As retail real estate development evolves to overcome multiple headwinds, the consumer is expected to benefit from an increasing number of new formats such as community shopping centres, a higher level of midmarket offering and price rationalisation. On the other hand, the volatile consumer confidence levels of the previous year and the delivery of additional supply continue to challenge the UAE’s retail sector this year, although well-established malls with higher footfall maintain healthy occupancy rates.
Consumer confidence has been on a down trend since 2015, according to the Nielsen Global Survey of Consumer Confidence and Spending Intentions 2016.
Confidence levels fell from 114 and 115 in January and July 2015, respectively, to the 107-109 since December 2015, according to the survey. This continued last year and is expected to be the same this year.
However, any number over 100 in the index indicates optimism.
“The general sentiment among retailers and mall operators is expected to remain cautionary this year,” real estate consultancy Knight Frank said in a research note. “Consumer confidence is low amid job insecurities, and the higher cost of living has impacted residents’ purchasing power. In addition, the strengthening of the UD dollar, with the potential for interest rate hikes in 2017, will make the country an expensive retail destination, especially for luxury shoppers from countries such as China, Russia and India.”
These hiccoughs notwithstanding, the UAE’s retail sector overall continues to grow and attract investment on the back of a robust growth strategy tied into increasing tourist arrivals. The sector remains one of the largest contributors to the country’s GDP at 29 per cent and employs about a quarter of the workforce.
Although relatively mature, the UAE’s retail sector continues to be driven by Dubai, which has 49 per cent of total mall stock, followed by Abu Dhabi with 36 per cent. Dubai’s stock ownership is also skewed towards large developers, with five mall developers owning more than 87 per cent of the gross leasable area (GLA) in the emirate, according to data compiled by Core Savills.
The consultancy also raises a yellow flag related to high mall density in Dubai and new malls and mall extensions coming into the market.
With 3.2 million sq m of GLA, Dubai boasts the world’s second-largest mall density after New York, at 1,214 sq m per 1,000 people. This, coupled with as much as 800,000 sq m or about 25 per cent of existing stock being built in the run-up to the World Expo 2020, is expected to force a rethink in terms of delaying handovers or optimising rents, Core Savills analysts said.
Tourism
Developers and retailers are banking on the light at the end of this tunnel being powered by strong visitor numbers in line with the vision to welcome 20 million tourists by 2020.
“While the emirate is not overly dependent on tourists from any one country, visitors from Saudi Arabia and the UK are major growth drivers for the Dubai retail market,” Core Savills said. “The impact of low crude oil prices on GCC buyers, along with the strengthening US dollar, which makes Dubai an increasingly expensive place to shop for British and European buyers, are among factors that give retailers cause for concern. This is exacerbated for the luxury sector, which has started to feel the heat of slowed conversion rates from footfalls to revenue.”
Underlining the importance and the inter-connected nature of tourism with the growth of retail in Dubai, Faisal Durrani, global head of research at Cluttons, tells PW: “Mega malls have a very different purpose; they are part of a wider strategy to create a destination and be an international attraction. Shopping is a key strategy for attracting tourists. If Dubai has to hit its target of 20 million tourists, tourism infrastructure, which includes shopping malls, theme parks and hotels, has to keep up. The city has 80,000 hotel rooms, which gives you 15 million tourists. In order to hit that 20 million target, you need more hotels and more attractions.”
All indicators point to this effort being on track. As Knight Frank says in its research report: “The delivery of Dubai’s theme park complex, among other demand generators, is expected to drive the hospitality market, which will undoubtedly have knock-on effects on the retail market. This is maintained by ongoing investment in the supporting infrastructure, namely Dubai International Airport, currently the largest in the world in terms of international passenger traffic, and Al Maktoum International Airport, in addition to the expansion of Emirates Airlines.”
e-Commerce and VAT
Another challenge facing the retail real estate market is the galloping growth of e-commerce. According to estimates by the Chalhoub Group, e-commerce sales are expected to account for $1.5 billion (Dh5.5 billion) of the GCC’s high-end luxury retail segment within the next four years. With a large population under 30, high levels of internet penetration and governments actively focussed on investing in technology and entrepreneurship, the online retail industry is expected to soar by 2021.
However, Knight Frank expects brick and mortar stores to continue to be essential, given that shopping centres in Dubai provide family entertainment in addition to shopping and respite from the summer heat.
But both Core Savills and Knight Frank expect that some of these headwinds facing retail will result in retailers realigning their real estate strategies to reduce operating costs and to invest in online channels. This holds the potential to weaken rents and result in a market correction.
Retail formats are also undergoing changes driven by evolving consumer preferences and younger demographics. A shift away from super built-up spaces such as mega malls to newer formats such as pedestrianised high street are adding a human scale to the industry. Examples of this are City Walk, Box Park and The Beach at Jumeirah Beach Residence.
The retail sector is also expected to progressively segment itself with higher and lower-performing assets created by a process of natural selection by retailers. “A gap is anticipated to form between these two sub-categories, reflected through heterogenous rents and vacancy levels — a case similar to Dubai’s two-tiered office market. Retailers are expected to optimise footprint and mark a flight to quality towards perceived high-functioning malls, while the slower performing assets may see a cascading effect of rising vacancy levels caused by this shift,” Core Savills said.
Another potential impact on the retail industry could come in the form of the new 5 per cent Value Added Tax (VAT) to be introduced in the UAE on January 1. According to Knight Frank, it is highly likely that shoppers will accelerate their purchases to beat a potential increase in prices. On the other hand, retailers will see an additional increase in overall occupancy cost, as VAT will be added to rents. However, details of the goods and services that will be included under VAT are still unclear.
Morphing to thrive
Analysts also expect the trend of neighbourhood malls such as City Walk and Box Park to accelerate. “We expect this sector to continue to prosper,” Declan King, managing director and group head, real estate, at ValuStrat, tells PW. “With Expo 2020 driving tourists to the city, the event will also help deliver extra footfall to our major malls.”
Ultimately, the retail real estate market is in a state of flux, uncertain of its direction post 2017.
Sameer Lakhani, managing director of Global Capital Partners, tells PW: “What you see happening in the retail and the hospitality sectors is an extension of the Dubai philosophy of ‘build it and they will come’. It is amusing to see analysts fret with worry. The city has always been in a sense ‘overbuilt’, or what appears to be ‘overbuilt’. In fact, it is the building out of capacity that then allows for demand to be catered to.”
According to Lakhani, the retail sector is at a point of its cycle that needs active managing, never an easy task at the best of times. “Yes, there is currently pressure on retail leasing as well as on parts of the hospitality sector. However, this is not only healthy, it is also inevitable. Nuanced analysis shows that market participants have finally started to cater to the mid-market segment across the economy. The supply entering this segment has also given investors, consumers and end users greater choice.”
