Abu Dhabi's retail sector going strong as shopping outlets expand

Driven by healthy population growth, world-leading income per capita, and steady demand for high-end retail space, Abu Dhabi’s retail industry has undergone years of strong expansion, leading to an influx of new project completions between 2013 and 2015. The industry, like many others, is beginning to feel the pains of reduced economic expansion, as lower global oil prices and the strengthening US dollar are expected to impact spending and tourism growth in the coming years. At the same time, two large-scale “super-regional” malls, on Al Maryah Island and Al Reem Island, are slated to open in 2018, intensifying competition and weighing on retail rents. Increased competition has nonetheless spurred innovation in the sector. Developers are increasingly linking retail developments to tourist attractions and residential complexes, and have sought to incorporate long-term urban planning considerations such as creating free public spaces and community centres. The grocery segment meanwhile is set to kick-start growth in the UAE’s nascent e-commerce industry, offering new opportunities for investment and expansion.

National Trends

The GCC remains very attractive to international retailers, with research firm Ventures Middle East reporting in 2015 that retail sales within its six member countries are set to expand by 7% annually until 2018 to reach $285bn. The UAE in particular remains an appealing market for future retail growth, owing to high household incomes, consistent spending growth and strong consumer confidence. AT Kearney’s Global Retail Development Index 2016 ranked the UAE seventh worldwide for retail attractiveness and growth prospects, the highest in the GCC. For eight of the last 10 years the country has ranked in the top 10.

Median household income in the UAE stood at $103,757 in 2014, putting it in the top position globally, according to a report by Agriculture and Agri-Food Canada (AAFC). As a result, spending levels are high: retail sales per capita stood at $7159 in 2016, according to AT Kearney, the highest in the GCC, while Euromonitor projected retail spending in the UAE rose by 7% in 2016 to $53.7bn. Consumer confidence is also strong, with Nielsen reporting in August 2016 that the UAE ranked sixth globally on its Consumer Confidence Index during the second quarter of 2016. The country scored 109 points on the index, up five spots compared to the first quarter of 2016, and surpassed the global average of 98. Although 48% of those surveyed believe the economy is undergoing a recession, this number was down 9% on the first quarter of 2016, while job prospect sentiments rose nine percentage points to 60% favourable, and personal finance sentiment rose by six points to 68% favourable.

Mall Growth

UAE residents are avid mall shoppers, which has driven demand for new retail space. According to real estate consultancy CBRE’s “Global Shopping Centre Development” report, published in May 2016, Abu Dhabi City ranks 17th on a list of the world’s most active cities for shopping centre development. The CBRE reported 265,760 sq metres of retail space were under construction in Abu Dhabi. The emirate’s supply of formal retail space is largely concentrated around its high-end shopping malls, which have increasingly offered entertainment, recreational and leisure facilities – as well as tourist attractions – alongside formal retail and food and beverage space.

Supply has grown rapidly in recent years on the back of population and tourism growth. Real estate consultancy JLL reports that total retail supply rose from 2.2m sq metres of gross leasable area (GLA) in 2013 to hit 2.5m sq metres of GLA in 2014, with another 53,000 sq metres added in 2015. While no major additions occurred in 2016, a projected 85,000 sq metres will be added in 2017, mostly in the form of residential communities and towers, followed by some 383,000 sq metres in 2018. If completed on schedule, JLL calculates that these projects would bring total retail stock in Abu Dhabi to approximately 2.7m sq metres of GLA by 2018.

The most significant recent addition to the emirate’s retail market is Yas Mall, which opened in November 2014 with 235,000 sq metres of floor space. Developed by Aldar Properties and located on Yas Island near Ferrari World theme park and Yas Marina Circuit, the mall includes a 20-screen cinema and 62 food and beverage outlets alongside more than 400 international brand stores – many of which opened for the first time in the emirate – including Hamley’s, Hollister, Brooks Brothers and Géant Hypermarket. In October 2015 tech giant Apple added its name to these, opening a store there, its second in the UAE. Yas Mall is also home to one of Chalhoub Group’s newest retail outlets, a 20,000-sq-ft department store carrying more than 250 local and international brands. With such variety in the offering, Aldar had estimated the mall would attract 20m visitors during its first year; it later reported 18m people had visited in 2015. This could be set to grow further with the late-2016 announcement that Sea World will be building a park on Yas Island, which had 25m visitors in 2015 and aspires to hit 48m by 2022, according to Miral Asset Management, the organisation mandated by the Abu Dhabi government to oversee the project.

Mixed-Use Attraction

Yas Mall joins a robust portfolio of high-end shopping centres offering major international brands, including Abu Dhabi Mall, Marina Mall, Deerfields Town Square, Dalma Mall, Al Wahda Mall and The Galleria, which opened in 2013 on Al Maryah Island. These developments have tapped into rising consumer demand in both the downtown core and up-and-coming residential hubs. Malls are increasingly looking to attract families for recreational purposes, serving as community centres and supporting retailers by boosting total footfall. “In this region families treat shopping centres as a social event during the week, whereas in the West it’s more about something that needs to be done,” David Macadam, CEO of the Middle East Council of Shopping Centres, told OBG. “Malls here offer recreation, leisure – a total experience where whole families pile in the car to go. This has helped the UAE develop malls in which the quality, maintenance, and variety are much better than anywhere else in the world.” Yas Mall, for example, is linked to the Ferrari World attraction, and will soon offer visitors the world’s largest indoor climbing wall as well as indoor skydiving facilities, when the Dh367m ($100m) Clymb facility opens on-site. In October 2016 Clymb developers announced that the attraction was 35% complete and was expected to open to the public in 2018. Others, like Al Wahda Mall and Abu Dhabi Mall, offer facilities including cinemas and children’s play zones. Marina Mall is home to an ice skating rink and Bounce, an indoor trampoline park, while Reem Mall will offer a snow park.

Challenges

Rising consumer demand and limited supply of formal retail space have kept retail rents elevated in recent years. JLL reported that vacancy rates in the retail segment remained stable at 2% throughout 2016. Average rents as of mid-year stood at Dh3000 ($817) per sq metre for facilities on Abu Dhabi Island, and Dh1860 ($506) per sq metre elsewhere. Both rental rates remained unchanged since the second quarter of 2015, however, while JLL noted signs of short-term declines in retail spending due to a subdued economic climate; 2016 was marked by job cuts, a reduction in employment benefits and contracting corporate hospitality demands, all of which weighed on the retail sector. As a result, JLL reports that mall operators are increasingly offering leasing incentives to maintain and attract tenants. The long-term outlook for the retail segment remains robust as a result of tourism and population growth. However, two major new developments – Al Maryah Central and Reem Mall – are forecast to significantly increase competition in the market, with total supply forecast to rise by 382,000 sq metres of GLA in 2020 on their opening.

Super-Regional Malls

Connected to The Galleria, Al Maryah Central will house two new brands to the emirate – Bloomingdale’s and Macy’s. The 146,000-sq-metre mall is being built by Brookfield Multiplex Constructions, which was awarded the $425m contract in August 2016.

Al Maryah Central’s developer, Gulf Related, is taking a unique approach to mixed-use offerings, in the hopes that free activities and open public spaces could offer the facility a competitive advantage. Instead of offering a headline-grabbing tourist attraction, there are plans to allocate 10,000 sq metres of the development’s total area for five public parks. The first of these is a promenade running along the mall’s nearby waterway, and was already partially opened by November 2016 as a walkway and urban running track. Two parks will be located on the mall’s roof, with one catering to athletics and the other to children’s activities. The remaining parks have been designed as a formal rooftop garden on top of Al Maryah Central, as well as a paved space to be used for outdoor markets and skating rinks. The mall will also offer visitors a large public library, offering families a lower price point for recreational activities, and potentially luring budget-conscious footfall away from higher-priced competitors.

Al Maryah Progress

In September 2016 Gulf Related reported the project was 50% leased, with 785,000 sq ft of commitment secured from retail groups, although its opening date was simultaneously pushed back by five months. The company reports it expects to capture a market share of between 20% and 30% once fully operational, with the mall scheduled to open in August 2018. In the same month, Gulf Related announced deals for a number of new restaurants at The Galleria, whose occupancy rates are at 100%. Those opened recently or slated to open soon include La Petite Maison, Roberto’s, Coya and a Loca outlet, with the company announcing The Galleria is in the midst of a realignment which will see its mid-tier retailers move to Al Maryah Central, while luxury brands will be concentrated in The Galleria.

This has helped calm industry concerns that the two developments will suffer from damaging competition, with Gulf Related reporting that luxury tenants are recording annual growth rates of between 15% and 60% annually at The Galleria. “Most mature marketplaces see segmentation of retail, so that this happening in Abu Dhabi is a normal phenomenon,” Kevin Ryan, managing director and COO of Gulf Related, told OBG. “There will of course be some crossover between developments, but on Al Maryah Island you will have 10m square feet of multi-purpose space, making it a truly urban mixed-use city centre. This is the value proposition.”

Reem Mall

A proactive strategy to attract new footfall will be critical for Al Maryah Central and others, after the Abu Dhabi Urban Planning Council granted planning approval to Reem Mall developer Al Farwaniya Property Development – a partnership between Kuwait’s National Real Estate Company and United Projects for Aviation Services Company – in January 2016. Final approval for the project was granted in July 2016, and in the same month Al Futtaim Carillon was selected to build the $1bn mall, which will offer 269,418 sq metres of space, including a 11,612-sq-metre snow park and more than 450 stores. In February 2017 National Real Estate Company signed for a $101.5m loan with Agility Investment Holding, a subsidiary of the Kuwait-based logistics firm. The firm said it would use this liquidity – a five-year convertible loan with the option of converting to company shares prior to maturity – to support completion of projects in its primary markets, which are worth a combined $1bn.

In August 2016 the Reem Mall developers announced Landmark Group had signed on to the project as a key tenant, with plans to open 23 new stores in the mall under brands including Centrepoint, Home Centre, Max, Iconic, Sports One and Shoexpress, as well as franchise brands New Look, Reiss and Adidas.

Reem Mall is scheduled to open to the public in 2020. “Footfall at shopping malls is still healthy, but spending is going down,” Mai Hassan, senior analyst at JLL, told OBG. “However, we still see rental rate stability, and mall operators are taking a proactive approach – for example, at Abu Dhabi Mall right now, they are changing the tenant mix to avoid competition with new and upcoming malls,” Hassan added.

Challenges of oversupply could be further compounded with the December 2016 announcement that Abu Dhabi-based National Investment Corporation (NIC) is launching an expansion plan at Marina Mall, located on the south end of the Corniche in Abu Dhabi City. The Dh3bn ($817m) project will break ground in the first quarter of 2017, with work set to finish in 2019, adding 120,000 sq metres of new space into the market.

Grocery

Outside of new malls, the grocery and e-commerce channels continue to offer significant growth potential to retail investors. In a February 2016 report, AAFC calculated that the UAE’s grocery market grew by 1.1% in 2014 to reach $28.7bn. The agency reports that UAE residents spent $3088 per capita on groceries that year, an increase of $80 on 2013. Grocery products accounted for 60% – by volume – of hypermarket sales and 81% of supermarket sales in 2014. Grocery spending has risen consistently in recent years, increasing from $24.5bn in 2011 to $26bn in 2012, $27.2bn in 2013, $28.7bn in 2014 and a calculated $30.4bn in 2015. The grocery segment is dominated by modern grocery retailers including convenience and discount stores, as well as supermarkets and hypermarkets. The market is also highly fragmented and competitive, with the top-five retailers accounting for only 14.8% of total market share, higher than elsewhere in the GCC but low compared to Western European markets. Euromonitor reports that the emirate’s top two grocery retailers, LuLu Group and Carrefour, accounted for a combined $2.1bn in sales in 2014, and over $900m in edible grocery sales, compared to under $500m in cumulative edible grocery sales for the next three largest retailers: Spinneys, Choitram and Al Maya.

Lulu Group

One of the largest retail chains in Asia, and the largest in the Middle East, Abu Dhabi’s LuLu Group is the market leader in grocery sales in the UAE. Also the fastest-growing chain, LuLu recorded a compound annual growth rate (CAGR) of 22.6% between 2010 and 2015, benefitting from easy-access locations and a lower price point than some Western chains, with its portfolio of hypermarkets standing at 131 branches as of November 2016. Euromonitor reports that LuLu Group sales rose by $273.5m between 2014 and 2015, cumulatively growing by $919m between 2010 and 2015, bringing its market share to 32% in the Middle East and its total annual turnover to around $6.6bn.

Double-digit growth has enabled LuLu Group to adopt a robust development strategy which has seen it expand product offerings and business lines to nearly all sectors of the economy, including health care, travel and personal finance. Often acting as an anchor tenant in major mall developments, the group has also moved into branded mall development through its subsidiary Line Investments & Property, which operates six malls in Abu Dhabi, including Al Wahda Mall, Mushrif Mall and Khalidiyah Mall. In October 2016 LuLu Group International announced plans for its largest-ever one-off investment in the UAE, a Dh2bn ($545m) plan to build three new malls in Umm Al Quwain, Sharjah and Dubai before 2020. The AAFC reports that just 25% of grocery offerings are produced domestically, creating new opportunities not just for local producers, but also for grocery importers and suppliers, and paving the way for future expansion of international export facilities.

Rising Competition

This expansion strategy should help keep the company on a growth path in the face of rising grocery competition. The company’s chief competitor in the UAE is Carrefour, which recorded a 13% CAGR between 2010 and 2015, with sales rising by roughly $100m annually, according to Euromonitor. Choithram, meanwhile, which boasts strong customer loyalty, recorded a 4.9% CAGR over the same period. Al Maya’s CAGR reached 6.5% between 2010 and 2015, with the company recording $76.1m in sales growth between 2012 and 2015 alone, and announcing plans to add new locations in Abu Dhabi and Dubai to its existing portfolio of 39 stores. Spinneys, which offers a higher price point, has been less successful, with a CAGR of -5.9% in the five years to 2015, according to the AAFC. With competition intensifying and some major brands already losing out, AAFC reports that hypermarkets and supermarkets are capitalising on consumer habits by opening either near or within large shopping centres, as was the case with Géant in Yas Mall. More recently, Carrefour announced in June 2016 that it would act as anchor hypermarket tenant at Reem Mall.

E-Commerce

Grocery retailers are also expected to be some of the first to invest in new digital sales channels, kick-starting growth in the UAE’s nascent e-commerce industry. Although e-commerce comprised just 0.68% of total retail sales in the UAE in 2016, Planet Retail projects the industry will grow by 8.8% in 2017 to comprise 0.74% of total sales, and by a further 8.1% in 2018 and 7.5% in 2019, to reach 0.86% of total retail sales. Consultancy Frost & Sullivan reports that the UAE’s e-commerce industry was worth $2.5bn in 2015, and expected to grow to $10bn in value by 2018.

Two websites, Trolley.ae and Supermarket.ae, currently offer a range of products including fresh fruits, baked goods, confections, frozen food, baby products, meat and pet food, with brands including Dove, Lipton, Nescafé, Nestlé, Evian and Kellogg’s. In Dubai, platforms launched in 2016 include Quickshop.ae and El Grocer, with the former announcing plans to expand services to Abu Dhabi in May 2016.

Also, while AAFC reports that the UAE’s top-five grocery players are not currently focused on e-grocery specifically, but rather on non-grocery e-commerce products, both Géant and LuLu Group have moved to broaden their online offerings in recent months. In June 2015 LuLu Group invested $5m to relaunch its website and launch a new mobile app offering click-and-collect services across stores in the UAE, Qatar and Kuwait. Géant, meanwhile, offers home delivery in Dubai, accepting both cash on delivery and electronic payments. Perhaps most significantly for e-commerce growth, Landmark Group announced plans to completely revamp its online strategy in November 2016. Rather than using one portal, LandmarkShops.com, the group will develop individual websites for its seven core brands, including Splash, Babyshop, Centrepoint and Home Centre. Savitar Jagtiani, business head of e-commerce at Landmark, told local media that all of the group’s brands will focus on both a bricks-and-mortar presence and an app-and-online strategy as part of a multi-channel platform. Perhaps the biggest shake up in e-commerce came in March 2017 when global giant Amazon beat out Emaar Malls in purchasing Dubai-based online retailer souq.com, the biggest platform in the Middle East. Souq.com sells some 400,000 products and was valued at $1bn during its last funding round.

Outlook

Retail competition is expected to increase considerably with the entrance of Al Maryah Central and Reem Mall, although the long-term retail forecast remains positive. Shifting consumer trends could see e-commerce record rapid growth in the coming years, complementing grocery segment growth, driven by hypermarket expansion in major retail developments. Although reduced purchasing power and low global oil prices remain a concern, the industry is nonetheless expected to stay on a strong, long-term growth path.