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Retail real estate in the UAE has seen a metamorphosis in the last half decade. The next five years will witness an even bigger transformation as the UAE positions itself as a much more mature market for various types of retail real estate. ''With an existing and upcoming supply of over 10 million sq m, the retail provision per capita [in the UAE] continues to be one of the highest in the world,'' according to last year's autumn edition of Retail Focus by property consultancy Knight Frank.
Once characterised by shops offering luxury items to tourists, more and more malls now focus on food and beverage on the back of growing domestic demand. Diaa Noufal, Associate Partner—Middle East and North Africa Development Consultancy and Research, Knight Frank, says, ''Although spending patterns are not seen as changing dramatically over the last five years, there was a drop in luxury retail spending last year due to the decline of luxury shoppers from around the globe.''
According to data released by payments processor Network International, which processes over 50 per cent of all transactions in the UAE, card spends in the luxury sector, essentially comprising jewellery and expensive watches, have reduced by 7 per cent. Spending by Chinese tourists in the third quarter last year was down 57 per cent compared to the same quarter in 2014.
In contrast, food and beverage spending in the UAE is expected to remain strong and create growth opportunities, according to Noufal.
''Food and beverage spending is the second largest expenditure segment among UAE households after housing and utilities,'' says Noufal. In the UAE overall, an indicative retailer group portfolio is weighed 27 per cent toward food and beverage, which is seen as an attractive sector, according to Knight Frank.
Payments data seems to support this trend. According to Network International, the sector saw a 30 per cent growth year-on-year. Domestic spends in the sector have also grown by 30 per cent in the third quarter last year compared to the same period in 2014.
However, despite these general trends, there are crucial differences in how the two major retail markets in the UAE — Abu Dhabi and Dubai — are positioning themselves. With a collection of some of the world's biggest super-regional retail centres, Dubai is now quickly adding to its portfolio a growing list of community malls. Abu Dhabi, on the other hand, has seen a big change in its retail landscape in the last five years with projects such as Yas Mall, Reem Mall and Sadiyat Mall.
Dubai is dominated by super-regional malls, representing 52 per cent of the existing supply, while regional and community retail projects account for 12 per cent, according to Knight Frank.
''Over the last five years Dubai has added around 650,000 sq m of retail space, the majority of which are community centres, bringing the total retail space to more than 3 million sq m,'' says Noufal. ''The total space of super-regional malls in Dubai is currently around 1.7 million sq m, with more than 2 million sq m in the pipeline until 2025.''
Clearly, the trend is toward a mid-market retail offering that caters to the resident population, while destination malls target inbound tourists. Dubai, nonetheless, maintains its status as a complex and multi-faceted retail hub. Says Noufal, ''To cope with the increasing regional demand and to position itself as the regional destination of choice, malls have been continuously increasing their attractions.''
While Dubai retail real estate still provides the biggest bang for the buck for investors, there is a slowdown in response to general economic conditions. JLL's Dubai Q3 report last year points to subdued activity as annual rental growth rates across all mall types continued to slow down. ''As the growth in retail sales figures remains sluggish, landlords are now having to adopt more realistic and rational approaches to leasing to retain their tenants,'' according to the JLL report, which forecasts a further rent drop this year.
Retail real estate majors in the UAE are taking a long term view. The third quarter saw the delivery of the Mall of the Emirates extension, adding 25,000 sq m of gross leasable area (GLA), and phase one of Majid Al Futtaim's City Centre Me'aisem in International Media Production Zone (IMPZ), adding 23,850 sq m. Around 136,000 sq m was expected to be delivered in the remainder of 2015, comprising mainly extensions to existing super-regional malls. At last year's Cityscape Global in Dubai, many new launches were announced. Continuing the trend of open retail, Meraas unveiled Marsa Al Seef, a 1.8km stretch of retail shops along the Dubai Creek. Dubai Holding announced a redesign of the Mall of the World master plan, to include wider boulevards allowing for retailers to create standalone stores.
Nakheel revealed plans to transform Palm Jumeirah's trunk into a pedestrian retail strip. The Palm Jumeirah Promenade, which stretches 1.5km, will connect the island's residential buildings with other entertainment facilities. Nakheel also unveiled plans to add 1.3 million sq ft of leasable space to Dragon Mart, renaming the master plan Dragon City, and announced Deira Islands Mall, Deira Islands Promenade and an expansion of Ibn Battuta Mall.
Pedestrian-friendly retail communities are also gaining ground. ''Developers are looking for creating new retail opportunities and for creating new shopping experience, [with] outdoor locations such as City Walk, Box Park and The Beach,'' says Noufal. ''Another example is Dubai Design District [d3], a new live-and-work community that is built around the creative and cultural industries. The retail offerings in d3 are in a European street environment with central plazas, pedestrian streets and areas for creative and community events.''
The market could also expect a boost from the lifting of economic sanctions on Iran, as Dubai saw a 41 per cent rise in Iranian visitors in 2014, according to Knight Frank. ''The lifting of the Iranian sanctions is envisaged to directly impact trade and tourism in Dubai leading to greater expenditure.''
On the downside, reduced economic sentiment amid lower oil prices, coupled with lower overall tourism demand, could affect spending from certain strata.
A new entrant to the world of super-regional malls, Abu Dhabi has seen its retail landscape change dramatically in the past decade. ''Abu Dhabi has gone through a complete change since Marina Mall was developed in 2001,'' says Noufal. ''Super-regional malls didn't exist five years ago. Abu Dhabi now has additional super-regional malls, including Yas Mall in Yas Island. Going forward, the development in the new areas in Abu Dhabi has seen dedicated regional malls such as Reem Mall and Saadiyat Mall.''
According to JLL's Q3 report, retail rents in Abu Dhabi are expected to remain stable until the fourth quarter this year. No major deliveries took place during the third quarter, keeping retail supply at 2.6 million sq m.
''Despite the slowing economy, consumer spending continues to grow, driven by population growth and increased tourism arrivals, attracted by Abu Dhabi's ever improving leisure offering,'' according to JLL.
Approximately 44,000 sq m of retail GLA is expected to enter the market by the end of the year, dominated by non-mall retail within mixed-use developments such as Gate Towers and Oceanscape on Reem Island, Landmark Tower on the Corniche and Saadiyat Beach on Saadiyat Island.
Well-located malls command rentals of Dh3,000 per square metre per year on Abu Dhabi island and around Dh1,860 off island, according to JLL. Vacancies remain minimal within established regional and superregional malls.
A tale of two markets
Even as Dubai focuses on domestic demand, its multinational population has resulted in a mixed bag of retail attractions. Retail in Saudi Arabia, on the other hand, is almost entirely driven by domestic demand. Both markets are seeing strong growth. ''Malls are an intrinsic part the fabric of everyday life in regions such as Saudi Arabia and the UAE,'' says Simon Wilcock, CEO of Arabian Centres.
In a YouGov survey of 1,000 UAE residents, 41 per cent of respondents said the frequency of their visits to malls increased in the last two years. ''Clearly the frequency of visits is on the rise and this is a welcome sign for the malls, retailers and for the UAE economy.''
Saudi Arabia, which recently introduced a policy that allows foreign investors 100 per cent ownership of retail and wholesale businesses, is likely to see rapid retail development similar to that seen in Dubai in 2000, Wilcock said at a recent round table organised by Arabian Centres, a developer and operator of shopping malls. But he says it is taking place over a significantly larger and fragmented canvas where souqs and traditional markets hold about 50 per cent market share.
''Retail provision per capita is highest in Dubai, while it is lowest in Oman and Saudi,'' says Diaa Noufal, Associate Partner — Middle East and North Africa Development Consultancy and Research, Knight Frank. ''That indicates a strong development opportunity to meet local demand in these countries.''
Sales of listed retailers rose by 12 per cent in 2014 in Saudi Arabia, the GCC's wealthiest economy and the Middle East's largest retail market. Its young population — one-third of its 30 million residents — has a propensity to spend.
How big is your mall
The Urban Land Institute classifies retail centres according to their gross leasable area.
Super-regional mall: above 90,000 sq m
Regional mall: 30,000- 90,000 sq m
Community mall: 10,000-30,000 sq m
Neighbourhood mall: 3,000-10,000 sq m
Convenience malls: less than 3,000 sq m
Source: Shalini Seth, Special to Property Weekly