Room to grow: Strong fundamentals are driving the expansion of both retail space and offerings

A raft of additional retail supply being brought to the islands and suburbs of Abu Dhabi City over the coming year is expected to shake up the sector on many fronts from brand penetration to rental dynamics. Mall operators and retailers recognise that this may cause some short-term turbulence, but that the sector’s longer-term prospects are more than encouraging.

Fundamentals

 The basic demand drivers for retail development within the emirate look strong. The annual population growth rate averaged 8.1% between 2005 and 2012, with the total population reaching 2.34m in the latter year. This is one of the highest growth rates globally and with the bulk of the population (70.6%) between the ages of 20 and 50, the potential impact on retail spending should be substantial. In addition, the emirate also has a strong track record of economic expansion. The real GDP growth rate stood at 5.6% for 2012 (using 2007 prices), with a GDP per capita of Dh390,500 ($106,300) at current prices.

The demand for retail services was also helped in 2013 by new regulations requiring Abu Dhabi government employees to live within the emirate in order to continue receiving a housing allowance. The rule was introduced in September 2012, and employees were obliged to provide proof of local residence by September 2013. The regulation has already had an impact on the property rental market, driving up rates by 8% in the first quarter of 2013. As workers relocate, there should be a concomitant rise in local retail spending.

Spending Potential

 These basic trends have alerted retailers to the spending potential in the market. This is illustrated by a closer look at wages and household spending. Compensation of all employees grew by 9.1% in 2012 to Dh164.1bn ($44.67bn). To some extent, this was driven by growth in the mining and quarrying sectors (including hydrocarbons) and construction, which saw wages increase 16.2% and 8.8%, respectively, although figures are not disaggregated to show for which positions growth was highest. Nevertheless, salary rises across all sectors were well above inflation.

Consequently, consumer confidence in the state of Abu Dhabi’s economy appears to be on the rise. The general consumer confidence in economic performance index prepared by the Abu Dhabi Department of Economic Development showed a two-point increase in the first quarter of 2013 against the same period in 2012. This followed a seven-point rise in 2012.

This trend has also supported an uptick in consumer borrowing. Across the federation, consumer lending increased by Dh15.3bn ($4.16bn) in the first six months of 2013, a rapid rise that was equivalent to the total growth in the previous 30 months. Outstanding consumer loans stood at Dh276bn ($75.13bn) at the end of June 2013. This growth in credit for consumption bodes well for retailers and mall operators.

Other Drivers

 Despite the credit environment, the inflation situation is also a healthy one for consumers and retailers. The rate stood at 1.1% in 2012. It was largely driven by hotels and restaurants, which showed a 16.4% average change in prices, as well as food and nonalcoholic beverages (2.9% average inflation) and clothes and footwear (1.9%). The strong demand situation and the stable operating environment have translated into a robust and healthy sector. According to the Statistics Centre – Abu Dhabi, wholesale and retail trade grew by 8.2% in 2012 (at 2007 constant prices), and the segment accounted for 3.7% of real GDP in 2012.

Most of the growth in the market is being driven by domestic demand, though the tourism industry also provides opportunities for retailers, albeit to a lesser degree.

In 2012 the emirate had 21,997 hotel rooms with an occupancy rate of 65.2%. “There is a lot of potential for tourism growth to drive retail spend. At certain locations, such as the Beach Rotana, Jumeirah at Etihad Towers and the St. Regis hotel, you have the same profile of customer as in Dubai. All the conventions, concerts and events, such as the Formula 1, also have a big impact,” Guillaume Darlix, the chief commercial operator of Aswaq Management & Services (AMS), which manages Abu Dhabi Mall among others, told OBG.

Retail Supply

 Given the long-term positive trends evident within Abu Dhabi, it is unsurprising that the supply of retail offerings in the market has begun to expand over the last five years. Nonetheless, the sector still has substantial potential for growth going forward, particularly in mall development. According to global real estate firm Jones Lang LaSalle (JLL), there were 1.77m sq metres of gross leasable area (GLA) in the emirate at the beginning of 2013. This is expected to rise to 2.13m sq metres by the beginning of 2014. Further additional supply will be in place by the end of 2015, when the GLA in the market will have increased to 2.6m sq metres, a 48.9% rise on end-2012 levels.

In terms of mall capacity, it could be argued that the market is currently undersupplied. Abu Dhabi had 0.76 sq metres per capita of retail space at the end of 2012. This compares to a figure of 0.99 sq metres per capita in Singapore, 1.20 sq metres in China and 4.69 sq metres in the US, according to Australian property consulting firm Urbis. Moreover, much of this is outside of the mall environment (suggesting a lower grade of retail space). According to JLL, 48% of GLA in the emirate was in a non-mall setting in the first quarter of 2013. Much of the rest of the inventory was housed in super-regional (between 90,000 and 150,000 sq metres) and regional (between 30,000 and 90,000 sq metres) malls. This mix is likely to change in the coming years with three substantial super-regional malls in the pipeline: Yas Mall, Saadiyat Mall and Sowwah Central.

Down The Road

 However, this data is misleading to some extent. Local development, particularly in terms of mall construction, has to take account of the major offerings down the road in Dubai. Indeed, local Abu Dhabi consumers can access 2.8m sq metres of retail space within an hour and a half’s drive, and Abu Dhabi operators are therefore competing with the successful super-regional malls in Dubai. For example, the Mall of the Emirates, Majid Al Futtaim’s flagship retail property in Dubai, was ranked seventh globally in terms of sales per sq metre in 2012, standing at roughly $15,320 in a venue of 230,000 sq metres, according to research by the International Council of Shopping Centres. The challenge for Abu Dhabi malls is to command these sorts of figures for their tenants by attracting high-spending footfall. “The whole strategy is to keep Abu Dhabi residents shopping in Abu Dhabi.” Darlix told OBG, Traditionally, this has proved a challenge. Given the limited offering and innovation in retail space, it has been difficult to attract the biggest brands to the emirate. Mark Morris Jones, director of the agency division of CBRE Middle East, told OBG, “If you looked at the car parks of malls in Dubai, you would see a lot of Abu Dhabi number plates there, particularly at weekends. Previously, you would ask why those Abu Dhabi-Dubai journeys were made and assume that there is a motivation for retailers to come to Abu Dhabi. But if you compare the roll-out of malls in Dubai to that of Abu Dhabi, there was not the ready real estate solution for them.”

This was compounded by the fact that many franchises for brands cover the whole GCC, meaning that once the franchise holder had opened in Dubai, they would be under pressure to open throughout the region before extending their presence further within the UAE. “What was their motivation when people could drive down the road to Dubai?” asked Morris Jones.

New Offerings

 However, this reality looks to be changing, and in Abu Dhabi’s favour. Mall property developers within the emirate are bullish about the prospects of rising to the challenge of retaining retail spend. For example, Gulf Related, a joint venture between Gulf Capital and US real estate developer Related, believes that it is well placed to capture a flight towards quality in terms of both tenants and consumers within the local retail market. It opened the 51,000-sq-metre Galleria at Sowwah Square on Al Maryah Island in the third quarter of 2013. The development was already fully leased six months before opening, and Kevin Ryan, managing director of development at Gulf Related, told Gulf Business that the project has a waiting list and was unable to accommodate brands such as Chanel and Hermès for lack of space.

“While there is a healthy amount of residential and commercial supply, there has been a lack of quality retail space. As a result, the full potential of consumer spending has not been realised,” Emile Habib, the managing director of investments and business development at Gulf Related, told OBG.

As such, the developer is now working on the construction of Sowwah Central, also on Al Maryah Island, to bring another 214,000 sq metres of space to the market by 2017. The new project already has a commitment from Al Tayer Group (the largest luxury retailer in the Middle East with franchises for Armani, Bvlgari, Harvey Nichols, Gucci, Banana Republic and Gap) as a major tenant. The company expects The Galleria and Sowwah Central to see a combined footfall of 23m-25m by 2018, according to local press reports.

Also new to the market in 2013 is Aldar’s World Trade Center Mall. It opened in October as part of the mixed-use World Trade Center project in Central Market, which includes offices, residences, a hotel and retail space. The 60,000-sq-metre mall features more than 160 shops, 20 dining outlets and an eight-screen cinema.

Size Matters

 The other major development on the horizon for Abu Dhabi is the 235,000-sq-metre Yas Mall, located on Yas Island 10 minutes away from the city centre. Yas Mall’s size alone represents an ambitious statement about the outlook for retail within Abu Dhabi. The project, expected to open in 2014, will serve the entertainment and tourism district of Yas Island and the eastern Abu Dhabi catchment area. The introduction of the mall is likely to have a significant impact on the market. It will become the second-largest shopping centre in the federation behind Dubai Mall.

Whether the project, carried out by Abu Dhabi’s largest developer, Aldar, can have the same impact as its counterpart in Dubai is as yet unclear. Dubai Mall, the largest in the UAE, attracted footfall of 65m in 2012. The successful city centre malls in Abu Dhabi, which are much smaller, do not play in this league. Abu Dhabi Mall has a footfall of approximately 16.4m per year, for instance. It would therefore be a big leap for Yas Mall to begin to approach the visitor numbers recorded by the UAE’s biggest mall, but it is targeting more than 25m in its first year of operation.

The mall will house a family entertainment centre, delivered by the Landmark Group; a cinema; a Geant Hypermarket; the largest Zara, Brooks Brothers, Nike and Adidas outlets in the region; and the largest H&M in Abu Dhabi. As of June 2013, 63% of the retail space had been leased and advanced negotiations for a further 25% were under way, according to Aldar.

New Look

 The arrival of additional competition in terms of space and brands is also pushing existing mall operators to improve their offerings. As such, the composition of malls and their services are beginning to change. One of the clearest manifestations of this is in the food and beverages segment. “Food and beverage is ever more important now in terms of the retail mix within the mall industry generally, allowing for a higher dwell time in the mall and giving a more rounded offer in the mix,” Morris Jones told OBG.

According to Morris Jones, Abu Dhabi’s food and beverage offering has moved on quite some distance from 20 years ago, when it consisted of more locally focused coffee shop and restaurant offerings. “Regional and international brands and higher-price-point restaurants are becoming more prevalent, and the market has responded with solutions in bespoke retail mall developments as well as in strip malls and urban locations, such as the new residential areas like Al Reem, Raha Beach and Al Bateen,” he said.

A number of mall operators have recognised the importance of adjusting the food and beverage options at their facilities and are planning accordingly. AMS, which manages Abu Dhabi Mall, is looking to add as much as 20,000 sq metres in GLA to the existing 72,000 sq metres in the next three to five years to incorporating more food and beverage outlets in the mall.

According to a 2012 report by Alpen Capital, food sales have accounted for 41-42% of total retail sales across the GCC over the last few years. Abu Dhabi has begun to cater for this, particularly at the higher end of the market. The range of supermarkets has increased, and the number of mid-range to high-end brand restaurants has grown substantially. At The Galleria at Sowwah Square on Al Maryah Island, branches of the London-based Carluccio’s, an Italian restaurant, and of the UK’s Zuma (Japanese) are set to open in early 2014, while the World Trade Center Mall includes the first PF Chang’s (Chinese) in Abu Dhabi and the Yas Mall will feature a Cheesecake Factory (American).

Rental Rates

The impact of this new inventory in terms of GLA and brands on rental rates is not yet clear. In the first quarter of 2013 retail rents for line shops (non-food and non-large-scale units) were in the range of Dh1500 ($410) to Dh3000 ($817) per sq metre, according to JLL. However, operators and analysts told OBG that in the high-occupancy city centre malls, top rents could climb from Dh4500 ($1225) to Dh5000 ($1360) per sq metre. For anchor tenants, rents were between Dh500 ($136) and Dh1500 ($410) per sq metre, while food and beverage outlets ranged from Dh2000 ($544) per sq metre for casual dining to Dh4500 ($1225) per sq metre for food courts, according to JLL.

Leasing is typically for three to five years in the existing city centre malls on the expectation that tenants will make a return on investment after three years. The leasing environment has also become more mature, and contracts often include a revenue-sharing component, with turnover rent dependent on gross sales. The additional supply in the market in terms seems to have had minimal impact on rates so far. According to JLL, after remaining flat from third-quarter 2009 through first-quarter 2013, rents for regional and super-regional malls on Abu Dhabi Island rose slightly in second-quarter 2013 to an average of Dh2887 ($786) per sq metre. However, these malls have an average premium of Dh987 ($269) per sq metre compared to malls off Abu Dhabi Island. New mall operators are likely to face downward pressure on rates in the short term as they build occupancy and establish a foothold in the market.

Moving forward, the outlook is likely to be positive for rental growth within the emirate in both existing facilities on Abu Dhabi Island and in the well-located and well-positioned malls in other locations. “Premium rates will be paid by retailers to get into well-managed schemes even in periods of stable demand,” Andrew Goodwin, director of real estate at Cornerstone Investment & Real Estate, told local media.

Keeping Up

 With Dubai reaching saturation in terms of brands – the city is second only to London for international brand penetration – many franchises will be looking to position themselves in Abu Dhabi.

“Attracting brands here is not going to be a problem moving forward – 99% of the brands want to be here,” Darlix told OBG. It is clear thus far that the two longstanding malls in Abu Dhabi’s city centre are continuing to prosper in the changing retail environment. “Abu Dhabi Mall and Marina Mall stood up well to the new malls. Their occupancy and rent remain at the top end,” said Morris Jones of CBRE Middle East.

Although Abu Dhabi Mall opened in 2001, it continues to perform in the increasingly competitive market. It has a current footfall average of 45,000 customers per day and an occupancy running at 100% of available units. AMS is investing in a redesign and fit out of certain sections of the mall and has been able to attract new brands, including Adidas Originals and PF Chang’s. Darlix told OBG, “The market share taken from Abu Dhabi Mall has been quite limited … and we have seen no influence on rental rates so far.”

Indeed, as the market rental rates suggest, it is the suburban malls that have been finding it more difficult to build footfall, occupancy and rates. However, many of these owners and operators remain bullish. Mubarak Brothers Investments, the owners of the Dh700m ($190.5m) Deerfields Town Square Mall in Al Bahia on the outskirts of Abu Dhabi, is confident that the new development will be lucrative. The anchor tenant, a Carrefour supermarket, opened its doors in September 2013. At the time, the mall was 80% leased. The company expects footfall of 12m in its first full year of operation after the official opening at the end of 2013. It is unclear what rents the new project is able to command, but it seems that in the shorter term, suburban malls will likely have to offer a discount to attract tenants, building rental income over time.

Auto Sales

 One segment of the retail market that has seen particularly strong growth of late is automobiles. Auto sales in the UAE are expected to top 350,000 in 2013, breaking the previous record set in 2008. According to the Middle East Automotive Council, sales for 2013 are expected to reach a total of 380,000 units, up some 23% on 2012 figures. Fleet sales to corporate clients, hotels, tour operators and limousine firms represent a significant driver for the segment. “The growth of fleet management services and the car rental industry as a whole is on the rise due to improving economic conditions,” Ahmed Abood Al Boasy, chairman and general manager of Emirates National Group, told OBG.

Ajay Narain, the general manger of LeasePlan Emirates, the local subsidiary of the world’s largest vehicle leasing and fleet management player, told OBG, “The growth in vehicle leasing and fleet management is being driven by greater awareness regarding the distinction between rentals and leases. Leasing involves a long-term partnership and a consultative approach that includes fleet management services and managing the full lifecycle of vehicles – including fleet consultancy, vehicle purchase, registration, insurance, repairs, maintenance, tyre and fuel management, accident management, replacement vehicles and vehicle remarketing – rather than simply renting.”

Outlook

Abu Dhabi well placed to absorb additional supply as it is currently underserved by retail space by international measures, which has left ample room for further brand penetration. As this situation is remedied over the coming years, there is likely to be a substantial impact on the mall environment in terms of design, retail mix and range of brands. In the medium term, it should bring an added maturity to the market, and the spread in rental rates, currently approaching Dh1000 ($272) per sq metre, is primed to grow further depending on location and offering. This will present challenges as well as opportunities for developers and retailers and mark a new phase in the sector.