More diverse retail mix supports positive sector forecasts

Characterised by strong growth and increasing diversity, Abu Dhabi’s retail sector has come of age in recent years, as developers, retailers and franchises have moved to capitalise on its increasingly affluent and expanding population. Several landmark mall developments opened in 2013 and 2014, strengthening the emirate’s retail portfolio and catering to tourists and the well-heeled residents who had been drawn to neighbouring Dubai in the past. More mall openings are expected over the coming years, which will increase competition in the segment. Nonetheless, well-planned developments should continue to benefit from growth and rising consumer confidence.

Grounds For  Optimism

According to a forecast by Oman Arab Bank, retail sales in the UAE were on track to reach $65bn in 2014, with strong growth expected in the coming years. By 2017 the bank projected $92bn in sales, for a compound annual growth rate of 12.28%.

Wage increases and rising consumer confidence are likely to be spurred on by resurgent economic growth. In October 2014 the IMF forecast that the UAE’s real GDP would expand by 4.3% in 2014 and 4.5% in 2015. While these figures may be revised slightly downwards by the fall in oil prices that took place in the second half of 2014, at the time of writing government officials were confident that the decline in the price of the country’s main export would not have too negative an effect on the economy. The government is committed to pushing ahead with several big-ticket projects that will help bolster demand, and certain sectors, such as tourism, may even benefit from the effect that lower energy prices will have on global growth.

Indeed, well-located and higher-end malls are already poised to receive a boost from growing tourism figures. More than 2.8m guests stayed at hotels in Abu Dhabi in 2013, 18% more than in 2012, according to the Abu Dhabi Tourism & Culture Authority.

Figures for the year-to-date November 2014 show a 24% year-on-year (y-o-y) increase in hotel guest arrivals to 3.15m – a figure exceeding the emirate’s total population of 2.3m. This suggests that Abu Dhabi may meet its goal of 8m visitors per year by 2030, if growth is sustained. “Abu Dhabi’s proposition is that it won’t go for mass tourism, but instead a higher-income, slightly older demographic, and this will have an impact on retail,” Mark Morris Jones, director of real estate firm CBRE in Abu Dhabi, told OBG.

According to Nikola Kosutic, research manager at Euromonitor, the UAE’s retail sector will grow by 6% (at constant prices) in 2015, down from 8% in 2014 on falling oil prices, but an impressive figure nonetheless in an uncertain global climate in which many developed and emerging markets are experiencing sluggish demand. In Abu Dhabi specifically, preliminary estimates from the Statistics Centre - Abu Dhabi (SCAD) showed that wholesale and retail trade – including vehicle and motorcycle repair – accounted for 3.6% of GDP at current prices, relatively stable from the 3.5% and 3.3% seen in 2012 and 2011, respectively.

SCAD figures showed GDP for the segment increasing by an estimated 9.9% in 2013, down from 12.7% in 2012, but more than double the rate of overall GDP growth for the year, at 4.8%.

Specific retailers and retail segments could grow considerably more quickly: Kosutic expects internet retailing to see value growth of some 40%, while Vipen Sethi, CEO of Landmark Group, a retail and hospitality firm, told local press that he expects a rise of 10% in like-for-like sales. He added that the company would add 25 new retail and hospitality outlets across the country in 2015, thanks to the positive retail environment. Lulu, a hypermarket chain, is similarly upbeat, forecasting an increase of 17-18% in footfall in new and existing stores in 2015, up from 12-13% in 2013 and 2014.

Retail Supply

Abu Dhabi’s retail stock has grown strongly in recent years, from 1.7m sq metres of gross leasable area (GLA) in 2011 to 1.8m in 2012 and 2.2m in 2013, according to Jones Lang LaSalle (JLL), an international real estate firm. By the end of 2014 this figure had hit 2.5m sq metres, thanks to the addition of Yas Mall on Yas Island, at 235,000 sq metres, and Capital Mall in the 9712 BMC development, at over 60,000 sq metres, and more than 220 retail units, which vary from 50 to 8600 sq metres. The pace of development in Abu Dhabi is evidenced by the 168,000 sq metres of retail space delivered in 2013 – the largest increase in the GCC, according to CBRE.

JLL is also forecasting continued growth, with 128,000 sq metres expected to come on-line in 2015, followed by 95,000 sq metres of new GLA in 2016. By 2017-18 JLL predicts the emirate’s retail real estate supply will have risen “significantly”, thanks to upcoming “superregional” mall projects, such as Sowwah Central, Saadiyat Mall (also known as The District) and Reem Mall.

Sowwah Central, scheduled to open on Al Maryah Island in the spring of 2017, will have 214,000 sq metres of space, connected to 1.5m sq metres of adjacent properties. The project already has a tenant commitment from Al Tayer Group – the largest luxury retailer in the Middle East with franchises for Armani, Bulgari, Harvey Nichols, Gucci, Banana Republic and the Gap.

The District, on Saadiyat Island, will have 168,000 sq metres of leasable space when it opens in 2017. The mall will feature over 550 units allocated for luxury and fashion brands, high-end department stores, home furnishing chains, art galleries, family entertainment venues and a range of other speciality stores, as well as food and beverage outlets. Meanwhile, the $1bn Reem Mall, on fast-developing Al Reem Island, is expected to open in 2018 with 360,000 sq metres of space. Although the development was first announced in 2008, it was put on hold by developers until the island had gained greater momentum as a residential area.

After quite a number of years with relatively few shopping options, the mall concept has really taken off in the emirate. “Abu Dhabi has for some time been ‘under-shopped’, particularly in the mall sector,” Jones told OBG. “Malls work here partly because of the heat. They tend to have longer dwell time and higher spending than the high street.” Moreover, malls are also a social gathering place, hence why food and beverage (F&B) outlets are “front and centre of the retail mix” in Abu Dhabi’s malls, he added. “The proportion of floor space taken by F&B is higher than ever, and they generate good revenue and thus good rents.”

Food outlets have become so important that some malls use them as anchor tenants, a concept pioneered by Majid Al Futtaim Group, a Dubai-based property development company and the UAE’s leading mall developer. The group’s most common model, now replicated in many malls, differs from that of, for example, Abu Dhabi Mall, in which the anchor retailer – the Abu Dhabi Co-operative Society – is accessible from outside, without needing to pass through the mall itself. Instead, Majid Al Futtaim’s design places anchor retailers at the heart of the building, meaning that shoppers who make their way to the store for their weekly shop will pass a range of other retail and F&B outlets, which will encourage them to drop in to make purchases.

Rents

As of the fourth quarter of 2014, average line store rental rates in malls on Abu Dhabi Island remained fairly stable, at Dh3000 ($817) per sq metre per year, up 3% y-o-y from Dh2900 ($789). However, despite urban development gathering pace on the mainland, malls there saw rents fall 2% y-o-y, from Dh1900 ($517) per sq metre per annum to Dh1860 ($506) in the last quarter of 2014. As these malls become increasingly established in developing areas such as Khalifa City, those in the best-located areas on the mainland present good value for retailers.

Competition Rising

Vacancy rates in the city as a whole are low, at just 2% as of the fourth quarter of 2014 – unchanged from the year before. With significant supply coming on-line, sector experts are concerned about the amount of stock coming into the market. “There will definitely be an oversupply of retail space if all the projects are delivered,” Jean-Hervé Bouyer, the CEO of Aswaq Management and Services, which manages the Abu Dhabi Mall, Bawabat Al Sharq, Avenue at Etihad Towers and other properties worldwide, told OBG. “Abu Dhabi City is not a huge market for its many current and upcoming malls – Yas Mall, World Trade Centre, Sowwah Central and The District, as well as super-regional malls opening that will soon double the existing GLA per capita in the Abu Dhabi market. This is a concern.” In his view, a model in which 70% of retail space is occupied by just 30% of retail operators, due to the monopoly of master franchisees, leads to favourable treatment being given to these anchor tenants. This pushes down profitability of retail properties, which are then developed in larger size to accommodate major operators’ requirements and load the smaller operators with higher rents.

However, Bouyer remains confident that well-planned developments can continue to succeed. “Lease rates will continue to be guaranteed with good projects that are granted a proper location, accessibility, design, brand mix, management and customer services, as well as the integration of Omni-Channel retailing and digitisation.” He also believes that malls will need to follow less of a copy-and-paste model, in which there is little difference between competitors. “It is now essential to create differences among projects and invest in the necessary assets to establish unique selling propositions in each of these shopping centres to attract consumers,” Bouyer said. This entails tailoring retail mix and other offerings to specific demographic groups and trying to offer more of a unique shopping experience. Malls that go hand-in-hand with tourist developments, such as Yas Mall, or with specific positioning tied up with surrounding landmarks, such as The District in Saadiyat Island, could be particularly successful.

Mall developers who target their retail offerings mainly to the upper-mid market may also be missing opportunities for growth, seeing as the majority of Abu Dhabi’s population is made up of labourers, who have less disposable income. This suggests that some developers might be better off focusing on a lower-income demographic. Bouyer also suggests that the sector could see longer-term benefits from the tighter regulation of retail space, development and zoning by the Urban Planning Council.

Jones agrees that retailers and developers in the UAE need to think on their feet to remain competitive, pointing out that some of the country’s older malls, which are losing higher-income shoppers to flashier upstarts, are reshuffling their retail mix to move down in price point and attract more varied demographic groups. “It is a case of adopt and survive,” Jones told OBG. “Abu Dhabi Mall, for example, has maintained a sensible, proactive asset-management stance.”

Of the new malls in the emirate, he expects Reem to be particularly successful, pitching itself as a mid-range mall with a similar mix to some competitors, but with new brands and a fresher look.

Down The Road

At the moment, however, many Abu Dhabi residents still travel to Dubai for weekend shopping expeditions, according to Jones, though this may be changing. “Better choice is creeping into Abu Dhabi,” he said. “There is less and less reason to go to Dubai.” Jones cites The Galleria, which opened on Al Maryah Island in August 2013, as a case in point. It is a relatively small mall, with 33,000 sq metres of GLA and 130 shops focused on high-end brands – many of them new to Abu Dhabi. Outlets include Jimmy Choo, Celine, Diane von Furstenberg, Marc Jacobs, Alexander McQueen, Pucci, Moschino and even Magnolia Bakery. The Galleria was developed by Mubadala Development Company, the state-owned investment firm, and Gulf Related, which is a joint venture between Abu Dhabi’s Gulf Capital and US-based Related Companies.

Continuing the trend of increasing shopping options, the Mall at the World Trade Centre joined the scene in October 2013, offering a diverse mix of retail options in downtown Abu Dhabi. Developed by Aldar, the mall targets local residents living within 4 km of the centre, though it is also expected to attract clientele from across the emirate. With 59,500 sq metres of leasable space, the mall is home to the first House of Fraser department store outside of the UK, as well as a number of other international brands.

Rents in Abu Dhabi are generally lower than at Dubai’s super-prime malls, such as Mall of the Emirates and The Dubai Mall, with rates of more than Dh6000 ($1633) per sq metre reported in late 2014. With demand outpacing supply, these malls saw strong rental growth in 2014, as rents increased by 25% from around Dh4800 ($1307) per sq metre in 2013. Meanwhile, other malls in Dubai charge anywhere from Dh1600 ($436) to Dh5000 ($1316) per sq metre, according to David Macadam, the CEO and vice-chairman of the Middle East Council of Shopping Centres.

Some super-prime malls in Abu Dhabi are now driving rents up towards Dubai levels, with Yas Mall leading the trend. However, Dubai’s malls are likely to continue to trade at a premium for the foreseeable future, partly due to its larger population and considerably higher tourist traffic, leading to higher footfalls.

Dubai is also more accessible to shoppers coming from the Northern Emirates and parts of Oman – and is established as one of the world’s leading shopping tourism destinations, something that Abu Dhabi has never aspired to be. Those seeking a weekend or holiday focused on shopping, coming from elsewhere in the Middle East, Europe, Asia and beyond, still choose to gravitate towards Dubai.

Indeed, retailers and franchise brands making their first entry into the Gulf market will tend to set up in Dubai first, says Morris Jones, given the size and prominence of the market. However, from there, many will then quickly establish a presence in Abu Dhabi.

Yas Mall

JLL expects Aldar Properties’ Yas Mall to be something of a game-changer for Abu Dhabi’s retail sector, particularly in terms of competing with Dubai’s malls, given its offerings in luxury retailing, beauty and cosmetics, fashion and children’s stores. In its third quarter market overview in 2014, the company predicts that “Yas Mall will significantly improve Abu Dhabi’s retail offering and will start to reduce the amount of retail spending that is currently lost to Dubai”.

With 235,000 sq metres of GLA, Yas Mall is now the second-largest mall in the UAE after The Dubai Mall, and with its opening, developer Aldar has become the biggest owner and manager of retail space in the emirate. It opened with much fanfare in November 2014, coinciding with the Formula 1 Etihad Airways Abu Dhabi Grand Prix at the adjacent Yas Marina Circuit.

The mall is located on Yas Island, 20 km from downtown Abu Dhabi City and 10 minutes from Abu Dhabi International Airport, the hub of Etihad Airways, one of the world’s fastest-growing airlines. Its location puts it in close proximity to Yas Island’s other attractions, including Yas Marina Circuit, Yas Waterworld and Yas Links. The mall is also directly connected to the world’s largest indoor theme park, Ferrari World.

The mall had 95% occupancy upon opening, according to local press reports, with the remaining units to be selectively leased by Aldar to ensure they complement the current retail mix.

Yas Mall has more than 370 shops, F&B and entertainment outlets. Anchor tenants include the largest Debenhams department store outside the UK, and the largest hypermarket of France’s Géant brand in Abu Dhabi. The 16,000-sq-metre Géant stocks more than 65,000 items and operates under a long-term lease agreement signed between Retail Arabia, an Emirati operator of franchised outlets, and Aldar. Chalhoub Group, a regional luxury brand retailer, manager and distributor, operates the region’s largest luxury department store at Yas Mall. The more than 18,500-sq-metre store showcases over 200 international brands.

The mall has the first Lego Concept store in the region and features other outlets, including Zara, Nike, Adidas and Jamba Juice. Entertainment outlets includea 20-screen cinema operated by UAE-based VOX Cinemas and a family entertainment zone run by FunWorks. The mall’s IKEA store is also expected to be the largest in all of the MENA region. Yas Mall is a destination mall, aiming to be a place where families and groups of friends can spend a full day doing a wide range of activities, rather than just a location for shopping. The mall’s design is similar to that of a small town, with avenues leading to a central town square. “Yas Mall is a similar proposition to The Dubai Mall,” explained Jones.

Strong Incumbent

While Yas Mall is breaking new ground for Abu Dhabi in terms of its size and ambitions, the emirate also retains some strong incumbents. The aforementioned Abu Dhabi Mall, which opened in 2001 with a total area of 200,000 sq metres, benefits from its strong brand and very central location in Abu Dhabi City. Its 72,000 sq metres of GLA may be increased by 20,000 sq metres in the coming years, with a focus on adding additional F&B outlets.

The Al Wahda Mall, developed by Lulu Group, is another well-established mall in the centre of the city, with over 306,000 sq metres of area and more than 350 brands – around 70 of which it brought to Abu Dhabi for the first time, including Lush, Pottery Barn and Olive Garden, as well as one of the emirate’s largest Lulu hypermarkets as an anchor tenant.

The mid-market Dalma Mall in Mussafah, with 150,000 sq metres of GLA and 400 outlets, has also performed well in recent years. With a catchment population of 600,000 in a developing area of the mainland, it also benefits from its location on the main Abu Dhabi-Tarif Al Ain Highway. It was developed and is owned by The Developers, a joint venture between local investment companies Al Hail Holding and Investment Holding.

Consumer Confidence

That the outlook for incomes – and therefore retail sales – is strong is reflected in the high level of consumer confidence reported across the UAE. Consumer confidence has a significant impact on retailing, particularly for retailers selling nonessential goods and big-ticket items.

In October 2014 the US-based information and measurement company Nielsen ranked the UAE among the top five countries in the world in its “Global Survey of Consumer Confidence and Spending Intentions”. The country scored 112, up three points from the second quarter of 2014. The UAE ranked first in the MENA region – seven points ahead of its nearest neighbour, Saudi Arabia, and fifth in the world.

“Consumers in the UAE continue to be bullish about future economic prospects,” Arslan Ashraf, the managing director of Nielsen in the Arabian Peninsula, said. “Despite the fact that rising rents are driving inflation north and consumers are mitigating risk via savings, they are still upbeat about future job prospects.”

Consumers were even more confident about 2015 thanks to an improving job market, with 73% of respondents in the UAE saying that the job market would be “good” or “excellent” in the coming 12 months, and 64% saying the same about their personal finances.

Outlook

As more malls open in the coming three to four years, growing competition will see players pushed to diversify – and in some cases rebalance – their retail mix. High-grossing F&B outlets are likely to expand, and while some new malls are still targeting the top end of the market, others may need to shift towards the lower-middle income segment, where there are more potential customers. The number and range of international brands in Abu Dhabi will continue to expand as specialist malls open, the market strengthens and more tourists arrive. The outlook for well-planned and managed malls and retail outlets, whether existing or still under development, is quite positive.