UAE retailers face tough outlook on oversupply

Rising competition from e-commerce is applying pressure as more space gets added.

Mall of the Emirates in Dubai. Dubai added 260,000 sq metres of retail space last year, the most since 2010. Pawan Singh / The National

Pressure on UAE retailers will rise over the next two years as 900,000 square metres of retail space is added to an over­supplied market competing with an ever-growing e-commerce sector, according to a report by real estate consultancy Knight Frank.

UAE retailers that used to enjoy double-digit sales growth ranging between 10 and 15 per cent now will have to contend with “modest” single-digit growth, the report said, pointing to a softening in the retail market because of uncertain consumer confidence.

While well-established malls with higher footfall will hold on to their “healthy” occupancy rates, rent calculations will have to change, according to Matthew Dadd, a partner with Knight Frank.

“We do see a correction on the way as to how rents are calculated with malls and retailers becoming retail partners sharing far more of the profits rather than demanding large base rents,” said Mr Dadd in telephone interview.

“The delivery of additional retail supply is expected to put pressure on overall occupancy rates. The likes of H&M or Prada won’t close down but they may change their shop formats to rely less on revenues in-store.”

The report was also less-than-certain about macro conditions easing the pressure on retailers, who are suffering from a strong US dollar, to which the dirham is linked, and poor purchasing power of residents grappling with the economic slowdown.

“Consumer confidence is low amid job insecurities and the higher cost of living has impacted residents’ purchasing powers,” the report said. “In addition, the strengthening of the US$ is showing little respite, particularly with the potential for interest rate hikes in 2017. This will ultimately push the dirham even further, making the country an expensive retail destination, especially for luxury shoppers from countries such as China, Russia and India.”

Last year, Dubai’s retail sector added 260,000 sq metres of space, the highest since 2010, including the expansion of Dubai Festival City, The Avenue in City Walk, Ibn Battuta Mall and new community malls, such as Shindagha City Centre, according to the broker JLL. The potential entry of more than 300,000 sq metres of additional retail space this year poses a risk of oversupply to the market, according to JLL.

In January, CBRE also forecast 900,000 sq meters of retail space would be added between this year and 2019 to the existing 3 million sq meters.

“I think Dubai’s secondary and tertiary malls are facing new supply challenges, apart from macro conditions,” said Matt Green, the head of research and consultancy at CBRE.

He said Abu Dhabi was a different case with the two best performing malls being Al Wahda Mall and Dalma Mall.

“These are in good locations and solidly looking after the mid market,” said Mr Green. “They offer value propositions with great occupancy. People don’t come to look at the fish tank or the ski slope, they go to them to spend money.”

Another external pressure highlighted by the report was the burgeoning threat of e-commerce although its exponential growth was not expected until 2021.

“The e-commerce sector could not have boomed in the UAE without its infrastructure having been organised,” said Mr Dadd.

“The postal addresses in the country have being regularised over the past couple of years but if one looks to Saudi Arabia that is still way off.”

The e-commerce sector has had a flurry of M&A activity in the UAE over the past couple of months with smaller players being aggregated into larger concerns but smaller established players are still recording huge growth.

“We received US$67 million in funding in 2016, after only a year of trading, and we saw sales quadruple in 2016,” said Pratik Gupta, the co-founder of Wadi.com. He would not comment on whether he thought Wadi.com was likely to be bought out by any big competitor.

“In 2017, sales have tripled already and last month we became operationally profitable,” he said. “We have big plans for the future and we strongly believe that whether there are two or three or four players in the market, we will continue to grow.”

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