Neighbourhood Watch: Retail rents must be realistic in order to maintain success

In a price conscious global environment, retail rents should be realistic in order to maintain success in this rapidly growing area. We know the market is cyclic, but under the current circumstances, retailers and landlords should perhaps lean in a conservative direction when embarking on expanding into new locations. Huge additions to major malls are overwhelming an already fragile market and the only way rents can be sustained is if there is a critical mass sufficient to support them. Unfortunately the current population growth rate is not in keeping with the growth rate of retail property and we are seeing empty space as proof.

Unrealistic rents simply force tenants to make lateral moves in search of better deals or in some cases, to close their business. Either way, the landlord loses revenue and has the hassle of searching for another tenant. Holding out for higher rent revenues is not necessarily wise if one is thinking long term.

Furthermore, continuous construction of retail space outside the mall venue should be thoroughly researched, as we continue to see developers who don't accept that the market is saturated. Undoubtedly, there is a need for some retail space in commercial/ residential buildings, however consumers are increasingly opting for the mall atmosphere when it comes to choosing a shopping venue. Consumers are leading a more hectic lifestyle than ever before and enjoy the space and atmosphere they find in malls. With the exception of a few outlets such as restaurants and convenience stores, retail space in buildings has become unpopular for fashion related concepts.

The world is experiencing a time famine and an information overload. Therefore consumers are searching for shopping atmospheres that provide convenience and variety, along with entertainment and leisure. These combinations create added value when they work together as opposed to facilities that have no specific orientation in terms of price or collection of content. As properties develop, retailers will have increasingly greater difficulty in being able to compete for a fair share of the market. In fact, it is entirely likely that many will have a difficult time in keeping their doors open, given the nature of the retail competition that is being planned, as well as that which has been announced.

There are a few successful retailers who enjoy a thorough understanding of this business as a result of time and experience over the years, and thus make informed decisions.

Unfortunately, many others simply embark on retail projects with the belief that their only prerequisite is a good brand name. Only after the payment of fit-out costs and rent does it become more obvious that the investor may have been a little too ambitious. How many centers do we see virtually empty due to an incorrect tenant mix.

There is no question that the investor is losing money and often is only able to keep the doors open due to solvency in other areas of his business. It is wise to conduct a thorough market study prior to building, in order to determine the kind of shopping centre required and who the target market will be in particular. Defining the market segment is key along with an understanding of who else is competing for the same customers. Inevitably the better product will win, and because a project has enjoyed a certain degree of success in the past, by no means insures its future prospects. Therefore a need to reevaluate and reposition on a regular basis is essential.

We continue to see an interest in shopping centre development and undoubtedly there are areas that can support this kind of investment. However, it is important for the investor to be 100 per cent sure of his market before embarking on any project. There is a certain reliance on the government to control the number of licenses, but due diligence on the part of the developer is the best way to be aware of future competition.


- The writer is a UAE-based Managing Director of Better Homes LLC.