Monday, Jan 25, 2016

Dubai: After five years of experiencing some of the sharpest rental hikes, retailers in the UAE could be in for some respite. Mall rentals, especially in Dubai, peaked during 2015 and are now starting to see some sort of softening, and especially on new leases, industry sources suggest. Even where there have been increases, these are being restricted to the bare minimum.

“The message that retailers have been putting out — of struggling with lower sales right through 2015 — is being heard by mall owners,” said Craig Plumb, Head of Research at the consultancy JLL Mena. “More mall owners are responding to the situation by being more flexible with their demands, both when setting the base rental rate or as a percentage of sales.

“This process of retail rent rationalisation will pick up steam this year. But the extent of the change will be mall-specific.”

Apart from the sharp drop in tourist-driven purchases, there are other factors adding their own push-and-pull effect on retail lease rates. Some of the older malls in Dubai have gone through extensive makeovers and in the process made quite drastic changes to their tenant mix. This meant the malls themselves made the transition from being “destinations” for all to being more of a shopping and entertainment attractions for the immediate neighbourhoods.

This has led to rentals being revised to be more in sync with the changed circumstances.

Clearly, such changes are more apparent at the older malls than at super-regional destinations such as The Dubai Mall, which is adding another 1 million square feet to its leasable area, and Mall of the Emirates, already through a major expansion. A top-of-the-line rental in the city’s prestige malls are reckoned to be in the range of Dh5,000-Dh6,000 a square metre. Even a standard-sized outlet at these locations carry a hefty premium.

According to Shivam Goel, Chief Operating Officer at the Landmark Group owned SportsOne chain, “We are all aware that the large malls come at a premium, reaching Dh3,000 a square metre for a unit measuring 1,400 square metres and Dh1,800 for a 700 square metre outlet. Even then, there are long waiting lists for space availability.

“As much as being present in a large mall is a great advantage, the rentals can be a pinch especially for smaller stores and put them under great pressure when rentals rise. With smaller or community malls, rental increases may not go up to a great extent, and many a times tend to remain consistent with the popularity of the mall.”

But retailers who had to endure lower sales and high rentals through 2015 will take even the smallest downward revision on their rental costs. The Q1-2016 sales numbers, including the turnover generated during the DSF phase, will be critical in setting them up for the rest of the year. There was some talk of tourists making a return from December.

But whether they are enough to effect a full-fledged turnaround in retail sector’s fortunes is not yet clear. Another point that will need clarification is whether they are the high-spending visitors — and not the sort to be put off by a strong dollar — splurging on the city’s prestige malls or penny-pinching for value brands elsewhere.

“The retail sector will continue to experience pressures, internal and external, and mall managements will have to respond accordingly,” said Plumb. “Expecting retailers to absorb higher lease terms is probably not appropriate in the current environment.

“There aren’t as many unrepresented international retailers lining up for a mall location as was there in recent years. The upturn for the retail sector will depend on future levels of tourist arrivals.”

By Manoj Nair Associate Editor

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