UAE shop rents climb as retail sales fall

Retailers in the UAE say they are struggling to survive as their rents rise as much as 20% and shoppers stay at home.

Shoppers stroll in Dubai Mall, one of the world's largest shopping malls, in this February 27, 2009 file photo. The homages to Pharaonic Egypt, ice rinks and shark-filled aquariums in Dubai's many malls still attract crowds, but retail in the Gulf Arab boomtown is looking fragile as luxury-lovers turn into bargain-hunters. Picture taken February 27, 2009.  To match feature DUBAI-MALLS/    REUTERS/Steve Crisp/Files  (UNITED ARAB EMIRATES BUSINESS SOCIETY) *** Local Caption ***  SEC10_DUBAI-MALLS-_0406_11.JPG
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Retailers in the UAE say they are struggling to survive as their rents rise up to 20 per cent, at a time when residential rates are decreasing and shoppers are staying at home. Duncan McLellan, the general manager of Dubai Holding Group, which holds the local franchise for brands such as Zara, said turnover has fallen by as much as 35 per cent but mall rents, a retailer's biggest expense, have risen between 5 per cent and 20 per cent upon renewal. "We're seeing quite significant decreases in our sales," Mr McLellan said. "While everybody is trying to be more tight on their budgets, their staffing, salary increases - all of these areas which you can control - the one area you can't control is your rent." A survey by the property consultancy CB Richard Ellis (CBRE) this month showed that retail rents in the first quarter fell in Dubai and Abu Dhabi for the first time in at least 10 years. Shopping centre rents fell 10 per cent in Dubai to Dh450 (US$122.51) a square foot, while rents in Abu Dhabi were static at Dh371 a sq ft. High street rents fell in the first quarter, year on year, by 11 per cent in Dubai to Dh400 a sq ft, and by 3.5 per cent in Abu Dhabi to Dh280 a sq ft. Mr McLellan said that while sales in Abu Dhabi had stayed relatively stable, sales in Dubai had taken a major hit. Yet, many retailers were still having their rents raised and were paying between 15 and 25 per cent of their sales towards rent, he added, more than the general standard of between 10 and 15 per cent. In some cases in newer, incomplete developments, retailers were spending between 35 and 75 per cent of their sales revenues on rent, Mr McLellan said. Keith Flanagan, the general manager of Al Ghurair Retail, which holds the local franchise for brands such as Springfield, said rents have risen between 5 and 20 per cent upon renewal. Closing these stores could lead to bigger losses, because of the capital investment in inventory and building, Mr Flanagan said. Marwan Eskandrani, the business development manager in the GCC for Kamal Osman Jamjoom Group, which has brands such as Mikyajy, said rents could be renewed for one year at the regulated 5 per cent rent increase. But Mr Eskandrani said that without a guaranteed renewal after that time, retailers were at risk of losing the money they put into the store. Mr Flanagan said sales had dropped by as much as 35 per cent in the first half of this year, especially in shopping centres, the tenant retailers of which have lost visitors to the 1.12 million square metre Dubai Mall. If landlords did not reduce retail rents in line with global trends, shop closures would increase, he said. As more and more retailers pulled out, it was less and less attractive for shoppers to go to the mall, he said. "It's not good for the retailers that are still locked in to those malls and can't get out." However, Mark Morris-Jones, CBRE's senior director for retail and industrial property in MENA, said rates that were agreed to five or 10 years ago might be lower than the current market rate and need to be increased. "There are rents under market, and rents over market," Mr Morris-Jones said. "Historical rents, where they are low, they will increase." He said the cost of a new store had dropped from a year ago, when the economic downturn had not yet reached the Emirates. However, there were variations depending on the location and conditions in previous lease agreements. Majid Al Futtaim Shopping Malls, the developer behind Mall of the Emirates, has said it did not plan to reduce rents at its malls. Shahram Shamsaee, the developer's senior vice president of retail, said sales were strong in the region compared with other economies, and rent rises might be required for contracts signed three or four years ago, which saw only minimal government-regulated increases in the retail sales boom. At MAF's malls, retailers were spending 7 per cent of sales on rent, he said. The developer of Dubai Mall, Emaar Malls Group, has said it would not amend its lease agreements. Craig Plumb, the head of research for Jones Lang LaSalle MENA, said it was only a matter of time before mall developers adjusted the rents. "It's logical it will happen but maybe it doesn't happen overnight," Mr Plumb said. "It takes a while for the market to adjust to the changing balance between the tenant and the owner, but once you see some vacancies in some of the centres, that's obviously going to detract from their ability to offer an attractive retail environment. "Therefore the owners will start to do more and support their existing tenants."