Core Savills predicts addition of 16 million sq ft of new retail space over next three to four years
Dubai retail sector battles oversupply but prime occupancy stays firm
The retail sector in Dubai will continue to feel pressure in 2018 due to increasing supply and residual weakness in spending, after a sustained period of low oil prices hit consumer purchasing power and compounded structural issues from the rise of e-commerce, according to a report.
Approximately 16 million square feet of additional retail space is expected to come to market over the next three to four years, the latest Dubai Retail Overview by consultancy Core Savills said.
However, prime and super-prime malls across the emirate are continuing to attract healthy footfall, while smaller community shopping centres in established neighbourhoods are expected to achieve steady yields over the coming year despite a 3 to 5 per cent annual drop in occupancy in the 12 months to March.
“Although most mainstream retail stock is still held by state-backed developers, we are starting to see community retail gain interest from institutional investors,” said David Abood, partner at Core Savills.
He pointed to real estate investment trust Emirates Reit’s Le Grande Community Mall in Dubai Marina, acquired in 2014, and ENBD Reit’s acquisition of Souq Extra Retail Centre in Dubai Silicon Oasis last December. "We expected this trend to continue, with well-performing community retail centres with mid-tier brands and established catchment areas to achieve steady yields," he said.
Dubai is perceived as an attractive destination for retailers because of its high per-capita spend, fast-growing population and innovative approach to development. However, the market is currently oversupplied, with retail space set to grow by 50 per cent to 4.6 million square metres by 2021, according to a report by consultancy CBRE in May – more than four times the gross leasable area (GLA) of Dubai Mall.
In addition, the industry is facing rising competition from the growth of e-commerce. This has led to fall in rents and rise in vacancy rates, with many retailers securing rent-free periods from landlords willing to take a cut rather than have empty units.
Core Savills’ study found that prime and super-prime regional malls – including flagship destinations the Dubai Mall and Mall of the Emirates – saw comparatively steady footfalls over the past year, allowing mall operators to maintain “relatively strong” occupancy of 90 to 95 per cent as of March 2018. Average rents stood at between Dh700 to Dh1,500 per sq ft, according to the report.
However, average occupancy in established community malls and new retail developments in upcoming areas contracted by around 3 to 5 per cent year-on-year in March 2018, to 80 to 83 per cent, pressing mall operators to offer incentives to attract tenants. Average rents lingered at Dh150 to Dh200 per square feet.
Retail GLA in Dubai is expected to rise by 16 million square feet over the next three to four years – a “significant” increase with the completion of many large retail developments, such as Al Khail Avenue, Nakheel Mall, Dragon City, Deira Mall, Deira Islands Night Souk and The Wharf, the report added.
Prominent additions to supply over the past few quarters have included the completion of Dubai Mall Phase 2 two, which added 52,400 square metres of GLA to the retail market, and the Al Seef Phase two and three developments.
A further pressure is the rapid expansion of retail developments in neighbouring emirates, which could soften demand in Dubai, “as consumers from these markets that previously added notably to consumer spending in Dubai will see a greater variety of retailers available within their local markets”, Mr Abood said.
In response to challenging conditions, brick-and-mortar retailers are increasing their online presence to target broader consumer preferences. Many retailers are choosing to support physical outlets with store digitisation, empowering retail staff to access stock online when it is not available in the store, the report said.
At the same time, experience-based shopping is an ongoing trend as retail operators compete to attract consumers to their swebites. Cityland Mall, by developer Cityland, is one such example, intended to become a new "nature-inspired" shopping destination. Nakheel’s Deira Mall will feature a 1 kilometre-retractable glass atrium.
The Dubai Chamber of Commerce and Industry said this year it is developing the first-ever index of retail rents in the emirate, in an effort to improve transparency in a complex and opaque sector. This, together with recovering regional economic growth, an uptick in the construction industry and rise in tourism, could buoy the retail sector in the future.
“Consumer and business sentiment is expected to improve visibly over 2018 due to the launch of several large infrastructure projects announced by Dubai Government and various policy initiatives aiming to attract tourists and overnight visitors,” said Mr Abood.