Shoppers at Deira City Centre. Market sources feel there has been a partial firming up of retail rentals in Dubai over the last two quarters. Image Credit: Arshad Ali/Gulf News Archive

Dubai: The best thing that could happen to a retailer with outlets in Dubai's leading malls is that they don't come up for renewal now. If they do, expect to shell out more in rent.

If the renewals are not due anytime soon, at least the retailers will have breathing space before they confront an increase in rents. Dubai's retail leases, at least in its major malls, are inching their way back to their pre-2009 level.

The malls on their part are leveraging what was an exceptional showing by the retail sector last year, helped by increased tourist arrivals and more domestic shoppers indulging in discretionary spending.

"As a general rule, higher sales equate to higher rental levels in the most successful retail environments," said David Macadam, regional director and head of retail at Jones Lang LaSalle Mena. "So, yes, it is very likely that new leases and renewals will see an incremental firming up of the lease rates in the leading malls in Dubai.

"Several of the most successful retail trading environments may be recording a firming up of rates on renewals and new leases."

While uniformly in agreement that they are benefiting from rising sales, retailers say it is still too early in the recovery phase for mall owners to push for higher rates.

To buttress their point, they say that a strong showing in December and January was offset by a slower run in February and this month.

"Two strong months on their own do not suggest a sustainable recovery is there — the retail sector requires more time to determine this is so," said the head of franchise operations at a leading business house.

But Macadam begs to differ on the point: "Retail sales over the past 12 months have been generally quite strong in Dubai overall. The largest number of tourists recently has been originating from the Far East and the Subcontinent.

"The Arab Spring events have positively impacted the growth of residences locally. The demographics of the population in the region also impacts retail sales locally as younger people are generally bigger consumers. These combined events have provided the basis for solid growth in the retail industry."

Other market sources reckon that a partial firming up of retail rentals has actually been in evidence at some point or the other over the last two quarters and not just over the last two or three months. "Key locations within large malls are definitely demanding a premium," said Neelesh Bhatnagar, director of Oasis Centre. "Rentals have witnessed a substantial increase for the first time since 2008."

If so, it's a 180-degree turn from the sense of panic that gripped the retail sector and malls during 2009. The question at that time was whether mall managements would have to cut their rates even further to retain tenants for the longer term. The joke going around at the time was that malls would even consider offering rent-free periods of up to a year as sops to key retailers.

But the way the industry has rebounded, and given its current pre-eminence, mall owners can pass it off as a bad dream. They have now woken up to smell the coffee… and charging a premium for that.

Fallout of Dubai Mall expansion

Dubai: What effect Dubai Mall's expansion plan may have on competitors is still in the realm of conjecture, according to William Neill, head of commercial agency at Cluttons.

"While it is difficult to predict what the effect will have on leasing rates within Dubai Mall itself, the likelihood is that it will not have a negative effect on any of Dubai's larger competing malls. If Dubai Mall struggles to fill the additional retail space, then it will experience a drop in rental rates caused by oversupply.

"As long as the competing malls manage their existing tenant mix effectively and keep general tenant demand at a healthy level, they should not feel the knock-on effects. If however the expansion causes shoppers from different catchment areas to choose the Dubai Mall as their preferred venue, this may have a negative effect on leasing rates within some of the competing malls."