While e-commerce is still at an early stage in the GCC and accounts for only a fraction of total online sales in Europe, the Middle East and Africa, its rapid penetration increased last year, posing a threat to traditional brick-and-mortal retail. Global consultant AT Kearney predicts the e-commerce market in the GCC to grow to $20 billion (Dh73.46 billion) by 2020, up 277 per cent from $5.3 billion in 2015 — a staggering increase in the space of just five years.

Mega-deals in the GCC, including Amazons acquisition of Dubai-based online retailer Souq.com in March for $650 million, certainly show the potential for growth. This deal will give Amazon access to millions of customers and an established distribution and logistics infrastructure in the Middle East. In addition, mega e-commerce platform Noon.com was recently launched. Although it has been delayed by more than eight months, the hype around the deal gives some insight into the exciting future of retail.

Online shopping is certainly seeing a wave of big investments in the GCC and retail landlords are not prepared to let retailers be the only ones to benefit from this trend.

For instance, in May we saw Emaar Malls (owner of Dubai Mall) buy a 51 per cent stake in Dubai-based fashion e-commerce site Namshi from Rocket Internets Global Fashion Group for $151 million. Emaar Malls will help develop Namshis logistics infrastructure and global expansion, adding to Emaar Malls digital-driven strategy.

Majid Al Futtaim Holding has chosen an organic route to build its presence in the online space by differentiating the customer experience and delivering a seamless integration between physical and digital offerings as part of their long-term strategy. This means investments in digital wallets, last-mile delivery, and other organic platforms. For example, Majid Al Futtaim has announced a partnership with logistics start-up Fetchr that allows customers to have their shopping delivered from the mall to their homes or hotels.

Although online retail is gaining traction, it is probably a lesser threat to physical shopping than it is in Europe. This is because malls offer more than just a shopping opportunity to visitors in the GCC. A visit to the mall is a family outing, especially in the hot summer months, offering various leisure, entertainment, and even touristic experiences like Dubais famous indoor ski slope or aquarium and zoo.

However, the slowdown in economic growth certainly represents a challenge for retailers and retail landlords in the GCC this year.

Pressure has arisen from lower oil prices, which has, in turn, subdued the hiring and expansion plans of companies exposed to the oil industry. Non-oil private companies business activities have also softened, decreasing consumer purchasing power. The region is bracing for the roll-out of a 5 per cent value added tax (VAT) that will increase the overall cost of living. Details of what will be subject to VAT have only just been revealed with the law stating that goods and services are subject to VAT at a standard rate of 5 per cent, albeit with some exclusions including preschool and school education, basic preventative healthcare, goods and services exported outside of the GCC, international flights from the UAE, gold and some other precious metals and residential property.

Retailers and their landlords also stand to be negatively affected by more cost-sensitive tourists this year, particularly in Dubai. Negative currency exchange rates render shopping more expensive for most international visitors, with the US dollar strengthening further against most currencies this year. The currencies of Saudi Arabia, the UAE, Qatar, Oman, and Bahrain are pegged to the US dollar. Kuwaits dinar is pegged to a basket of currencies including the US dollar and the euro.

Despite evidence of weaker tenant sales accentuated by low oil prices, currency appreciation, and lower tourist purchasing power, retail rent seems to be more or less flat versus 2016 as reported by the regional real estate companies S&P Global Ratings public rates. This is especially true for high quality assets in good locations.

However, future supply may soon reverse this trend. According to real estate and investment management company JLL, retail supply in Dubai is expected to grow more than 25 per cent by 2020, up from 17 per cent growth for the past four years. Excess supply in the retail market will no doubt put downward pressure on rents.

Additionally, lower purchasing power, job insecurity, the potential impact of VAT and the likely impact of e-commerce have the potential to make GCC retail landlords more cautionary.

The writer

Sapna Jagtiani is a real estate analyst at S&P Global Ratings. The views expressed here are her own.

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