Dubai malls' rental rates face '40% correction'

The retail sector in Dubai has grown rapidly in recent years, boosted by rising household consumption, an affluent population, and a booming tourism industry.

The emirate now accounts for more than 50% of the total retail space across the UAE, and until recently its malls enjoyed extremely high footfalls, with the Mall of the Emirates alone averaging two million visitors per month.

Despite the large number of malls in Dubai, occupancy rates in destination shopping malls in the emirate are nearly 100%, with average occupancy levels over 90% across the market, according to a study by Colliers.

The most recent high-profile opening in the emirate was Dubai Mall, which was built by Dubai-based developer Emaar.

Sprawling over 12 million square feet (equivalent in size to more than 50 soccer pitches), Dubai Mall will have over 1,200 stores when fully operational, which would be the most of any shopping centre in the world.

Emaar is also operating two other malls in Dubai; Souk Al Bahar, an Arabesque shopping and entertainment development in Old Town, and Dubai Marina Mall, which will have 600 stores and 390,000 square feet of leasable space.

Not to be outdone, rival developer Nakheel says it plans to build 100 malls in the emirate over the next 20 years, and is currently spending over $100m to more than double the leasable area of Ibn Battuta Mall.

Meanwhile, the largest shopping behemoth being planned for the emirate is the $817m Mall of Arabia in Dubailand. With 930,000 square metres of space to rent, Mall of Arabia is slated to have almost twice as much retail space as Dubai Mall.

However, the project, which is being built by local firm Mustafa Galadari Group, is running behind its original mid-2009 completion date, and it is not expected to be completed until 2010 at the earliest.

Slowdown looms

Analysts warn that the boom times for Dubai retailers appear to be over for the immediate future as the financial crisis deepens.

'With the economic downturn and the likelihood that population growth will be very minimal or possibly even negative in the short term in Dubai, it goes without saying that the retail market in the emirate will be affected,' says Firas Eid, a Partner in Deloitte Consulting.

Footfall over the past few months has been less than in previous years as people have decided to hold off on big purchases amid concerns about layoffs.

The difficulty that retailers face is that not only are residents spending less, but tourists - who account for a large portion of consumer spending in Dubai - are cutting back on their travel to the emirate.

The malls that will be least affected are the ones that enjoy a prime location and have the highest footfall, Eid says. In a report issued last month, Colliers predicts that oversupply will hit smaller, older malls hardest, and says they will need to reposition themselves to appeal to specific market segments. The report argues that larger malls with a strong mix of tenants and more leisure amenities will triumph.

In terms of specific products, demand for luxury items is likely to take a greater hit compared to basic commodities like clothes and food, which remain necessities for the consumer, Eid says.

All of this is putting increasing pressure on Dubai retailers, who are currently paying the most expensive rents in the UAE. According to a study published last year, Dubai Festival City had the highest average annual rent in the city at Dhs7,100 per square metre. By comparison, rent in Abu Dhabi's Marina Mall, one of the capital's most expensive malls, was Dhs5,500 per square metre.

Oversupply, combined with the impact of the financial crisis, could lead to a correction in rental rates by up to 40%, Eid says. 'A big chunk of retailers' costs are the rents they pay to the malls. Unless pressure is transferred to the mall operators we will see a correction. It's about supply and demand being reflected across the entire chain, starting from retailers all the way up to mall operators,' he said.

Already there is evidence that rates are softening, according to Eid, who noted that one of his retail clients in a prime location in a new mall development was able to negotiate a rate of Dhs250 per square foot.

'Value cycle' pervades

Stuart Gissing, regional director of retail for Colliers International Middle East, believes that a more pressing question is not whether there is oversupply in the retail market but rather whether 'market formats' have been satisfied.

'By this we mean, have the specific requirements of the local and regional demographics been supplied? This we believe has yet to be satisfied. An example would be, are there enough value centres, lifestyle malls or retail parks? We feel there is tremendous scope to direct retail development in a well researched and targeted manner,' he said.

Gissing believes we are entering into a 'value cycle' and as such the downturn presents a great opportunity for products in this category. 'However, a value proposition must be seen within the target market a development positions itself against and to the overall offering in its mix,' he noted.

Although many customers may indeed be looking for value, Eid points out that retailers in the low-cost segment are also taking a hit because many of their core customers - labourers - have lost their jobs due to the real estate crash.

He says retailers were developing sales programmes and promotions even prior to the Dubai Shopping Festival, which began January 15. About 6,000 retailers are taking part in the month-long event, and early reports indicate that stores are offering larger discounts than in previous years.

The festival will be a good indicator to where retail is going from many angles, Gissing says, including the type of products being bought, the kinds of promotions that are successful, and the locations where specific retail categories perform well.


See also:
Dubai hotels try to lure guests with discounts
Dubai tourism faces challenges in 2009