Exclusive: Emboldened retailers to seek lower rents in 2018, says Nakheel CEO

Retail rents in Dubai may drop this year as tenants seek discounts in a sluggish market and landlords are forced to negotiate, said the chief executive of real estate developer Nakheel, which is building several shopping malls across the emirate.

“There is obviously a lot of pressure on the retail sector and it is possible [rents could come down],” Sanjay Manchanda told The National.

Nakheel is finding ways to “help” existing tenants on binding rental contracts, Mr Manchanda said, but the default for incoming new tenants is to charge market rates.

“Previously there was a clamouring of, ‘I want this space, I want this space [no matter what]’,” he said. “Now retailers come, they want the space, but they also want to have a discussion. So that element of negotiation has found its way on to the table.”

The master developer, which built Dubai’s iconic Palm Jumeirah Island and other mixed-use communities, has experienced a tough start to 2018 on the back of slow residential sales, Mr Manchanda added.

“It’s been a challenging quarter. Everybody is waiting and watching,” he said. “Every report I’ve read has talked about a drop in rents, drop in sales prices across the Dubai real estate market.

“That ‘wait and watch’ scenario is creating a little bit of a mismatch between our expectations and actual delivery. Sales are happening, but we would like to have their pace quickened up or additional momentum.”

Nakheel reported a 17 per cent rise in full-year net profit to Dh5.67 billion in 2017 compared to 2016, and a 58 per cent year-on-year rise in the last three months to December, to Dh1.67bn.

When asked if the developer expects to match its 2017 financial performance, Mr Manchanda said it is “too early to tell”, but it could be a “tall order”.

Nakheel is offering incentives to buyers such as flexible post-handover payment plans “where you can pay as little as 5 per cent or 10 per cent down-payment and start living there.” It is also waiving or partially waiving unit registration fees.

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“Market dynamics have slightly changed in favour of buyers, both in the residential and retail sectors,” the chief executive added.

This month, the Dubai Chamber of Commerce and Industry set up an industry lobby group, the Retail Business Group, aimed at addressing retailers’ concerns over rent and other issues. The group’s members are pushing for the establishment of Dubai's first ever retail index – a record of rents charged at malls and other locations across the emirate to increase market transparency, said Mr Manchanda.

Dubai’s Real Estate Regulatory Authority publishes a residential rental index at least once a year to prevent private landlords inflating rents. However the retail sector does not have a similar index.

“Retailers want their businesses to prosper and...a Dubai Retail Index, which would allow people to make sure they are paying fair rent for the facilities they are getting in various locations,” Mr Manchanda said.

Construction of Nakheel Mall, the Dh1.2bn retail and entertainment destination on the Palm, is 85 per cent complete with fit-out under way at some outlets, Nakheel said this month.

Meanwhile, the developer has begun discussions with prospective tenants for its next large-scale scheme, the Dh4.2bn Deira Mall that forms the centrepiece of Nakheel’s planned nine million square feet mixed-use community, Deira Central, said Mr Manchanda. Construction is due to start this year.

The mall will take four years to build and the developer will fund the project through a mix of internal accruals and external debt financing, he said. Talks are ongoing with banks and Nakheel will have a “better idea” of the debt-to-equity split in two years’ time.

The partnership between two of the biggest UAE developers Emaar Properties and Aldar Properties announced last week is a positive sign for the market, but Nakheel has no plans for a similar tie-up at present, the chief executive said.