An International Associate of Savills

IN FOCUS

START-UP ENVIRONMENT IN DUBAI

2016

Core ResearchDubai Property

Overview

Dubai, with its enterprising business ecosystem, proactive governance and most favoured business rankings in the region, has been increasingly attracting technology start-ups and SMEs in the last few years. With start-ups and SMEs representing 95% of all �rms, accounting for 86% of the workforce and contributing around 60% to the non-oil GDP, this sector is fundamental to Dubai’s growth story.

The strength of Dubai’s innovation-driven environment lies in the combined efforts of government and private players, which have been key to pushing the ecosystem towards the right direction.

The government is making start-ups a key growth parameter in its Vision 2021 development plan through positive directives such as the recent announce-

02 | IN FOCUS | Start-up Environment in Dubai

Figure 1

GRAPH 1

Source: UAE Ministry of Finance

Source: UAE Ministry of FinanceSource: Dubai SME (2014 data)

GRAPH 2

“Location advisory, customised real estate strategies along with dynamic work place planning are critical for cost efficiency and operational optimization of burgeoning start-ups across sectors and stages of growth. This paper aims to address the challenges faced by start-ups and SMEs in Dubai’s dynamic office market.”

72%

18%

5%5%

Size - wise split of business establishments in Dubai

Total work force in SMEs

& start-ups

Contribution to Non Oil

GDP

SMEs & start-ups out of total �rms

86% 60% 95%

SME and start-ups in UAE

Source: IMF, World Bank & IMD

4th Foreign High

Skilled People

5th Government

Ef�ciency

2th Image and Branding Abroad

7th Creation of

Firms

8th Resilience to

Economy

12th World

Competitive Index

31stEase of Doing

Business, Highest in the

Region

5th Diversi�cation of Economy

UAE’s Global Business Rankings

ment of a $82 billion science and technolo-gy fund, designed to catapult the country up the ranks of competitive knowledge economies, and the UAE National Charter 2021, which is seeking to turn the UAE into a global entrepreneurship hub.

These af�rmative steps are evidenced by many famous start-ups choosing Dubai as their base to capture and widen their catchment area across the region: Souq, Dubizzle, Compareit4me, JadoPado, Just Falafel, Property�nder and Namshi are just a few.

Does Dubai stand as the regional start-up hub? – Yes! Is it beginning to achieve global impact? Our conclusion is a cautious yes, however despite positive harbingers, start-ups in Dubai do face �nancial, infrastructure and talent-oriented challenges.

11%

73%

16%

Sector - wise split of business establishments in UAEManufacturing Services Wholesale & Retail Trading Medium LargeSmallMicro

VIEW POINT

core-me.com | 03

Figure 2

CHALLENGES FACED BY START-UPS

The UAE Government has clearly de�ned SMEs/start-ups to serve as a framework for operationalis-ing multiple initiatives directed towards the development of SMEs as an engine for economic growth.

While the government has intensi�ed its support through equity funds and other �nancial initiatives provided by Dubai SME and Dubai Chamber, many expatriate-owned start-ups, which account for almost 95% of the SME sector, still face fundamental obstacles.

SETTING UP Although it is extremely easy for an entrepre-neur to start a business in Dubai, permissions for technology start-ups are yet to be clearly de�ned in the region. Choosing the right location (mainland vs offshore) may also be a challenge given the marginal disparity between regulations and eligibility criteria in the individu-al free zones.

FUNDINGFunding remains a persisting issue as many SME owners, according to the survey conduct-ed by MEED (Middle East Business Intelligence), still turn to family and friends as their top source for acquiring �nance (49%), followed by banks (41%) and other sources such as private �rms, angel investors, and credit cards and savings (10%).

The recent news of the UAE Banks Federation adopting proposals intended to provide �exibil-ity for loan repayments of SMEs comes as a respite for existing companies. However, with UAE banks just accounting 3.8 percent of their lending portfolio to SMEs, the gulf between demand and funding avenues is relatively wide. Despite having to balance liquidity issues due to the fall in hydrocarbon prices, possible subsidies and attractive funding mechanisms for start-ups and SMEs, are vital for this emerg-ing segment.

Nonetheless, successful Dubai based e-com-merce ventures such as Souq and Careem have managed to attract sizeable funding, primarily from overseas investors. Interestingly, Souq, with a valuation of more than $1 billion USD, ranks amongst the of the famed global unicorn list.

Functional challenges faced by start-ups

As Dubai strengthens its position as a global economic hub, it is bringing many �nancial platforms to the fore. Crowd funding, increasing exposure to regional and interna-tional angel investors, venture capitalists and private equity funds are helping the Dubai startup ecosystem, however, lack of knowledge in �nance, strategies to scale-up along with limited capabilities to pitch to investors ef�ciently cause many start-ups to struggle in this phase.

TALENT ACQUISITION Finding the cultural �t, skill sets, and the start-up mentality in a package has left many start-ups awry. Talented employees who �t the bill may be unwilling to move out of their cushioned jobs and join cash crunched start-ups at frugal initial compen-sations.

Founders/owners, who already are vigorously multitasking, are short on time and lack HR skills to align recruitment with the growth and �nancial plan of a start-up. This may result in excess hiring or rampant

�ring thus making working for start-ups all the more volatile.

That said, Dubai, due to its diverse demo-graphic and cosmopolitan culture, does attract top talent from the region and around the globe which is evidenced by a majority of its start-ups being owned by expats. MARKETING & ADDRESSING TARGET AUDIENCE An important step for a start-up is to analyse its consumer base through critical market segmentation thus identifying its core target audience and potential expansion areas. Answering the fundamental question “who are we selling to?” through behavior and segment analysis and consequently differentiating or customizing their business model and marketing strategy, propels a start-up to meteorically increase its clients /users.

At its current population size, Dubai may yet be a small market compared to other global technology hubs, nonetheless, the Emirate boasts a vibrant multicultural target audience with both the appetite and the purchasing power to attract innovative new products and services. Start-ups meeting this demand can expect to achieve critical mass in Dubai with the potential to scale up across the region.

COST CONTROLThese integrated challenges of capital and talent acquisition, coupled with technology and marketing costs, greatly in�uence the �nancial feasibility of a start-up. However, real estate costs dominate the fund alloca-tion pie of any growing company. Controlling real estate costs through tailor made solutions in tandem with the growth stages is critical for start-ups to restrict costs.

*Turnover in AED Million. Source: Dubai SME

SME Definition

Trading Manufacturing Services

Micro

Small

Medium

≤9 5

50

250

10

100

250

3

25

150

≤20

≤100

≤250

≤20

≤100

≤250

≤35

≤75

Employees EmployeesTurnover* Turnover* Employees Turnover*

Establishing

Limited clarity in permissions and

approvals for tech start-ups across

free zones and on shore areas

Funding

Restricted avenues for

acquiring �nance at or before key

milestones

Talent

Hiring, developing and retaining top

talent

Marketing

Attracting target audience and

achieving critical Mass

Cost Control

Maintaining low real estate and

operating cost, yet able to expand /

contract

04 | IN FOCUS | Start-up Environment in Dubai

GROWTH CYCLES AND REAL ESTATE PROPOSITIONSConventional real estate strategies may not work for the new age start-ups due to their inherent nature of operations. Through analysis and customization of lease terms, start-ups can be advised to strategically align growth stages, workplace strategies and real estate requirements to optimize footprint and cost.

Real estate costs typically dominate the of�ce space selection criteria closely followed by �exibility in lease terms along with the ability to expand/contract. As the employee base rises, easy access to public transport and requisite social infrastructure also becomes imperative.

3-10 Employees 10-25 Employees

Em

plo

yees

Sp

ace

req

uire

men

tsO

ptio

ns in

Dub

ai

Astrolabs, The Cribb, Make, Pavilion, Impact Hub, Shelter

Servcorp, Regus

25-100 Employees Above 100 Employees

DMCC, DIC, DMC, DIC, Business Bay, Tecom.

DIFC, DMCC, DIC, DMC, Downtown, Business Bay.

Real Estate Cost

Flexibility in lease term and lock in. Ability to expand or contract

Access to public transport and social infrastructureAccess to common supplies and administrative staff

Building Grade, Ease to Expand

Parking

Start-ups, in their concept stages, prefer to work out of co-working spaces, incubators and accelerators leveraging on lower costs, peer learning and shared yet �exible resources. Business centers or serviced of�ces may be a preferred choice for start-ups/�rms who have progressed from their concept stage but still need �exibility in operations without substantially adding on real estate cost.

Once a start-up has graduated to a pro�ta-ble business machine and is expanding its stream of operations and resources, the company may ideally look for relevant of�ce options in secondary locations/existing free

zones which offer �exibility to expand with in the same premise.

A subsequent shift to prime locations, to enhance brand image, attract talent, provide just in time service to key clients, may be �nancially viable if the start-up establishes itself. Organisations at this stage may also deploy advance workplace strategies to optimise resources.

Start-ups miscalculating real estate require-ments along development stages may be penalized through higher rentals, probable loss of talent, restricted connectivity and limited expansion/contraction opportunities.

Crit

eria

for

Of�

ce S

pac

e

Incubators, Accelerators, Co-working of�ces.200-800 sq. ft

Few hot desking work stations with meeting rooms on need-to basis.

Serviced of�ces/ Business centers1000-2000 sq. ft

Assigned work stations and usage of space graduating to monthly/ quarterly basis

Grade A/B of�ces in designated free zone/ Secondary locations4000-10,000 sq. ft

Moving towards open plan of�ces, combination of hot desking and �xed seating.

Grade A of�ce spaces in primary/secondary locationsAbove 10,000 sq. ft

Establishing advanced workplace strategies

Conception

Focus on the idea development and

successfully starting operations

Initiating

Initial stages of operations. Lean

Structure. Developing back-end operations,

exploring business models and targeting consumers

Scaling

Establishing product, rapidly expanding

consumer base and market share. Improvising

operations.

Establishing

Achieved exponential growth that can be

sustained .Vision and Business model in place. Attracting �nancial and

human resources

core-me.com | 05

LOCATION ANALYSIS

Dubai Map

Source: Core - UAE Associate of Savills Research, REIDIN.

For a start-up, �nalising a location is intensively dependant on the desired owner-ship, sector of operations, size and �nancial capability of an enterprise. Off shore or free zone locations are a good option for those companies that need to do business only outside the UAE, while local LLC companies are for those who want to supply goods and services within the country.

With the exception of branch and profes-sional licenses, foreign nationals incorporat-ing a LLC (limited liability company), with the DED (Department of Economic Develop-ment) must hold 51% UAE national share-holder.

Whereas free zones allow 100% foreign ownership for entities with limited liability. If a start-up prefers a free zone for its opera-tions, they may need to evaluate the twenty plus free zones housed in Dubai in order to determine the one that best suits their needs.

Capital requirements vary in each free zone, with DIFC (Dubai International Financial Centre) having the highest capital require-ment, attributed to its �nancial and legal operations. DIFC is also at the top end of the of�ce market by virtue of its location, invest-ment grade of�ce stock and blue chip occupiers, thus commanding the highest rentals.

Industrial and logistics free zones such as JAFZA (Jebel Ali Free zone), Dubai Flower Centre and Dubai South typically have medium to high base capital requirements attributed to higher infrastructure costs, activity type and licence obtained.

Other free zones such as DAFZA (Dubai Airport Free zone), D3 (Dubai Design District), DMCC (Dubai Multi Commodities

Centre), DSO (Dubai Silicon Oasis), DIC (Dubai Internet City), DMC (Dubai Media City), Knowl-edge Village, DIAC (Dubai International Academ-ic City), Studio City, IMPZ (International Media Production Zone) and DHCC (Dubai Health Care City), the requirements are relatively easier to meet, however, are again subject to activity and ownership.

For broadcasting �rms and hospitals, the capital requirements are much higher even though these may be located in DMC, IMPZ or DHCC. For creative �rms, Studio City, DMC and IMPZ, for IT related companies DIC, DSO and Dubai Outsource Zone and for education related �rms, Knowledge Village and DIAC would be recommended.

Free

Zo

nes

Ons

hore

Are

as

DIFC

Dubai Media City

IMPZ

DAFZA

JAFZA

DHCC

IHC

Dubai South

Dubai Internet City

DMCC

DSO

Knowledge Village

Academic City

Studio City

D3 (Design District Dubai)

Downtown

Business Bay

Deira / Bur Dubai

Tecom - C

Al Barsha

Garhoud

D3 (Design District Dubai

Finance, Law

Television / Media

Printing / Media

Industrial, Logistics

Industrial, Logistics

Hospitals

Non Pro�t Organisations

Industrial, Logistics

IT/ITS

Commodities

IT/Call centers

Education

Education

Film

Design, Fashion, Retail, F&B

All

All

All

All

All

All

Primarily Design, Fashion, Retail, F&B

Area Sectors Real estate costAccess to public transportand proximity to other business hubs

Free ZonesOnshore Areas

DIFC

IMPZ

DFZA

JAFZA

DHCC

Knowledgevillage

AcademicCity

Studio City

DowntownBusiness

Bay

Deira

Garhoud

Bur Dubai

D3 DesignDistrictDubai

DubaiSouth

InternetCity

DMCC

Dubai Media City

Al Barsha

Tecom - C

DSO

IHC

Al MaktoumAirport

Dubai Int.Airport

Access to public transportand proximity to other business hubs

Very High

LowMediumHigh

Real Estate Cost Low

MediumHighVery High

Minimal

06 | IN FOCUS | Start-up Environment in Dubai

GRAPH 3 In addition to base capital requirements, lack of smaller yet scalable of�ce options, public access for employees and supporting social infrastructure, are among the major issues faced by of the sub-ur-ban free zones located away from Sheikh Zayed Road.

However, purely analysing real estate costs across preferred free zones by benchmarking a typical small scale start-up of�ce unit of 2,000 sq ft, our data suggests DMCC and DSO to be the most competitive free zones for typically cost conscious start-ups.

While most of the of�ce spaces available in DSO are large and cater to multinational corporates, head of�ces and banks, in recent times, smaller units have been brought to the market in order to cater to the growing small and medium size enterprises. The free zone has seen steady of�ce rentals in the last few quarters with prices ranging from AED 70-80 sq ft per annum. Well placed off Mohammed Bin Zayed Road, however, the area is not yet connected to the metro system.

In contrast, Jumeirah Lake Towers (JLT), the master community of DMCC free zone, enjoys excellent connectivity with two metro stations in the develop-ment along with a growing social infrastructure system. To further aid the ever changing space and resource requirement of new start-ups, DMCC offers company licence options with either a �exi-desk (virtual space) or a 150 sq ft serviced of�ce, both of which permit up to three visas. Ample conventional lease options are also available in the free zone with typical prices, ranging between AED 60 and AED 120 sq ft per annum.

Furthermore, Dubai Media City, juxtaposed by Dubai Internet City and Knowledge Village, is a bustling community and home to many home grown web based companies such as Dubizzle, Careem and Property�nder. Equipped with comparatively superior built quality stock and good access to public transport, the cluster commands relatively higher headline rentals.

Dubai’s continued commitment towards bolstering the innovation and creative sector is followed by the successful opening of Phase-1 of D3 (Design District Dubai) in 2015. D3 is a purpose-built community housing residential, hospitality, retail and of�ce properties providing both free zone and on-shore offerings. Situated adjacent to Business Bay, D3 is centrally located and upon completion is expected to become a full service commercial hub for design industry-related organizations across the value chain. D3 was launched at very competitive rentals to attract anchor clients, however harness-ing its concept, design and locational advantages, it recently has seen the highest rental growth, primari-ly due to a lower initial base.

While Dubai is the main centre projected globally under the Dubai Inc. marketing banner, the North-ern Emirates also offer further free zone options, with Ras-Al Khaimah targeting manufacturing and conventional industries while Ajman and Fujairah attract a cross section of consultancy and commer-cial services.

0

50

100

150

200

250

DIFC DIC KV DMC DHCC D3 Dubai South DMCC/JLT DSO

AE

D/s

q f

t/an

num

Rent comparison across Dubai's preferred free zones

GRAPH 4

Q1 2015 Q1 2016

0

20

40

60

80

100

120

140

Business Bay D3 Deira Bur Dubai Al Barsha Tecom-C Garhoud

AE

D/s

ft/a

nnum

Rent comparison across Dubai's secondary office locationsQ1 2016Q1 2015

Source: Core - UAE Associate of Savills Research, REIDIN. *D3 became operational in H2 2015.

core-me.com | 07

Free zones, however, may not be the preferred option in the case of businesses that need to be in city markets and malls or need to supply goods to the local populace or government organisations. In these cases, the start-up may take the LLC route for company formation. Supportive local partners, or corporate nominee shareholders, may prove bene�cial to a start-up, accessing a bigger market and a broad choice of locations to suit budget and business interests.

Competitive onshore of�ce locations in the traditional Deira, Bur Dubai and Garhoud areas, have a large selection of smaller Grade of�ces at reasonable prices, comparable to the ‘new Dubai’ locations, e.g. Business Bay, Tecom-C and Al Barsha.

Among these locations, Business Bay is emerging as the preferred destination for small and medium enterprises. Its central location, proximity to DIFC, Downtown and Sheikh Zayed Road, public transport accessibility and its fast developing infrastructure has made it very popular with start-ups. Small of�ces are available across various towers where landlords are offering sub divided �oors to cater to the demand from start-ups. Business Bay has attracted the interna-tional serviced of�ce providers Servcorp and Regus offering �exible of�ce solution packages which may be attractive for new companies trying to establish a foothold.

Nonetheless, economies of scale do come into play with rates per sq ft for larger of�ce spaces falling in comparison to rents for smaller units. This trend is distinctively illustrated in newer of�ce locations such as Business Bay and JLT, especial-ly in buildings with larger �oor plates which restrict further subdivision. However, old Dubai of�ce districts fare relatively well in offering smaller of�ce units, although they may lack expansion options.

Flexibility in lease terms and the ability to expand/-contract across multiple �oors is a key issue faced by most corporate tenants. Dubai does offer shorter lease terms when compared globally, offering start-ups the freedom to graduate to larger of�ces, however this may expose tenants to higher rental escalations in a strong market. In addition, expanding within strata owned buildings may prove dif�cult when compared to single owned buildings.

As Dubai of�ce market is organised in multiple sub locations, each with multiple buildings and often multiple owner/landlords, it is critical for burgeon-ing start-ups to possess a detailed knowledge of current supply, owners and offers to take an informed decision.

Current of�ce supply in Dubai offers a wide range of sizes, quality and price points across dedicated free zones and onshore locations, providing relevant cost structures for various sectoral start-ups at different stages of growth. Undoubtedly, cost gradient is a major factor driving occupier decision making, however it is proportionately necessary to understand the complete value of contract terms, not just the headline rent. Tenants’ ability to negotiate terms permitting expansion and contraction of space will allow start-ups to strategically plan their resource require-ments and gain the competitive edge needed to own market share and grow to full potential.

In the last 15 years, Dubai’s government’s has made a conscious effort to diversify its economy from hydrocarbons, to a knowledge and innovation based economy. The creation of dedicated economic clusters has in turn created a positive supply chain with businesses deriving value from each other. These enterprising endeavors, coupled with exponential improvement in business and social rankings, have �rmly cemented Dubai’s position as a regional start-up hub.

To continue empowering its global impact, the Emirate needs to further enhance its start-up ecosystem by ensuring adequation between speci�c demand for of�ce with availability of competitive of�ce supply addressing different stages of start-up growth, one of the most important challenges faced by other global cities.

The Ministry of Finance projects SMEs to contribute more than 70% to UAE’s GDP by 2021, a steady growth from the current 60%. Furthermore, with 350,000+ companies under the SME category in UAE, developers/landlords are increasingly addressing the demand from a growing SME market segment, in addition to maintaining a portfolio suitable for large corporates. This trend is gaining traction in secondary onshore locations and technology/ commodity themed free zones, with landlords subdividing �oor plates and offering partially �tted out options for faster absorption of stock. These competitive locations continue to be the preferred choices for SMEs and start-ups looking to set up initial bases.

The response from government bodies and developers/landlords to start-ups and SME demand, for Dubai to continue as a strong contender amidst global cities to attract and retain world class talent and nurture ideas throughout their growth curve into established businesses with worldwide in�uence, will play a signi�cant role in shaping Dubai’s of�ce market in the next �ve years.

OUTLOOK

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Core Research

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Core - UAE Associate of Savills

As one of the largest UAE property services �rms, Core, UAE associate of Savills, combines expert local market insight with the international strength provided by 700 of�ces globally.

Core’s multi-lingual advisers share an entrepreneurial spirit with a commitment to cultivating long-term, collaborative client relation-ships. Our local roots, commitment, and attention to detail are backed by the global standards of Savills’ 150 year old brand, giving our clients direct access to 30,000 experienced practitioners, with a deep understanding of specialist real estate services in over 60 countries.

Our bespoke residential and commercial property advice enables our clients to make informed real estate decisions both locally and abroad, through a single point of contact in any of the 15 languages spoken by our consultants, in one of our 3 of�ces, in Downtown Dubai, Jumeirah Lake Towers and Abu Dhabi.

This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Core, UAE associate of Savills, accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Core’s Research Team. © Core Real Estate Brokers.

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