It’s been one of the development wonders of recent years, but the Middle East’s retail property market has come unstuck
What a difference a year makes. 12 months ago the huge surge of people, investment and opportunities to parts of the Middle East was continuing apace. Even in the second half of last year, when the West was groaning under the weight of an insurmountable credit burden, the new gold rush in the United Arab Emirates seemed largely unaffected.
Retail in the area was growing at a near unprecedented scale as hundreds of Western brands such as New Look, Matalan, Marks & Spencer and Mothercare spread east to fill vast new shopping malls. Thousands of expats duly followed. Retail property was booming as developers rushed to complete the space and the letting market was working in overdrive to find tenants as fast as the buildings were going up.
But as the global banking system collapsed, Dubai was hit especially hard. The speed at which the retail property bubble grew has been matched only by how quickly it has now burst. Rental growth has begun to fall, supply is set to take over demand and already retailers want to cut back on their property footprint. The party, it seems, is over.
New Look international managing director Michael Lemner says: “There’s no doubt that the market is suffering at the moment. A lot of construction has stopped, expats are leaving, unemployment is increasing and a lot of people are worried.”
So why have things changed so much? The simple answer is that the Middle East has proved as vulnerable as anywhere else in the world to the sudden credit crunch and the system has more or less come crashing down.
What is unique about the change in the Middle East is that it follows such grand and supposedly well-laid plans, as set out by the property developers.
Development figures in Dubai are astounding. Last year alone the amount of leasable shopping centre space rose 28 per cent to 21.4 million sq ft, 50 per cent higher than it had been just three years before.
“There’s been an enormous amount of space added to the Dubai market,” says DTZ head of Gulf region retail Andrew Goodwin. “They’ve opened five malls within a relatively small space of each other, each competing for share of the market.”
What’s even more staggering, especially given what has happened to the economy, is how much space is still to come. By the end of next year the figure will have risen to more than 30 million sq ft of shopping centre space and is estimated to continue to more than 41 million sq ft by the end of 2012.
If this growth does continue it will be the equivalent of nearly 17 centres equalling the size of Westfield London being built in seven years, in a city with a population of about 1.7 million – a fifth of London. Even if all of the 20 million sq ft of space that is predicted for the next three years doesn’t happen, two schemes will certainly go ahead and open next year, one of which, the Mall of Arabia, is the size of Westfield London and Liverpool One combined.
It is the incredible rate of growth of the past decade in Dubai in particular that is part of the problem. Its sharp reversal has ruled out the possibility of a smooth slowdown and the ensuing problems are becoming evident. Rental growth in Dubai had already begun to slow by the fourth quarter of last year, reaching only 1.6 per cent compared with 14.7 per cent in the third quarter.
“What’s been bubbling away under this is that the market has been moving incredibly quickly,” says CBRE director of the Abu Dhabi office Mark Morris-Jones. “We’re in a position now where it is moving from being an emerging market to a mature market and what’s happened in the past six months has brought it forward. Retail operators are now looking at reviewing their portfolios.”
This is something of a euphemism, which in effect means store disposals – hardly a phenomenon unique to Dubai, but what is extraordinary is the speed of the ageing process. Previously blithe retailers are all of a sudden treating their property portfolio with extreme caution and diligence, and many are slowing down or even halting expansion plans.
Goodwin explains: “There’s no doubt that chains have opened up more and more stores at every opportunity that has come along without really dealing with their existing spending. If consumer spending continues to fall they will start to address their number of openings.”
For evidence of this you need look no further than the Marina Mall in Dubai. The vast scheme has been open for more than three months, yet only 15 per cent of its 150 stores are trading. As any developer will tell you, this is enough to cause more than a few sleepless nights. You don’t have to go back far, only a month in fact, to when the Dubai Mall opened with 1,200 stores to see how quickly things have changed. While this has a less than desirable 50 per cent of stores trading, compared with the Marina Mall it’s a bona fide success.
“There are not as many newcomers,” adds Lemner. “People who are not there yet are going to think twice. The big question now is, will retailers leave?”
But Dubai is only one city in a large and diverse region. Elsewhere in the United Arab Emirates, Abu Dhabi isn’t suffering anywhere near as much. Dubai’s heavy reliance on tourism and expats – who make up 90 per cent of the population – has left it dangerously exposed. The slowdown in tourism and a wave of redundancies have been catastrophic to Dubai, made worse by laws forbidding any expat without work to reside in the country.
Abu Dhabi, on the other hand, is coming from a far wealthier starting position. With an eighth of the world’s oil supply coursing beneath the city, its population is one of the most affluent per capita in the world. Without the rapid influx of foreign workers and tourists that Dubai has welcomed, Abu Dhabi has been allowed to grow at a much more realistic rate.
“Dubai has got to the point that rents peaked in the fourth quarter of last year and have now started to decline,” says Jones Lang La Salle head of research for the Mena region Craig Plumb. “But Abu Dhabi still has a very limited number of malls. There is plenty in the pipeline but there is still an active rental market.”
Where Dubai is already saturated, Abu Dhabi is still experiencing rental growth. While in Dubai the pipeline is looking increasingly in danger and supply is already outstripping demand, in Abu Dhabi retailers are still taking the space coming through. Of course, even Abu Dhabi is not immune to the effects of the crunch and demand has slowed slightly, but this has not been on anywhere near the same scale as in Dubai.
As has been proved in the US, the UK and much of the developed world, voracious property growth cannot continue indefinitely. Dubai is facing a tough few years as it readjusts to the crunch after a decade of huge growth and with more space still due this is only going to get worse in the short term.
Looking further ahead, the inevitable solution is for a big portion of the 10 million sq ft of shopping centres due by 2012 to be shelved. And this is already becoming a reality, not just in retail. A report from Jones Lang La Salle published last month said that more than 50 per cent of announced residential and commercial projects due to complete before 2012 are now on the shelf and forecast that the pipeline will continue to shrink.
As painful as this might be, the alternative would be the nightmare scenario of millions of square feet of empty shopping centre space with fewer and fewer retailers to fill it. As Lemner rightly points out, the big issue now is whether retailers are willing and able to stay and ride out the storm.