Dubai set to remain retail market leader

21 January 2013

With more mall space in the pipeline, the UAE shows no sign of losing its title as the Middle East’s leading retail hub

Dubai, already home to the world’s biggest shopping mall by area, announced plans in November to exceed it. The Mall of the World will be housed in the sprawling mega-project, Mohammed bin Rashid City, and will have capacity for 80 million visitors a year, potentially bypassing the Dubai Mall with its 1,200 retail outlets. It is the clearest sign yet of the UAE’s renewed confidence in its booming retail sector, with the promise of further growth to come.

The UAE is the undisputed retail hub of the GCC, fed by a thriving tourism sector and its high-spending population. Point-of-sale transactions, a proxy for retail sales, reached AED3.1bn ($840m) in the fourth quarter of 2011, a 57 per cent increase on the same period in 2010.

Retail growth in the UAE

Withdrawals from automated teller machines (ATMs) surpassed AED365bn in 2011, UAE Central Bank data shows, up from AED304.1bn the previous year. The country was expected to see 4 per cent economic growth in 2012, according to the Washington-headquartered IMF.

For consumers, much of the draw is the Gulf state’s glitzy mega-malls. The UAE was quick to see the benefit of prime shopping space in attracting both foreign brands and tourists, and has funnelled billions of dollars into bolstering its retail offerings. The bulk of the mall space is concentrated in Dubai and Abu Dhabi, a reflection of the emirates’ dominant economies.

Top cities for global stores
City% of retailers present
New York43.9
Hong Kong40.5
*=2012 rankings. Source: CBRE

Dubai has an estimated 2.9 million square metres of retail space, according to data from US property consultancy Jones Lang LaSalle (JLL), with a further 243,000 sq m due online by 2014.

Rents in the city’s top malls average AED4,700 a sq m, JLL data shows, with demand for tenant space remaining robust. Dubai Mall alone attracted 54 million visitors in 2011, according to owner Emaar properties. The developer claimed this made the complex the most visited shopping and leisure destination in the world.

Abu Dhabi’s growth has been more measured. The UAE capital has about 1.67 million sq m of retail space in its metropolitan areas, according to JLL, with an additional 700,000 sq m due to be released by the end of 2014. About half of its retail market is still comprised of non-mall space – such as neighbourhood stores or small traders – a ratio that will shift as more shopping centres come online. Average annual rents in Abu Dhabi Island’s prime malls averaged AED2,750 a sq m in the third quarter, JLL data shows, but these may soften as the competition ramps up.

The UAE was quick to see the benefit of prime shopping space in attracting both foreign brands and tourists

The UAE’s retail sector made its name with a glittering mix of foreign brands. More than 53 per cent of global retailers have a presence in the Gulf state, according to property consultancy CBRE, outpacing fashion hubs such as New York, Paris and Hong Kong. Almost all are franchised.

MH Alshaya, the franchisee behind Boots, Pottery Barn and Starbucks, has more than 200 outlets across the UAE. Luxury retailer Al-Tayer operates the largest Harvey Nichols outside the UK, and launched the first overseas Bloomingdale’s stores.

For many brands, the robust retail trade has helped to offset slumping sales in their domestic markets and is seen as a springboard to the wider region. In November, Hong Kong apparel chain Giordana opened a hub in Jebel Ali to spearhead an expansion drive across Africa, central Asia and Eastern Europe. The company already operates 2,800 stores in 40 countries.

Shopping projects in the UAE

More malls are in the pipeline for both emirates. Across the UAE, some $8.9bn-worth of retail projects are planned, under construction or being commissioned, according to regional projects tracker MEED Projects.

Among the largest in Abu Dhabi is the 235,000 sq m Yas Mall, the flagship retail development on the capital’s Yas Island. Developer Aldar Properties said in November that 60 per cent of the mall’s retail space has been pre-let to tenants, ahead of its scheduled completion in 2013. The complex was initially expected to span 300,000 sq m, but was scaled back in 2011 in line with the subdued economic climate.

In Dubai, the market will continue to be dominated by mega-malls. Two of the largest projects in play involve the expansion of existing shopping centres. State-backed Nakheel plans to add 158,000 sq m of retail space to its China-themed mall Dragon Mart, doubling its size with a slew of retail and entertainment outlets. Nakheel said in 2011 that it had leased more than a third of the mall’s tenant space within five days of opening pre-let bookings.

The extension, which is scheduled for completion in the third quarter of 2013, will include a nine-screen cinema complex and a 10,000 sq m Geant hypermarket.

Dubai Mall is also poised for expansion. Emaar Properties said in February it plans to add 1 million square feet to the complex, to include serviced residences, properties and a new hotel. Details of the design have not yet been released.

The glut of new supply raises the spectre of market saturation. Much depends on the UAE’s ability to keep tourist numbers high. The emirates’ older malls, many of which have already seen rents slump, are likely to feel the pinch of increased competition. Lease rates in Dubai’s second-tier malls average AED1,885 a sq m, according to JLL, less than half that commanded by the city’s top shopping centres. The city has an average mall vacancy rate of 15 per cent, a reflection of the struggle older properties face in luring tenants and footfall.

In the capital, annual mall rents outside Abu Dhabi Island average AED1,900 a sq m, or 30 per cent less than that seen in prime malls. As competition ramps up, some malls are offering incentives such as rent-free periods or turnover rents to entice new tenants.

Expanding horizons

In the face of rising domestic competition, the UAE’s largest mall developers have turned their focus overseas for further growth. Majid Al-Futtaim, operator of six malls in the UAE, has expanded into Bahrain, Oman and Egypt, and plans to launch properties in Lebanon and Syria. In October, Emaar Properties announced plans to enter a $820m joint venture to develop the Cairo Gate shopping and entertainment complex in Egypt.

The changing retail landscape has also spurred an increased focus on community-based shopping. Big-box retailers including French retailers Geant and Carrefour have launched smaller grocery stores, in a bid to broaden their footprints. There are seven Geant Easy supermarket outlets across the UAE, and 17 Carrefour Market stores, each a fraction of the size of the hypermarkets the two brands are known for.

A similar shift is in play among mall developers. Nakheel plans to build smaller community centres in two of its housing projects to tap local shoppers. The Palm Mall retail complex will span 160,000 sq m and serve shoppers on the Palm Jumeirah. A smaller 10,600 sq m community centre in its Jumeirah Park development will serve 4,200 homes. Emaar, the UAE’s largest developer by market value, has built retail centres in six of its master-planned communities across Dubai.

While this trend is unlikely to dampen the UAE’s taste for mega-malls – just 4 per cent of Dubai’s under-construction retail space falls into the community mall category – it is a growing niche market.

The UAE is the Middle East’s most developed retail market, a ranking it is unlikely to lose in the near future. From an economic perspective, its high-end malls are critical to attracting tourists and encouraging consumer spending. For both foreign retailers and consumers, there is little regionally to rival it. But there remains a risk of oversupply if the UAE is unable to sustain its tourism figures. Older malls also risk becoming obsolete if they are unable to find a niche in the market, as newer properties come online.

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