Dubai mall rents drop by 20%

The cost of renting a new store in Dubai fell by at least a fifth in the last three months as shoppers cut back on spending.

To Let signs in Dubai retail spaces have become a sign of the times as shoppers cut back on spending.

The cost of renting a new store in Dubai fell by at least a fifth in the three months from April to June, according to the property consultancy CB Richard Ellis (CBRE). The average retail rent on a new shop in a mall dropped by 20 per cent in the second quarter compared with the same period last year, while rents for stores on the ground floor of office and residential buildings were down 29 per cent, CBRE found.

Mark Morris-Jones, CBRE's senior director for retail and industrial property for MENA, said that as consumers continued to cut back on their spending, retailers were reluctant to sign on for new shops, driving the prices down. "They're in a position where the trading conditions are such that they need to have some sort of guarantee that when they open the shop they're going to do business," he said. "Two years ago, it was a much healthier environment for retail."

A new shop in a Dubai shopping centre cost an average of Dh400 (US$108.90) a square foot in the second quarter, down from Dh500 a year ago, according to Matthew Green, the head of research for CBRE. Rent for a high-street shop cost an average of Dh250 a sq ft, down from Dh350 between April and June last year, he said. Retailers in the UAE have been struggling this year, especially those selling luxury goods or big-ticket items, with sales down as much as 40 per cent. Renting shopfloor space was one of a retailer's biggest overhead costs and falling rents were good news, said Keith Flanagan, the general manager for Al Ghurair Retail, which manages brands such as Springfields.

"It's good, but the problem is depending on where you are, the rents may be back to 2007 levels, but turnover is back to 2006," he said The rents might be lower, but to pay them could still mean spending as much as 50 per cent of sales turnover, which was unsustainable, Mr Flanagan said. "Now retailers have got very little money to invest in anything because of uncertainty of what the future holds," he said. "There has been little increase in sales."

However, for the convenience store chain 24 Seven, which is planning to open between five and seven new outlets this year, the fall in high-street rents had made it easier to expand, according to Martin Pointon, the company's operational director. The company had originally submitted tenders for retail space on the Dubai Metro. But because rents for shops on the ground floor of residential and office buildings, prime space for a convenience store, had fallen by 30 per cent, 24 Seven abandoned its bids, he said.

"The rents in the market place in Dubai and Abu Dhabi have significantly dropped," Mr Pointon said. "So we can look to grow quicker." The property management firm Jones Lang LaSalle found that retail rents across all types of shops in the second quarter fell by 6 per cent, on average, compared with the same time last year. Craig Plumb, the head of research for Jones Lang LaSalle in the MENA region, said it did not surprise him that high street rents were falling faster than in shopping centres.

"What you're finding at this time is there will be a flight to quality," he said. "And it's going to be the bigger malls, with professional management." High-street shops depended on the people living and working above them, Mr Morris-Jones said, and the softening demand for residential and office space was having a ripple effect on new street-level stores. "You need a critical mass of people actually using, living and working there, depending on whether it is residential or office accommodations in the towers above, to actually power and drive that retail," he said.

Mr Plumb said he expected retail rents to continue to fall, but not as fast as that of residential and office space because many shopping centre developments had been postponed. "The retail supply going forward has now been cut, so there will not be as much retail space this year or next year as was originally planned," he said. "With projects being delayed, that's going to give the market a bit of a breathing space to recover. Whereas in office and residential, there will still be high levels of new supply in the market."