Shopping mall
Dubai accounts for 49 per cent of the malls in the UAE. Image Credit: Gulf News Archives

Dubai: New malls and shoping areas are being added in the Dubai at a rate faster than expected sales over the next five years, raising more concerns about more supply flooding the market than is actually needed.

Alpen Capital, the consultancy, puts some numbers on what this is likely to be.

Dubai is estimated to have additions of about 2 million square metres between 2018-23, which equates to a compunded annual growth rate of 6.6 per cent. This will come on top of 900,000 square metres of leasable space built between 2014-18.

As against that, overall retail sales is forecast to grow at around 4 per cent during 2018-23, with much of the actual growth coming from online platforms. “Additions in retail space coupled with competition for acquiring and retaining tenants is likely to affect occupancy rates and lead to downward pressure on rental rates in selected markets within the region,” said Krishna Dhanak, Executive Director at Alpen Capital.

“Accordingly, we expect a possibility of oversupply in the UAE.” Which would set off another intense round of battles between older malls and the news ones that will take up prominent spots across Dubai and elsewhere in the UAE. Alpen declined comment on whether it saw increased vacancy levels at the older malls; but market sources say that these destinations are “repurposing” newly vacated spaces to line up options that are more in sync with visitor requirements these days, such as F&B or entertainment.

Dubai accounts for 49 per cent of the malls in the UAE. The average occupancy across Dubai’s malls fell to 87 per cent in Q1-2018 compared to 90 per cent in Q1-17. The comparable numbers for Q1-19 are not available, but since the second-half of last year, some of the older malls have been facing exits from prominent retailers.

The pressure on malls to do more on their rental demands will continue. “The high rentals is affecting the profitability of the operators,” Alpen reports. “In Dubai, the rents in primary locations stood at $1,268 per square metre in 2017 compared to $817 in Abu Dhabi.

“Rents have declined in certain areas, making the current market tenant-friendly. While occupancy levels in prime malls in Dubai remain as high as 98 per cent with stable rents, secondary malls are facing a slowdown.

“Though tenants are able to re-negotiate favorable lease terms and property owners continue to offer concessions to maintain occupancy, retail rentals in the UAE remain much more elevated than that in prime locations across Saudi Arabia and the other GCC nations.”

Developers aren’t the only ones facing pressure. Retailer margins are under constant threat. “Both domestic and international retailers are adopting aggressive promotional campaigns by offering discounts to further drive revenues,” its new report states. “Although such strategies increase top-line growth, they will lead to margin pressures. Hence, prominent retailers are either looking at increasing their footprint within the region or launching omni-channels to offset the margin pressures arising from increasing competition.”

But as developers build new mall destinations and retailers chase consumers in new markets, a lot of the action - and deal-making - is taking place in the online space as well. “The GCC e-commerce market is relatively small as it accounts for only 0.4 per cent of GDP compared to 3.5 per cent in the UK, 2.3 per cent in Singapore and 1.9 per cent in the US,” the report says.

“We saw several intra-regional and cross border M&A transactions with a significant focus on e-commerce/online retailing space in the last two years. We expect to see continuing activity as retail companies look for new opportunities for expanding their market base and size.”

Finding a permanent solution to high mall rentals in Dubai

Dubai is developing a retail rent index to improve transparency within the sector, according to Alpen. “The index will serve as an important benchmarking tool enabling industry stakeholders to track performance and identify key market trends and challenges.”