When Kewal Mehta was searching for new locations for his chain of ice cream shops last year, consumers were still out in force.
Retail rent declines slowing
When Kewal Mehta was searching for new locations for his chain of ice cream shops last year, consumers were still out in force and retailers were rushing to open as many stores as possible - and were willing to pay the price. Now shoppers are watching their wallets, retailers are much more cautious and some landlords are more willing to negotiate to fill their centres, said the manager of Cold Stone Creamery in the UAE.
"Before you could say the landlords were ruling," said Mr Mehta. "Now more tenants are ruling in these projects. You can see the buying power of the tenants is much stronger at this time." As a result, the average rent for a new store in Dubai continued to fall in the third quarter of this year, though not as steeply as in the first half, real estate consultants say. Rents declined by between 2 per cent and 3 per cent between July and September, said Craig Plumb, the head of research in the MENA region for Jones Lang LaSalle, compared with a 6 per cent drop in the second quarter.
"I don't think retail rents will fall as far as with other types," he said. "They will not halve as they did with office and residential rents." Property rental rates in Dubai have fallen across all sectors since the onset of the economic downturn. Prime office rents are down by roughly half and residential rents have slumped as much as 35 per cent since the end of last year, according to Jones Lang LaSalle's latest city report.
Retail property rents were the last to drop in response to global conditions. However, as consumer spending in the UAE began to contract at the end of last year, retailers scaled back expansion plans and crimped demand for retail space. Rents fell from an average of Dh351 (US$95.56) per square foot per year in the first quarter to Dh330 per square foot annually by the end of the second quarter, according to Jones Lang LaSalle. Retail rents, which continued to fall between July and September, have begun to stabilise, said Michael Atwell, the head of Middle East operations at the commercial real estate firm Cushman and Wakefield.
"It's falling slower," he said. "The big correction has happened in Q1 and Q2, and now we're hopefully coming to an end." The slow power shift from landlords to tenants will lead to an increase in incentives such as rent-free periods and shorter leases, said the Jones Lang LaSalle report. The decline, however, will probably not match declines at offices and homes because retailers are more dependent on shops in prime shopping centres, said Mr Plumb.
"At the end of the day, retailers need exposure to sell their brands and they really need to have a presence in the best quality malls," he said. Shahram Shamsaee, the senior vice president of retail for Majid Al Futtaim Shopping Malls, which owns the Mall of the Emirates, said his company had not decreased rents. "We are 100 per cent occupied at the moment," he said. "We have no vacancies and we have had a 99 per cent renewal rate on all the expired contracts."
However, in secondary locations such as at the bottom of residential or office buildings, rents have dropped significantly. "A year ago it was very expensive, but I think we all expected a market correction," said Martin Pointon, the operational director of the convenience store chain 24 Seven. The drop in rents has enabled the chain to push ahead faster with its expansion plans, he said. "We're pleased we've had a market correction. It's what we needed for the business to be sustainable."