Monday 06, March 2017 by Jessica Combes

Dubai Retail Review 2017

The overhang of upcoming supply and existing high mall density levels indicate retail market saturation.

As one of the most penetrated retail markets in the region, Dubai, despite its modest population has the second highest mall density in the world of 1,214 square metres of gross leasable area (GLA) per 1,000 people, trailing marginally behind New York, according to a new retail report by real estate outfit, Core Savills.

Dubai has a mall density nearly 380 per cent higher than that of London and 240 per cent of Paris, partially because these European markets have a stronger high street market in addition to a much higher population base than Dubai. Such high mall density is largely justified by Dubai’s very high visitor to tourist ratio of nearly 5.6 visitors per resident.

The report highlighted that Dubai offers the most competitive prime rents across global retail hubs and positions itself favourably amongst luxury and fashion retailers. Luxury retail rents in Dubai are nearly 90 per cent lower than New York and almost 75-76 per cent lower than Hong Kong, London and Paris.

“Although mature in its volume, retail offerings coupled with a strong B2C network, Dubai’s retail sector largely remains an oligopoly. Demand is led by privately owned retail groups, which operate almost 90 per cent of global brands in Dubai while the top 5 state-backed developers form nearly 87 per cent of total retail supply. In a retail eco-system such as Dubai, this “close control” makes the market relatively less elastic compared to other global markets which are typically driven by a much larger pool of offer and demand,” said David Godchaux, CEO, Core Savills.

2016 saw nearly eight per cent topping of retail stock, pushing the market size to nearly 3.2 million square metres of GLA. With many projects nearing completion like The Dubai Mall expansion, Nakheel Mall and Pointe on the Palm Jumeirah, in addition to more malls aiming to be operational in the run up to Expo 2020, an overhang of overall retail supply is expected. Nearly 800,000 square metres of major retail supply is forecast for the next three years, adding 25 per cent to existing stock.

“Despite the softening regional economic conditions, demand from retailers has not seen a significant dip with stable preleasing activity witnessed in The Dubai Mall expansion and other strategically located under-construction malls nearing completion. Furthermore, the super-regional malls which are located on the Sheikh Zayed Road are all currently witnessing occupancies northwards of 98 per cent. This has led many retailers to be on the waiting list as developers aim to maintain a tenant mix that is unique and appropriate for the pitch in which the brand is located,” said Godchaux.

Godchaux further emphasised that with the looming overhang of deliveries to escalate existing high levels of mall density in the next three years, the warning signs of market saturation have started to show. The strengthening dollar has caused a contraction in spending from Russian, British and European tourists while the lull in oil prices and ensuing austerity measures have affected the buying sentiment, particularly for discretionary spending of the GCC consumers. Ongoing flat rentals are yet to reflect these relatively lower margins and are straining the ability of some retailers to pay rent for the prime strips that they occupy.

With most major international brands already having a presence in Dubai and many in fact having multiple stores across super-regional malls, room for potential demand may start to contract as market penetration reaches its peak, according to the report.

“Despite a relatively closed market, we foresee the retail sector to progressively segment itself with higher and lower performing assets created by a process of natural selection by retailers. A gap is anticipated to form between these two subcategories, reflected through heterogeneous rents and vacancy levels – a case similar to Dubai’s two-tiered office market. Retailers are expected to optimise footprint and mark a flight to quality towards perceived high functioning malls while the slower performing assets may see a cascading effect of rising vacancy levels caused by this shift,” said Godchaux.

The report forecast that three super-regional malls on Sheikh Zayed Road–The Dubai Mall, Mall of Emirates and Ibn Battuta Mall will remain the top choice for existing and new brands to operate as the market starts to saturate. Low rise pedestrian retail offerings are expected to gather pace as they add value to residents by upgrading community living without losing the tourist appeal, capturing both these demand segments. On the other end of the spectrum, community centres, which offer a well thought out tenant-mix and serve a strong captive market, to perform well, while retaining retailers as well as minimising leakages to super-regional malls, particularly for basic needs.

However, retail outlets in outer areas which do not have access to public transport, coupled with a relatively skewed tenant mix and lower catchment populations may witness absorption issues while increasingly feel the pressure to sustain rents, particularly expected for auxiliary retailers.

Godchaux added Dubai has long shed its “emerging retail market” tag and has firmly positioned itself as a global shopping destination on the back of its robust retail and tourism sector, which positively affects other domains of its diverse economy. With rising levels of new stock coming to market over the next three to four years and first signs of market saturation starting to show, it is to be seen if demand can continue to match up – albeit the strength doesn’t become a threat instead.

 

  

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