Dubai, with its extensive portfolio of shopping malls, has emerged as a key retail destination in the GCC over the past five years.

Since 2006, the total stock of retail supply in the emirate has increased 73 per cent, from 15 million square feet of gross leasable area (GLA), to 26 million sq ft today. Some 75 per cent of this retail space is concentrated in about 15 major malls, although in total there are 57 shopping centres of varying sizes in the emirate.

Key fact

Retail sales revenues in Dubai declined by an average 30 per cent in 2009

Source: Jones Lang LaSalle

But the financial crisis has hit the sector hard. Restricted consumer spending has resulted in lower footfalls and declining sales in retail outlets the world over, and Dubai has been no exception.

According to real estate consultancy Jones Lang LaSalle, retail sales revenues in the emirate – home to several of the world’s largest shopping centres – declined by an average 30 per cent in 2009.

Greater flexibility

At the same time, new mall supply entering the market and increasing competition for retailers has weighed heavily on rental rates.

The average estimated rental value (ERV) for retail space in Dubai’s malls dropped 34 per cent to AED240 ($65) a square foot in the first quarter of 2010, from the same period in 2009. The rental prices in the largest malls tend to be 30-40 per cent higher than the average rents for the sector, but those too have come under pressure, falling from AED560 a sq ft in early 2009, to AED360 a sq ft at the start of 2010.

Dubai retail supply
 Gross Leasable Area  (million square feet)
2009 24
2010 26
2011 27
2012 27
2013e 31
Source: Jones Lang LaSalle e=estimate

 

Mall owners have responded to the downturn by introducing greater flexibility into leases, including offering more short-term leases, break clauses and rent-free periods, as the market shifts in favour of tenants.

In Abu Dhabi there is certainly more opportunity for retail schemes, but not in Dubai

UAE-based contractor

But prices could soon find a floor, as the pipeline of new mall construction has now tapered off.

The opening of the local Majid al-Futtaim’s Mirdif City Centre mall in mid-March is expected to be the last major addition for two to three years as developers’ attention shifts to smaller projects and community malls. The scheme added 183,400 square metres of GLA.

Several other malls had been planned for Dubai, but the global recession has stalled their development. “Many proposed retail centres have been delayed due to the downturn,” says Craig Plumb, head of research at Jones Lang LaSalle Mena. “Few would admit to [them] being scrapped altogether – a better phrase would be on indefinite hold. The best example in Dubai would be Mall of Arabia.”

The Mall of Arabia forms part of the planned City of Arabia scheme in the area known as Dubailand. The first phase of the massive shopping complex is now expected to open in 2013, at the earliest. Once subsequent phases are completed, it will have 930,000 square metres of GLA making it the world’s largest shopping mall. If the first phase does open in 2013, the total mall stock in Dubai would reach 31 million sq ft of GLA.

A local contractor that was looking to get involved on the scheme confirms the project appears to be going nowhere for the foreseeable future. “On Mall of Arabia there has been very little activity,” he says. “We have not been aware of any real movement there for a while. It is unlikely anything will be happening for quite some time.”

Another UAE-based contractor with previous experience of building malls agrees there is very little on the horizon for retail work. “A lot of malls have recently opened up in Dubai. If you factor in the current economic climate, there won’t be much happening there now for some time. In Abu Dhabi there is certainly more opportunity for retail schemes, but not in Dubai.”

The retail markets in the UAE’s two largest emirates are quite distinct. Whereas Dubai is oversupplied with shopping malls, there is a shortage of high-quality retail space in Abu Dhabi, which has expanded at a much more measured pace. The total retail stock in Abu Dhabi is just 1.42 million sq m of GLA, and of this only 36 per cent is in enclosed malls or shopping centres.

According to Jones Lang LaSalle, there are currently only 16 major retail centres in the federal capital, with a combined GLA of less than 520,000 sq m. Due to the lack of premium quality space, occupancy rates in existing malls are high, at more than 95 per cent.

Analysts also say that Abu Dhabi’s retail market has been much less affected by global financial crisis than Dubai’s. This is primarily due to retail sales being driven by the spending power of UAE nationals and expatriates rather than tourists, which makes it less susceptible to economic forces. Although nationals accounted for just 36 per cent of household income in Abu Dhabi in 2009, they accounted for 43 per cent of the AED18.9bn spent in the retail sector last year.

At present, the tourism sector contributes less than 10 per cent of total retail spending in Abu Dhabi, but this is likely to increase in the years ahead. The emirate has set itself the target of attracting 3 million tourists a year by 2030 – double the current number of annual visitors – and is investing heavily in building new cultural attractions to achieve this, including versions of France’s Louvre and the US’ Guggenheim museums. In November 2009, Abu Dhabi also hosted its first Formula 1 motor race at its new Yas Island Marina circuit.

New shopping malls are also being planned, and Jones Lang LaSalle forecasts that leasable retail space in Abu Dhabi will rise some 55 per cent to 2.2 million sq m by 2013. This is expected be sufficient to meet the demand in the emirate and to cater for increasing tourist arrivals.

While this is good news for shoppers in Abu Dhabi, the wave of new malls is likely to have negative impact on footfall down the road, as at present, Dubai with its diverse range of retail outlets and ancillary attractions benefits from significant spill-over demand from the UAE capital.

Slow return to growth

But by 2013 the world’s economy should have regained its health. Indeed, there are already some signs of a fragile recovery and consumer spending in Dubai is predicted to rebound from this year onwards.

Dubai’s Chamber of Commerce expects total spending in the emirate to increase by about 4 per cent in 2010 and by more than 8 per cent in 2011. Jones Lang LaSalle, meanwhile, foresees a rise in sales revenues of 3-5 per cent in 2010, though the consultancy says this will be driven by demand for non-luxury goods.

But with forecasts that Dubai’s economy will contract by 0.4 per cent in 2010, and only return to growth in 2011, it will still be some time before the recently added retail space in Dubai is fully utilised.

“More end-user demand will be the main driver [of a recovery in the retail sector] – this really means more employment,” says David Dudley, head of the Abu Dhabi office of Jones Lang LaSalle. “This is likely to grow again from 2010, but it could take a time to absorb some of the excess [mall] supply that has been produced.”