that prices of commercial real estate in Dubai have fallen by almost 30 percent already and they are expected to reconcile at 35 to 40 percent below their peak during the third quarter of 2008. Additionally, the company reported that commercial rents are expected to drop by 30 to 35 percent.
The ball is currently in the tenant’s court, hence businesses are capable of finding offices in Dubai’s prime locations with affordable rents. Hala Abou Nader Kassis, owner of Agate Engineering Consultants, says “the landlords or the sales representatives who still have our application are calling us to offer the chance to rent a space that we applied for and could not rent because of the high rate. Currently we expect to move from our location to a better one, with wider space and a better price too.”
Kilzi echoes Kassis, explaining that, “we were almost never able to find office space available on Seikh Zayed Road. Only this week, we have received requests from owners to lease out about 10 [different offices] there.”
Wages
Before companies started to lay-off their staff and freeze their hiring strategies, high wages in Dubai were making it problematic for new businesses with limited capital to open. One of the reasons for the wage hike was the expensive accommodation for which employers had to compensate. Furthermore, Dr. Uwe Forgber, director of Conject Dubai, a leading provider of management software for the real estate and construction industry, says “Dubai is a busy [human resources] market with people who are ready to change jobs just for some more percent of salary. This makes choosing the right people difficult as you never know if they are money driven or really interested in what the company is doing.”
It was also easier for large companies who started their businesses or opened their branch more than five years ago, since prices of residential properties were still affordable, which induced them to buy property to accommodate employees at reasonable prices. Davinder Reo, co-founder of Duplays, a full-service sports portal, opened his business in March 2008. “We came at a time where housing was so expensive, it was unaffordable for us to buy a three bedroom apartment to accommodate three people.”
Similarly to rents, wages are also coming down since people who are in need of a job are settling for less in fear of being rejected or remaining unemployed. Employers say wages have decreased up to 25 percent, making it easier for new businesses to attract talented employees. Eric Raes, general manager of Makateb holding, notes that “it was always hard to find talented [employees] …nowadays, new businesses and established ones will find the process of hiring people easier as top talents are now willing to negotiate and settle for a lower salary range. However, these lower wages should be accompanied with a reasonable package that allows the candidate non-monetary benefits like training programs and personality/skills development sessions.”
Bureaucracy
New entrepreneurs also have to decide whether to settle in one of the free zones or outside. One of the main differences lies in the sponsorship system, which is applicable to companies setting-up outside the designated free zones. The sponsor must be a UAE national and be at least 51 percent owner of the company. Moreover, the sponsor will require a fee and/or a percentage of the profit. Additionally, outside the free zone area, an office space and a rental contract should also be arranged prior to applying for a license.
Subsequently, a license should be applied for at the Dubai Economic Department (DED) — unless indicated otherwise in exceptional cases — for which different rules are set for different types of businesses. Three types of licenses exist: commercial licenses, professional licenses and industrial licenses.
Different investors had different experiences in setting up their businesses. While some considered it easy, others struggled.
“Getting a license is a real challenge, it took us about three months,” says Reo. He used the help of the local sponsor who guided them through the procedure. Forgber says “setting up a company was more difficult than advertised by the Tecom Free Zone. But all-in-all the people were and are really helpful and friendly. We finally managed to found the company after overcoming some obstacles.”
Others found the process easy and straightforward. D’Abdo says “the time for getting a license can range, but it is not going to take a couple of months. Getting a license… has never been a difficult task and we have not faced any obstacles. It is very straightforward.”
It is much harder for investors who are managing their paperwork themselves without guidance or past experience. This explains the popularity of business advisors who help with the process. DED is currently trying to facilitate the licensing procedure by making most of its services available online, meaning investors can perform most of the process at home. “Wherever possible, we are also working with other government departments that enable investors to set up businesses with more ease. If all the paperwork is in place, it is only a matter of hours before any investor can get a business license and roll out the enterprise,” asserts Mohammed Shael, chief business registration and licensing officer at the DED.
More importantly, in late 2007 DED launched nine e-services on its website, “which are specifically created to boost efficiency of operation and enhance productivity,” claims Shael. These e-services are to help potential entrepreneurs find information about starting up new businesses in Dubai. The service is available in both Arabic and English.
New businesses
Despite the challenging conditions the global economy is currently facing, it seems new entrepreneurs have not shied away from Dubai and still consider it an attractive investment destination. DED announced that 3,503 licenses were issued in the fourth quarter of 2008, up by 3.3 percent compared to the same period in 2007. Furthermore, 429 new licenses were given out during the first two weeks of 2009, in addition to 50 Intilaq licenses to UAE nationals enabling them to set up home-based businesses. Eighty percent of the new licenses were trade-focused commercial licenses, while professional licenses made up just under 20 percent, leaving the rest for tourism and industry.
Anil Mampilly, business development manager at EMN Chartered, attributes the increase of licenses to the fact that many companies are relocating to Dubai, finding it less expensive than other countries. “We have branches in different countries and we are currently receiving calls in our UK and Russia offices from people saying they decided to relocate their business to the UAE, mainly because it is less expensive and also because of the tax incentives. [They are coming] not only to Dubai but also to Sharjah and Ras Al Khaimah,” explains Mampilly.
Looking forward
Although office rents and wages are not the only factors entrepreneurs consider before opening a business, they are definitely among the more important. “Being able to hire good staff for lower salaries and finding a suitable office space at lower prices make this period a good time for investment,” states Raes.
Although the international economic conditions might not be very encouraging for investment, Dubai could now represent an attractive opportunity for those who are willing to invest for the long run.
