Competition increasing in Abu Dhabi's retail sector

Investing large sums in recent years to both entice locals to spend their hard-earned cash closer to home and to capture higher proportions of tourist dollars, Abu Dhabi’s retail strategy appears to be paying off. Strong expansion in the emirate’s high-quality retail stock with a focus on added entertainment and food and beverage (F&B) components has helped to draw the crowds, and the sector as a whole has benefitted with robust growth.

As oil prices continue to remain flat though, there are signs that consumer confidence is beginning to be affected. While spending remains robust for now, some analysts predict that the sector may be facing greater polarisation, and with a significant level of new retail supply scheduled for completion from 2018, according to real estate services company Jones Lang LaSalle (JLL), older malls may well see rents driven down. Much will depend on the emirate’s growing tourism market, with developers hoping that the strategic location of many of the newer malls next to major tourist attractions will drive footfall from well-heeled visitors.

In Figures

According to preliminary data compiled by Statistics Centre - Abu Dhabi (SCAD), wholesale and retail trade in the emirate amounted to Dh42.1bn ($11.5bn) in 2014 when measured at current prices. This represented annual growth of 18.3%, or 8.7% at constant prices, beating average growth for the economy as a whole of 2.2% at current prices. As a result, the sector now accounts for 4.4% of the emirate’s GDP, compared with 3.8% in 2013.

Gross fixed capital formation (GFCF) in the sector currently stands at Dh2.4bn ($653.3m), an increase from Dh2.2bn ($598.8m) in 2013 and representing 1.6% of GFCF in the emirate. While GFCF across the economy as a whole has remained relatively flat since 2010, capital formation in the wholesale and retail sector has more than doubled over that period, reflecting the substantial sums invested in new malls.

When measured in terms of employment, wholesale and retail plays an even more substantial role in the economy. According to the latest SCAD figures, the sector accounts for 7.8% of the employed population, although among UAE citizens it represents 1.6% of jobs, as opposed to 8.3% among non-citizens.

The most recent absolute figures for the size of Abu Dhabi’s labour force date back to 2011, when it numbered 1.4m people. Assuming the compound annual growth rate within the labour force has remained relatively constant in the past four years, OBG estimates the current number of individuals employed in the retail and wholesale sector to be around 165,000, of which around 162,500, or 98.5%, are likely to be expatriates.

Prices

According to SCAD, Abu Dhabi’s consumer price index rose from 124.5 points to 128.5 points in 2014 (2007=100), suggesting the underlying rate of inflation was 3.2%. This was an acceleration in comparison with 2013 figures, when inflation was only 1.3%, and indeed followed on from two years when inflation was below 2%. Figures produced by National Bank of Abu Dhabi in October suggest that UAE-wide inflation would average 4.37% in 2015; however, these levels must still be considered relatively benign when compared with pre-2009 rates, which frequently ranged between 6% and 15%.

The lion’s share of inflation in Abu Dhabi in 2014 was attributable to housing and utilities, which contributed to 46.1% of the change; among retail goods, 7.4% of the increase was attributable to price rises in miscellaneous goods and services, and 14% to F&B. The underlying rate of inflation in these latter two categories was, respectively, 5.4% and 2.5%.

Confidence

The accelerating rate of inflation, coupled with worries about lower oil prices and the general shape of the global economy, have contributed to a slight annual decline in sentiment among Abu Dhabi’s consumers. Consumer confidence, as measured by the Abu Dhabi Department of Economic Development (ADDED), dropped by seven points year-on-year in the first quarter of 2015 to 138 points, compared with 145 points in the same period of 2014. Viewed from a quarter-on-quarter perspective, however, the figures made for slightly more optimistic reading, with the index rising compared with the last quarter of 2014, and future expectations in particular growing three points quarter-on-quarter.

At the UAE level, consumer confidence appears to be less stable. Data compiled by US-based information and measurement company Nielsen showed the biggest quarterly decline in consumer confidence in six years for the second quarter of 2015, with the index losing seven points compared with the first quarter in 2015, falling to 108.

While UAE residents remain the most optimistic in the MENA region, 70% nonetheless claimed they were looking to find ways to reduce household spending, particularly on items such as clothes and take-out meals, while the top worry was job security.

One area in particular where declining consumer sentiment already appears to be having an impact is consumer electronics. According to a survey released in September 2015 by Plug Ins, a consumer electronics retailer, average spend in the UAE fell from Dh4793 ($1305) in 2014 to Dh4000 ($1089) in 2015. Price erosion was seen as an important issue. Colin Beaton, managing director of retail consultancy Limelight Creative Services, told local press that a combination of factors was hitting sales, including “lower oil prices, the perception that the economy is slowing down, and fewer tourists [from source markets like Russia and Europe].”

Regulation

The retail sector in Abu Dhabi is regulated by ADDED, in accordance with Federal Law 24/2006 (“Protection of Consumers”), and earlier laws regulating commercial companies and civil transactions. In particular, the Executive Regulation to Law 24/2006 devolves responsibility for implementation of the federal law at the emirate level to the local competent authority, in this case the Consumer Protection Section, which is affiliated with ADDED’s Commercial Protection Directorate. At the federal level, ultimate responsibility for the sector lies with the minister of economy, and is exercised through the High Committee for Consumer Protection and the Department for Consumer Protection.

As part of its role in protecting consumers, the Department for Consumer Protection has since 2011 worked with major retailers to establish fixed prices on everyday household consumables. In 2015 the agreement included some 500 products, such as rice, oil, meats and flour, with over 500 retail outlets throughout the UAE agreeing to participate in the scheme, including major retailers such as Lulu and Union Cooperative Society. The prices are enforced through local inspections, with officials also preventing reselling among smaller retailers. A similar scheme is also put in place specifically for Ramadan to prevent sharp price increases.

Value-Added Tax

The year 2015 also witnessed renewed discussion regarding the introduction of value-added tax (VAT) in the UAE. The federal government has announced that VAT will be introduced to the UAE in January 2018. Staple food items, health-care, education and social services will be exempt from VAT. Furthermore, it is expected that VAT will be introduced across the wider GCC region as well, though the timeline has yet to be discussed.

Younis Haji Al Khouri, undersecretary at the Ministry of Finance, told local media in early December 2015 that Gulf states had agreed on key issues for implementing VAT at a meeting of representatives from Gulf ministries. According to Al Khouri, it will take between 18 and 24 months to implement it once a final arrangement has been reached.

Exemptions

Health care, education, social services and 94 food items will be exempted from VAT, and there remain several areas – including financial services – where agreement is lacking. The IMF has suggested an initial rate of 5%, and it is understood that the ministry is also considering the introduction of a federal corporate tax to coincide with VAT.

New Developments

The past five years have witnessed a sharp increase in the stock of dedicated retail space in Abu Dhabi. According to JLL, gross leasable area (GLA) in Abu Dhabi’s retail sector grew from 1.9m sq metres in 2012 to 2.6m by the third quarter of 2015. While further additions are planned, the rate of growth looks set to slow in the coming two years. JLL expects a further 44,000 sq metres of GLA to have been added in the final quarter of 2015, followed by 79,000 sq metres in 2016 and 41,000 sq metres in 2017. This current estimate is down slightly on earlier forecasts, with JLL previously anticipating an additional 85,000 sq metres of GLA for 2016. The company noted that, while the pipeline for the largest super-regional malls had reduced somewhat, there nonetheless remains a significant level of new retail supply scheduled for completion for around 2018.

Prime among these will be the Al Maryah Central mall, to be located on Al Maryah Island; the District Mall on Saadiyat Island; and Reem Mall on Al Reem Island. The first of these, Al Maryah, broke ground in November 2014 and is scheduled to open in March 2018. The 214,000-sq-metre mall will be anchored by US department stores Macy’s and Bloomingdale’s, and in keeping with other super-regional malls in the emirate will feature a substantial F&B component consisting of 90 different dining options, alongside a 20-screen cinema and health club. The $1bn mall is being developed by Gulf Related, which has described it as “fully financed”, and will form part of Mubadala Development Company’s master-planned development for Al Maryah Island, which has been designated as Abu Dhabi’s central business district.

The second mall on the list, District Mall, is scheduled to be built on Saadiyat Island as part of a complex of cultural attractions including the Abu Dhabi branches of the Louvre and the Guggenheim. The mall, which will be developed in a joint venture between the Tourism Development & Investment Company (TDIC) and the real estate arm of luxury goods conglomerate LVMH, is planned to be the emirate’s largest, with 269,000 sq metres of GLA, and will focus on luxury retailers. According to media reports, TDIC began seeking finance for the development towards the end of 2014. No firm information has been released concerning funding or construction; however, according to a Reuters report in April 2015, fundraising for the project had been delayed, with sources citing concerns that there would be insufficient demand for the development in light of the recent growth in GLA elsewhere in Abu Dhabi.

The final large mall on the list has been in the works since 2008. Reem Mall is being developed by Kuwait’s National Real Estate Company and the United Projects for Aviation Services Company. The project was placed on hold for several years to give Al Reem Island the opportunity to mature as a residential location, but now appears to be moving on apace with news in July 2015 that the Urban Planning Council (UPC) had given the $1bn mall the green light. The announcement followed on from a new master plan for the island developed by the UPC, with the council hoping it will become home to 210,000 residents. The mall will have a built-up area of around 185,000 sq metres, and feature 450 shops, 85 F&B outlets, and ( reportedly) the world’s largest indoor snow-play park. Construction is expected to be completed by 2018.

New Kids On The Block

When they eventually open their doors these future arrivals will face an increasingly competitive retail market. Alongside established malls such as Abu Dhabi Mall, Al Wahda Mall, Marina Mall and Dalma Mall, recent years have seen the addition of new malls including Galleria (on Al Maryah Island), a 33,000-sq-metre boutique mall which opened in mid-2013; World Trade Centre Mall, a 59,500-sq-metre GLA development by Aldar which opened in late 2013; and Capital Mall, a 60,000-sq-metre development in Mohammed Bin Zayed City which opened in early 2014.

The most significant recent addition, however, arrived in November 2014, when Abu Dhabi’s largest mall opened its doors to shoppers. Yas Mall, located on Yas Island next to the Ferrari World theme park and the Yas Marina Circuit, has 235,000 sq metres of GLA, almost 400 stores and a 20-screen cinema, as well as 62 F&B outlets. The mall was developed by Aldar Properties, and according to its CEO, Mohammed Al Mubarak, an extension is already planned, with Al Mubarak telling press that, “We couldn’t fit all the retailers we wanted to be here, so we’re already starting to plan phase two.”

The mall is the largest in Abu Dhabi, and alongside hosting the largest Nike, Adidas, H&M and Zara stores in the region the developers secured a major coup in October 2015 when one of the first two Apple stores in the Middle East opened its doors there. Yas Mall is also home to Chalhoub Group’s concept store Tryano, a three-story high-end shopping destination with more than 250 international and local brands, and which offers handbags, beauty and an entire floor dedicated to children. The developers have been successful in persuading brands to come to the mall: as of late 2015 not only was it fully leased, but 95% of stores were trading.

Evolving Malls

According to Saoud Khoory, deputy general manager at Yas Mall, the retail development was “the last piece of the puzzle” for Yas Island. “Tourists want to stay somewhere with a mall, and with the arrival of Yas Mall we can now market Yas Island as a complete destination,” he told OBG. Indeed, in this respect Yas Mall represents something relatively new for Abu Dhabi: a large mall of the scale usually associated with Dubai, attached to a major, dedicated entertainment and activity complex.

Little wonder then that some in the sector have spoken of Yas Mall as not merely disrupting the market, but “shifting the geography” of retail in the emirate away from the city centre. However, while Yas Mall no doubt brings added competition to established malls, there is an awareness among mall managers that, with so much space recently added to the sector, growth for everyone will now become more dependent on drawing in visitors to the emirate. Livio Fabi, general manager at Khalidiyah Mall, one of Abu Dhabi’s more established malls, emphasised this point. “The retail space per capita in Abu Dhabi is now very high, and it’s growing much faster than the population,” he told OBG. “This means that retail will have to be more dependent on other sectors – such as tourism – to maintain its growth rate.”

This new trend is likely to put greater emphasis on F&B and entertainment offerings. “The importance of non-retail developments is vital,” Fabi told OBG. “Particularly in the summer, people will come to malls for the cinema or other forms of entertainment.” This emphasis on malls as destinations in themselves is increasingly reflected in the greater space being given over to F&B outlets, and the greater variety among concessions. There is also a renewed emphasis on events to draw footfall. “At weekends we’re packed,” Khoory told OBG, “but we’re also seeing a lot of mothers with children during the week. We’re hoping to introduce events like mother and baby walks soon to increase weekday footfall.”

Rent Splitting

Market indicators would seem to show that, thus far at least, the new retail supply has been absorbed by the sector without too much difficulty. According to JLL, vacancy rates within Abu Dhabi’s malls remained stable at 2% between the third quarters of 2014 and 2015. Rents were also flat, with on-island malls averaging Dh3000 ($817) per sq metre per annum, and off-island commanding Dh1860 ($506) – neither showing any change from the previous year. JLL expects rents to remain stable in the short term; however, the company anticipates the new malls entering in 2018 to have a more marked effect on the sector, with polarisation anticipated in the coming years. In particular, lower-quality malls are forecast to see rents decline, and JLL expects to see some re-positioning of these in the lower end of the market. Indeed, an oversupply appears to be emerging within the mid-range market, which prompts questions as regards to the feasibility of some of the new developments attempting to enter what is becoming a crowded segment.

The result may be to push some of the established malls in particular to refresh their brand profiles, with a renewed drive to bring more international brands to the city centre, and indeed attract some of the bigger names to branch out from Dubai. In this sense, a critical mass of malls may even help, as the growing maturity of Abu Dhabi’s retail sector begins to offer a more tantalising proposition to established international brands – as indeed has proved the case with Apple. Equally, homegrown retailers are also beginning to have an impact within the region, with Abu Dhabi-based Burger Hood and Liwa Dates both reported to be looking to expand into the GCC.

Outlook

Having been under-supplied for many years, Abu Dhabi’s retail sector has seen the addition of substantial new volume over the past three years, with more set to come by 2018 (albeit at a slower rate than previous). There have been some worries that the sector is heading for over-supply, particularly in the mid-range segment of the market. However, while domestic demand by itself will struggle to sustain the new supply, it is evident that the successful marketing of Abu Dhabi as a destination is providing added momentum to the new developments, and even helping the emirate retain some of the market it has previously been losing to Dubai.

Equally, a refocus on F&B and entertainment to drive footfall should ensure that the impact of declining consumer confidence is minimised. The most likely trend within the retail sector will be increasing segmentation, as greater competition for footfall – particularly among the more established city centre malls – leads to increased market differentiation.