Shopping spree: A major economic contributor continues to benefit from rising local incomes and the growth in tourism

Over the past decade Dubai has become the Middle East’s chief retail centre. The emirate is home to one of the largest malls in the world, has a massive domestic consumption of retail goods and boasts a reputation as a prime shopping destination among well-heeled tourists. While many other sectors have continued to see declining activity in the wake of the 2008-09 international financial downturn, the retail industry has remained buoyant. In 2010, according to a February 2012 report released by the Abu Dhabi-based Arab Monetary Fund, domestic consumption in the UAE reached Dh649.9bn ($176.9bn) in total, which translates into per-capita spending of Dh79,270 ($21,577), the highest in the Arab world by a substantial degree. The market for luxury and global brands, in particular, has posted steady growth since 2009 (see analysis).

CHALLENGES & ADVANTAGES: Despite Dubai’s many competitive advantages, the retail sector faces some challenges. While the market has exhibited solid performance in recent years, financing for expansion projects and new business development can still be hard to come by. Both domestic and international banks, many of which are still holding onto troubled assets acquired during the downturn, remain wary of lending in Dubai, even to firms with secure revenue streams in profitable sectors. Furthermore, attracting and retaining a high-quality, well-trained workforce is an ongoing challenge for many retailers.

These issues aside, the retail industry is expected to continue to benefit from rapid expansion for the foreseeable future. Consumer sentiment has been steadily improving since 2009, alongside local salaries and spending. According to a February 2011 report released by Luxury Movement, an international management consultancy that focuses on the top-end market, some 56% of Dubai’s expatriate population (which accounts for around 80% of the emirate’s total population) has disposable income of more than $3000 per month.

Additionally, in recent years the government has worked to burnish the emirate’s reputation as a destination for shopping tourism; visitors from nearby Saudi Arabia account for a substantial percentage of purchases at Dubai Mall and Mall of the Emirates, Dubai’s largest malls. The retail sector has also benefitted from steadily increasing demand from tourists from other wealthy Arab countries, China, India, Russia and the EU. With these growth drivers in mind, the retail sector is preparing for continued expansion for years to come.

OVERSIGHT & REGULATION: A number of government organisations and official entities are involved in regulating and managing the retail sector. The Commercial Compliance and Consumer Protection division (CCCP) at the Department of Economic Development (DED), for example, has a mandate to maintain and enforce the emirate’s consumer protection law, which lays out operational guidelines for local retailers.

The CCCP plays an active role in the sector. In early June 2012 the organisation issued fines of up to Dh250,000 ($68,050) to a handful of shops that had provided false promotional material about sales pricing in an effort to manipulate and deceive customers. In addition to the hefty fines, the DED confiscated around 800 products from the shops. “It is necessary to evolve statutory measures to make producers and traders more accountable to consumers,” Mohammed Shael Al Saadi, the CEO of the business registration and licensing division at the DED, told local media.

FESTIVALS: Other agencies involved in the retail sector include the Dubai Events and Promotions Establishment (DEPE), the Department of Tourism and Commerce Marketing (DTCM) and the Dubai Land Department (LD). The DEPE, which, like the CCCP is also under the DED, has a mandate to promote the emirate as a year-round retail tourism destination. In addition to maintaining and releasing Dubai’s official calendar of events, the agency oversees a number of the emirate’s largest annual festivals and events, including the Dubai Shopping Festival (DSF), the Dubai Summer Surprises (DSS) shopping festival and festivities that take place during Ramadan, the Islamic month of fasting.

The DTCM, meanwhile, has a broad mandate to promote Dubai as a leading tourist destination in the region and around the world, which includes highlighting its many retail offerings. Finally, the DLD, which oversees property rights in the city, works closely with local developers, many of which have major retail holdings.

GLA: In 2011 Dubai’s malls and independent shops included 2.8m sq metres of gross leasable area (GLA) in total, up from 2.6m sq metres in 2010, according to mid-2012 data released by real estate and property management firm Jones Lang LaSalle (JLL). Super-regional shopping centres, which are defined as malls with more than 74,000 sq metres of GLA and three or more anchor stores, make up the great majority of this total area, accounting for around 64% of total GLA as of the second quarter of 2012. Regional centres, meanwhile, which are defined as having more than 37,000 sq metres of GLA, account for around 20% of the total, while community malls make up 9%, neighbourhood shopping centres 6% and small convenience shops around 1%, according to JLL data. The pace of growth has been impressive. Since 2005 – when Mall of the Emirates opened – Dubai has seen a 60% jump in GLA.

The emirate is relatively saturated in terms of retail space. In 2012 just two new malls were scheduled to be completed. Al Madina Mall, which has around 200,000 sq metres of GLA, opened for business in mid-May 2012 in the Muhaisanah 4 area, while phase one of The Avenue, a luxury retail project being developed by Meraas, a local firm, is now expected to be completed in 2013, bringing around 16,000 sq metres of new GLA to the market, according to JLL. The next major influx of retail GLA is not expected to come on-line until 2014, when the 150,000-sq-metre Dragon Mart – the largest Chinese shopping centre outside of mainland China – is planning to complete a 175,000-sq-metre extension. As of March 2012 some 80% of the mall’s new GLA was already leased, according to Nakheel Properties, which built and manages Dragon Mart.

As of the end of the second quarter of 2012, Dubai’s mall vacancy rate stood at around 20%, due almost entirely to low occupancy rates at smaller shopping complexes, many of which have yet to recover entirely from the downturn. In general, super-regional and regional malls have very low vacancy rates. As of late 2011 both Dubai Mall and Mall of the Emirates had occupancy rates in excess of 90%, according to local reports.

BY THE NUMBERS: According to the Dubai Statistics Centre, wholesale and retail trade made up 30.7% of Dubai’s GDP in 2011. Retail revenues jumped 5.3% to Dh113bn ($30.8bn) in 2011, according to data from Business Monitor International (BMI). BMI expects this figure to have risen to Dh120bn ($32.7bn) by the end of 2012 and to Dh157bn ($42.7bn) by 2015.

Retail rental rates in super-regional and major regional centres averaged Dh5400 ($1470) per sq metre as of the end of the second quarter of 2012, according to JLL data, and were expected to continue rising through the end of the year in the leading malls. Rental rates at smaller retail centres, meanwhile, fluctuated between Dh850 ($231) and Dh3200 ($871) per sq metre in the same period, depending on the size, quality and location of the space. According to Peter Walichnowski, the CEO of Majid Al Futtaim Properties, “With footfall and retailers’ turnover on the rise we can anticipate that rents are likely to increase in the medium term.”

MALL OF THE EMIRATES: Mall of the Emirates, which opened its doors for business in September 2005, was built and is operated by Majid Al Futtaim Properties, a leader in shopping mall development in the MENA region. The mall has 235,000 sq metres of GLA and is home to around 580 tenants that include retail shops, a variety of food and beverage outlets, hotels, entertainment facilities and Ski Dubai, an indoor ski slope. While Mall of the Emirates is Majid Al Futtaim’s flagship development, the firm also operates 10 other malls throughout MENA, including six in the UAE.

Majid Al Futtaim Properties earned total revenue of Dh2.8bn ($750.4m) in 2011, the most recent year for which financial information was available at the time of publication, up from Dh2.3bn ($626.1m) the previous year. The great majority of the firm’s revenue comes from retail developments. In 2011 shopping malls brought in Dh2.3bn ($627.9m) in revenues, which was equal to 84% of the company’s total revenues that year.

BIG EARNER: In the first half of 2012 some 20m shoppers visited Mall of the Emirates, putting it on track to exceed the total number from 2011 of 36m. The flagship facility has been ranked seventh in a list of the world’s 15 most productive malls in an annual survey by the International Council of Shopping Centres, with profits per square metre nearly three times the industry average. It held the same position in the 2011 ranking, and is the only Middle Eastern mall on the list.

In early May 2012 Majid Al Futtaim announced that it was planning an expansion project at Mall of the Emirates, with the goal of adding around 93,000 sq metres of new space, the majority of which will be filled by luxury and high street brands. The expansion project will also include space for new food and beverage outlets. The space is likely to see significant demand; according to Majid Al Futtaim, as of mid-2012 Mall of the Emirates has a 98.9% occupancy rate.

DUBAI MALL: Dubai Mall, which opened for business in early November 2008, has 350,000 sq metres of retail space and a 112-ha footprint, making it the largest mall in the world by total area and the sixth-largest by GLA. According to government-owned developer Emaar, which built and manages the mall, in 2011 Dubai Mall was the single most visited shopping and leisure destination in the world, bringing in 54m visitors over the course of the year, up 15% from 2010. The 2011 figure is reportedly higher than the 50.2m visitors to New York City in the same period. The mall is home to around 1200 stores, including a variety of international brands and retailers. It also has an aquarium, theme and amusement parks, hotels, more than 160 food and beverage outlets, an ice rink and a cinema.

Dubai Mall is part of Emaar’s $20bn flagship Downtown Dubai development, which also includes the Burj Khalifa, the tallest building in the world as of mid-2012, in addition to high-end office space, hotels and other attractions; the observation deck at the Burj Khalifa is only accessible through Dubai Mall.

EMAAR: Founded in Dubai in 1997, Emaar is the Gulf’s largest real estate developer, with around Dh60bn ($16.3bn) in total assets at the end of 2011. In addition to Downtown Dubai, the company is responsible for other large-scale, master-planned projects and communities throughout the UAE, including Arabian Ranches, The Greens, Dubai Marina, The Meadows, The Views, The Springs and The Lakes, among others.

Outside of the UAE, Emaar is also involved in major projects in most countries across the MENA region, including Saudi Arabia, Egypt, Pakistan, Turkey and Morocco, among others. Retail projects have played an increasingly important role in Emaar’s portfolio in recent years. Indeed, the company’s retail division contributed some Dh2.14bn ($582.5m) to revenues in 2011, which was just over a quarter (26%) of the firm’s total revenues of Dh8.1bn ($2.2bn) earned in the year.

NEW PROJECTS: In February 2012 Emaar announced plans to add 304,800 sq metres of floor space to Dubai Mall in the coming years. The new area is expected to house additional hotel, entertainment and retail facilities. Emaar is the second-largest retail operator in Dubai behind Majid Al Futtaim, and it owns three other retail projects: Dubai Marina Mall, Souk Al Bahar and the Gold and Diamond Park.

Launched in 2011, the Gold and Diamond Park has become the emirate’s leading destination for gold and diamond jewellery, with 90 retailers, 118 manufacturing blocks and commercial space for more than 350 offices. Established in 2004, the Dubai Diamond Exchange is now home to 500 regional and international precious stones and diamond companies registered, making it the fourth-largest diamond trading centre in the world, with diamond trading volume hitting $35bn in 2010, and $41bn in 2011.

“With limited bureaucratic hurdles, a fixed exchange rate, highly efficient Customs clearance and its prime location, Dubai is extraordinarily well positioned to further increase its global share of the industry, which is expected to see prices rise over the next several years as demand continues to outstrip supply,” Rihen Mehta, executive director at diamantaire Rosy Blue, told OBG.

OTHERS: In addition to Mall of the Emirates and Dubai Mall, Dubai is also home to other large-scale shopping centres, including the aforementioned Dragon Mart, Ibn Battuta Mall, Deira City Centre and Mirdif City Centre, among others. Nakheel, which owns Dragon Mart and Ibn Battuta Mall, is a major retail player in the emirate. Founded in 2000, the government-owned developer completed a Dh59bn ($3.5bn) debt restructuring in August 2011, after nearly defaulting in early 2009. Since then, the company has restarted work on numerous large-scale master-planned projects, including on reclaimed land off the coast of Dubai – the Palm Jumeirah and The World – both of which are man-made islands.

Both Dragon Mart and Ibn Battuta Mall, which were completed in 2004 and 2005, respectively, have been solid earners for Nakheel over the past half-decade. In addition to the planned extension to Dragon Mart, Nakheel announced in March 2012 that it was planning to more than double the size of Ibn Battuta Mall in the coming years; it currently has around 111,500 sq metres of GLA and more than 260 stores.

NEW MALLS: Despite appearances that Dubai’s retail sector may be mostly saturated, a number of new malls are currently either under construction or in the early stages of development. The largest of these is the Mall of Arabia, a massive retail centre that was originally announced in 2003, but was pushed back in 2009 as a result of the financial downturn. The mall, which is being developed by the local Ilyas and Mustafa Galadari Group, is part of the firm’s City of Arabia initiative, a massive mixed-use project that is eventually expected to house more than 32,000 residents. Phase one of Mall of Arabia is expected to include some 4.6m sq metres of GLA, which would make it one of the largest shopping centres in the world. A number of smaller malls are also under construction at present, including phase one of Meraas’ The Avenue project and the Dubai Pearl Mall.

Meraas Holding is also expected to develop a centre along the Jumeirah Beach Residence (JBR) – a seafront stretch of 40 residential towers with shops and restaurants already below. The project is designed to cover 1 km with more extensive shopping facilities, along with entertainment and leisure activities.

On a much larger scale, work on the Mohammed bin Rashid City mall has already begun near Dubai’s downtown. Announced in November 2012, the centre is set to overtake Dubai Mall as the largest mall in the world, boasting a water and marine life park, amusement parks sponsored by Universal Studios and Bollywood productions, as well as a surrounding green space expected to be 30% larger than London’s Hyde Park.

DUBAI DUTY FREE: Despite its relatively small footprint in terms of GLA, Dubai Duty Free (DDF), which operates around 18,000 sq metres of retail space at Dubai International Airport (DXB), is a major contributor to the emirate’s retail sector. Founded in 1983, DDF is currently owned by the Investment Corporation of Dubai, a government entity. In 2011 DDF had turnover of Dh5.3bn ($1.4bn), making it the single largest airport retailer in the world. The company has benefitted from the rapid expansion of Emirates, the state-owned airline, over the past decade, and the concurrent expansion of DXB into one of the region’s major transport hubs. In 2011 nearly 51m passengers travelled through the airport, making it the fourth-busiest airport in the world. According to recent figures, DDF sells to just under 50% of the passengers that travel through DXB. Duty-free companies in other airports around the world manage to sell to only 18-20% of total passengers.

FESTIVALS: The DSF, which runs from early January through early February each year, is Dubai’s largest shopping festival. In 2011 the event contributed Dh15.1bn ($4.1bn) to the emirate’s economy, according to a study carried out by DEPE in early 2012; some Dh5.9bn ($1.6bn) of the 2011 total was spent by tourists from outside the UAE. Disproportionally high-spenders, foreign visitors accounted for 22.1% of the 4m DSF attendees in 2011 and 39% of expenditure.

According to VisaVue Travel, the card services company’s internal tracking service, in 2012 international visitors to Dubai spent $497m on their Visa cards during the DSF, up 22% from $406m the previous year: Visa cardholders from Russia were the biggest spenders during the festival in 2012, racking up charges of $122m in total, followed by Saudi cardholders, who spent $106m, and US cardholders, who spent $92m.

While not quite as big a draw as the DSF, the DSS festival, which takes place every year in June, also has a major impact on Dubai’s economy. During the first two weeks of the 2012 festival, which ran from June 14 through July 14, local malls, hotels and other tourism-related firms reported revenue gains of 15-20%, according to local press reports. In addition to DSF and DSS, the DEPE also oversees major festivals that coincide with the Islamic month of Ramadan and Eid Al Fitr, the feast that marks its conclusion.

THE AUTO MARKET: While clothing, accessories and other personal goods account for most retail activity in Dubai, the emirate is also a major centre for the regional auto segment. Following the rapid market expansion of the mid-2000s economic boom, the emirate’s automobile dealers saw a substantial decline in business as a result of the 2008-09 downturn. Since then, however, the market has posted steady growth. In 2011 and 2012, most dealers reported increasing sales figures, especially in the high-end luxury segment. According to Autodata, a local firm that tracks the industry, 2011 was a record year in terms of new car sales, with most major suppliers reporting an increase of 11% over the previous year. “SUVs drive the automotive industry accounting for approximately 60% of most dealership sales, and this trend is likely to continue,” K Rajaram, the CEO of Al Nabooda Automobiles, a leading luxury car dealer that handles Audis, Volkswagens and Porsches, told OBG.

Almost all of the cars sold in Dubai are imported, primarily from Japan. A number of major global makes are popular, including Toyota, which has an estimated 40% of the market; Nissan, with around 20% of the market; Mitsubishi; and Honda. In addition to the thriving local auto market, Dubai is a major shipment point for dealers that supply other major markets in the Middle East.

A handful of family-owned firms control the local sector. The Al Futtaim Group (distinct from Majid Al Futtaim) is the sole UAE distributor of Toyota, Honda and Volvo, among others. The Al Rostamani Group distributes Nissan, Renault, Suzuki and more; the Al Tayer Group handles Ford, Ferrari and Maserati, among other makes; and the Al Habtoor Group handles Mitsubishi, Bentley, Bugatti and McLaren. The UAE’s harsh desert climate has a deleterious effect on cars so most of those shipped to Dubai are manufactured specifically for the local market, resulting in slightly higher prices.

OUTLOOK: With rising incomes among locals and expats alike, record-breaking numbers at the DSF and DSS, and a stead ily increasing supply of international brands, local retailers are optimistic about the future. Retail tourism is expected to play a major role in the industry in the coming years. Both Dubai Mall and Mall of the Emirates have reported an increase in visitors from China and India, in particular. At the same time, tourists from elsewhere in the Gulf are expected to continue their major role. Indeed, retail is considered to be a cornerstone of the emirate’s tourism industry, and will likely play a major role in the government’s tourism development plans moving forward. With this in mind, local retail centres can look forward to a bright future.