The Gulf's insatiable appetite for retail

Huge new malls are competing fiercely for business in the Gulf, but traditional shops still account for a large proportion of retail sales. Published in MEED, 3 December 2014

When Yas Mall in Abu Dhabi opened its doors on 19 November, it marked the latest phase in an ongoing battle among Gulf cities to claim the prize as the retail destination of choice in the region. The development, owned by the local Aldar Properties, was timed to open just ahead of the Formula One Grand Prix at the nearby Yas Marina circuit and has some 235,000 square metres of leasable space.

But retailing is a competitive business and it will not be long before Yas Mall is superseded by other developments vying to lure consumers. More than $31bn-worth of retail projects are planned or under way in cities around the region, according to regional projects tracker MEED Projects. The vast majority are in the GCC, with the most active market being the UAE. It is responsible for close to $20bn of the total, although more than half of that figure is accounted for by schemes that are still at the study or design stages.

Perhaps the most eye-catching project is the Mall of the World, a $6.8bn project by Dubai Holding, which was launched in July and is intended to be the world’s largest mall, occupying some 743,000 sq m. Other developments in Dubai are on a smaller scale but still involve large investments, including the $2bn City Walk scheme of the local Meraas Holding and Nakheel’s Deira Islands Mall, which is worth an estimated $900m.

Elsewhere around the Gulf, there is the $900m Mall of Qatar being built in Doha by the local Urbacon Trading & Contracting, which is due to open in 2015. Kuwait City’s main shopping mall – The Avenues – is being expanded at a cost of about $150m, while in Saudi Arabia, recent completions have included the Al-Nakheel Mall and the retail space in the Olaya Towers, both in Riyadh.

According to US real estate agency JLL, confidence appears to be high in the Saudi capital, leading to more schemes being launched recently, including the Salbough Mall, which will add 275,000 sq m of retail space by 2016, and the 250,000 sq m Al-Dirriyah Festival City, which is due for completion by 2018.

All this adds up to a sense that the region has an insatiable appetite for retail developments. “The psychology is that a development is not regarded as complete until it’s got a mall in it,” says one industry observer.

There are some notable schemes outside the Gulf too, including the 162,500 sq m Mall of Egypt in Cairo and the 61,000 sq m Waterfront City Centre in Beirut, both of which are being developed by the UAE’s Al-Futtaim Group; and the 73,000 sq m Abdali Mall in Amman, Jordan by Kuwait’s United Real Estate Company.

Despite the broad spread of activity, the UAE looks like it will remain the most vibrant retail market for the foreseeable future.

“In terms of the main cities for building new retail outlets or expanding and refurbishing existing ones, Dubai is leading the way,” says Christopher Seymour, head of property at UK consultancy EC Harris. “But major expansions in new space will happen in Abu Dhabi over the next five years. Other key markets are seeing plans for significant increases in space, such as Qatar, where several shopping centres are under construction, and Egypt, which is dependent on a more stable political environment.”

Given all the investment pouring into huge new malls, it might seem that traditional retailers in souqs or standalone, street-front shops could get squeezed out. But there are some developments to boost these areas too. For example, the Deira Fish Market in Dubai is being given a $15m revamp by Dubai Municipality and a new vegetable, fish and meat market is planned for Fujairah at a cost of $10m.

There certainly seems to be plenty of demand for more small outlets. Nakheel is developing the Night Souq as part of its Deira Islands scheme. This will cover a 1.9-kilometre stretch along the waterfront and will include 5,300 shops in what is meant to resemble a traditional souq. Up to 200 units an hour were being bought by investors at the peak of demand in early November.

In fact, traditional retailers still account for the majority of grocery sales in almost all countries around the region, according to research firm Euromonitor. They have a market share of above 90 per cent in Algeria and Iran, and in the high 70s or 80s in the likes of Yemen, Syria, Morocco, Libya and Jordan.

In the GCC, the landscape is more evenly balanced, with modern supermarkets and hypermarkets taking between 43 and 49 per cent of the grocery market in Bahrain, Kuwait and Oman, and a majority of the market in Qatar, Saudi Arabia and the UAE.

Such stores often act as anchor tenants alongside big department stores in the large mall developments that are becoming so prevalent in the Gulf. Department stores make up a tiny fraction of the overall retail market in the region, with a share of less than 1 per cent in Algeria and Jordan, and not much more than that in Morocco, Yemen and Egypt. But in most GCC countries as well as Iraq, Lebanon and Syria, department stores typically account for more than 2 per cent of retail sales, with the UAE leading the region with 4.2 per cent.

With all the investments being made, there are some questions to be asked about the scale and speed with which new major shopping malls are being launched. The rate of change means that what seems like a cutting-edge scheme now can quickly become a rather stale and old-fashioned site. That necessitates a different business model for developers than is seen in other parts of the world.

“You can’t approach it with a European financing model of assuming you’re going to build something that’s going to be adequate for 15 years, get refurbished after 20 years and then fall away after 30 years, at which point you demolish and rebuild again,” says Robert Blundell, a Dubai-based partner at UK law firm Holman Fenwick Willan, who specialises in the construction industry.

“We’re talking much shorter lifespans for retail projects. In Dubai, we’re seeing buildings being demolished that are only 15 years old. Of course, you don’t necessarily need to make back your investment in that timescale if the land you’re sitting on is undergoing such an increase in value that it’s cheaper to knock down something and build something even bigger and fancier.”

Even so, it can be daunting just how quickly the market can change if you are a developer or property owner trying to make a return on your investment. In Jeddah, new, higher-quality developments have been forcing down prices in lower-grade community malls this year. According to JLL, rents fell by 8 per cent in the third quarter, compared with the same period in 2013, due to the likes of Flamingo Mall and Salam Mall opening during the year.