Retail developers hit by higher costs

Regional retail developers are considering rolling back projects amid soaring inflation and fears of a credit crunch spillover.

The cost of building materials has eased, but there is still a shortage of skilled labour.

DUBAI // Regional retail developers are considering rolling back projects amid soaring inflation, volatile commodity prices and fears of a credit crunch spillover. Graham Dreverman, the group managing director at Nakheel Retail, said the market "was definitely heading in that direction". "Prices for building were up by 40 per cent this year, so what's happened is steel and concrete and the major components are coming down so we've proceeded, but we are definitely keeping an eye on things."

According to Retail International, a British consultancy, 16.35 million square metres of retail space is scheduled for completion in the GCC region by 2010 with about 2.6 million sq m of gross leasable area set to be ready by next year. The UAE and Saudi Arabia will see the highest increases of gross leasable area in the GCC, contributing 44 per cent and 30 per cent respectively, according to Colliers International.

With this and many more retail projects in the mix, including a goal set by Nakheel to build 100 malls in Dubai in the next 20 years, an aggressive international expansion plan by Emaar, and construction on Mall of Arabia, set to outsize every mall in the world, some believe that the current economic climate will exacerbate the ability of developers to stay up to speed. "We're working for some real estate companies in the region and the one topic we're working with them on is how do you strategically position yourself to not lose out if the market loses out," said Robert Ziegler, the vice president of AT Kearney in Dubai. "We definitely recommend diversification in different ways - not just in terms of mixed use, but also going international ? and not just doing high end property development."

Worth about Dh367 billion (US$100bn), the retail sector serves as a driving force behind the economies of the GCC and has become the second-largest non-oil industry in the region. Retail spending in the UAE alone is projected to reach Dh37.4bn a year by the end of the decade. However retail is often the first sector to take a hit at times of an economic slowdown. In the US, for example, chain store sales last month rose by one per cent year-on-year, according to the International Council of Shopping Centres - the slowest since Sept 11 2001, when consumer spending ground to a halt after the attacks in New York and Washington.

With a continued growth in profit of approximately 30 per cent, year on year, at malls across the UAE, industry insiders say any concerns being expressed now are merely out of vigilance. "The first impact that happens when your economy is in a rut is retail sales go down," Mr Dreverman said. According to Al Mazaya Holding, construction costs in the GCC increased about 30 per cent last year and 50 per cent in the first half of this year.

While the prices of certain commodities and building materials have eased in recent weeks, several challenges remain, including high transportation costs, supply shortages, a lack of contractors capable of delivering projects on time and a shortage of skilled labour. "Unfortunately soaring construction costs are unavoidable when you have so many projects going on at the same time," said Jade el Khalil, the chief sales and marketing officer for Dubai Properties.

"Our colleagues in the market are experiencing things similar to what we are experiencing, in the sense that costs are going up and inadvertently you will have a push up in all the prices." Jocelyn McBride, the group corporate communications and marketing manager for City of Arabia, agreed. "Knowing where the market is going, and having the flexibility to grow with the project - any good project should be able to do that," she said. "They should watch what's happening in the markets and accommodate based on that."

Many developers say their consultants have recommended that they push through with projects as quickly as possible, given increasingly uncertain market sentiments and volatile commodity prices. Others, however, say that while the current economic climate warrants delays when projects are in the early phases, it is generally not recommended for later-phase projects, as the financial repercussions are often severe.

"Delays work for people who have not started physical construction - they should hold, take a step back and watch what is going on," said Shadi Ramzi al Majali, the general manager of Saraya Aqaba, a Jordan-based developer of mixed-use properties. "If the skeleton is up, you have to move on and finish the project, otherwise you will only hurt yourself more." @Email:[e-mail]