UAE. Dubai's developers, battered by three years of falling prices for homes and offices, are seeking refuge in retail assets as shopping tourism powers the economy.
Emaar Properties PJSC said today it’s expanding the Dubai Mall, the world’s biggest, by 1 million square feet (92,903 square meters) as retail accounts for a growing share of the company’s income. Nakheel PJSC, the government-owned company that restructured US$16.1 billion of debt last year, is adding to its Dragon Mart shopping center and trying to raise funds to build a cluster of restaurants and stores at the tip of its Palm Jumeirah artificial island.
“Most developers are looking to build recurring revenues because there are so few property sales happening right now,” said Patrick Gaffney, an analyst at HSBC Bank Middle East Ltd. “The sectors that are doing best are retail and hotels because of strong tourist arrivals.”
Dubai’s malls and shops have become more attractive after home values fell by more than 65% from their 2008 peak while retail sales have been rising since 2009. Developers that don’t already generate significant revenue from shopping assets will struggle to get a foothold in the market because little is being built or sold and banks are reluctant to finance any type of development in the emirate, including retail, Gaffney said.
Retail revenue in the United Arab Emirates probably increased 5.3% last year to AED113 billion (US$31 billion) Business Monitor International estimated. That will probably rise to AED120 billion this year and AED157 billion by 2015, it said.
Majid Al Futtaim Holding LLC, the operator of Carrefour SA stores in the Middle East, is the largest owner of shopping malls in Dubai. The closely held developer this month raised $400 million selling Islamic bonds for the first time as part of a US$1 billion program. Last month the company reported an 18% increase in revenue in its home market and said 2011 was its most successful year since being founded in 1992.
Majid Al Futtaim priced its US$400 million, five-year Islamic bond, or sukuk, at a rate of 5.85% on January 31. The yield rose 4 basis points since it started trading this month to 5.66% today. That compares with a yield of 7.4% for Emaar’s 8.5% Islamic notes maturing in 2016. Emaar, Dubai’s second-biggest retail operator, also builds housing and offices.
Emaar reported that 41% of revenue and 68% of pretax profit came from hospitality properties and leased space including shopping malls in the first nine months of last year. That compares with 24 percent of revenue and 27 percent of profit a year earlier.
“The Dubai Mall is a powerful demonstration of the competencies that Emaar has developed in retail, regarded as one of the core sectors of Dubai’s economy,” Emaar Chairman Mohamed Alabbar said in today’s statement.
Owning the Dubai Mall, with rentable space equivalent to 50 football fields, also helped the company when it used the asset as collateral to refinance AED3.6 billion of debt at a lower price. The expansion announced today will lift the total size of the development to more than 13 million square feet.
Retailers including American Eagle Outfitters Inc., Limited Brands Inc. and luxury watch seller Rivoli Group are opening shops in Dubai as consumer confidence rises. Macy’s Inc., the second-biggest U.S. department-store company, in January 2010 chose the Dubai Mall to open its first Bloomingdale’s store outside its home market.
Prospects aren’t as bright for developers that haven’t built up retail assets. Union Properties PJSC, which is mainly focused on homes and offices, this month reported a full-year loss of AED1.57 billion. The company in January handed over ownership of properties including some in Limestone and The Index to settle AED1.1 billion of debt.
Deyaar Development, partly owned by Dubai Islamic Bank, has AED234 million of debt coming due this year, compared with about AED37.7 million of profit in 2011. The company had a loss of aED2.9 billion the previous year.
“Even though retail is generally strong, especially at the large malls, we don’t expect many developers to build new ones because funding is tough and there is already a good amount of supply in the market,” Gaffney said. “The areas that will do best are smaller strip malls or supermarkets near housing developments.”
Shopping accounted for about 30% of Dubai’s gross domestic product last year, Standard Chartered Bank Plc economist Philippe Dauba-Pantanacce estimated. The Dubai Statistics Center said retail and wholesale trade rose by 9.3% and hotels and restaurants increased by 4.4% in 2010. It hasn’t yet released figures for last year.
Nakheel is in talks with banks to raise at least AED300 million for its first new project since the debt-ridden company received a government bailout in 2009. The Pointe at Palm Jumeirah, across the water from the Atlantis hotel, will include 120 restaurants, 75 shops and landscaped areas for visitors with a view of an offshore fountain.
“The retail sector is strategic for Nakheel,” Chairman Ali Rashed Lootah said at a press conference in January. He added that 60% of an extension to Nakheel’s Dragon Mart mall was booked by retailers within a week of its announcement. The company plans to add 1.7 million square feet of retail space and 5,000 parking spaces to the mall.
Even with a growing retail market, Nakheel may have difficulty raising the money after it received a government bailout and restructured debt, according to analysts including Ahmed Talhaoui, the Abu Dhabi-based head of investment and asset management at Royal Capital.
“Any issue would have to be at a very competitive yield and probably with a structure that gives some government guarantee,” Talhaoui said in a January interview.
The yield on Nakheel’s AED3.8 billion, 10% sukuk maturing in August 2016, fell 114 basis points, or 1.14 percentage points, so far this year to 16.83% today, according to data compiled by Bloomberg. That compares with an average yield of 4.45% for U.A.E Islamic bonds on February 10, the HSBC/NASDAQ Dubai UAE US Dollar Sukuk Index shows.
Emaar, which opened Burj Khalifa, the world’s tallest tower, in 2010, derived about 23% of its 2011 income from retail rents and is now focusing almost exclusively in Dubai on growing sales at its malls, HSBC’s Gaffney said. Tourists visiting the Burj Khalifa’s observation deck can only get there by going through the Dubai Mall.
“Emaar was better positioned than others when the financial crisis hit,” said Gaffney. “They had already launched and sold so much in Dubai and didn’t have tons of unsold inventory coming on line. They also were focused on the construction of Burj Khalifa, Emaar Boulevard and Dubai Mall, rather than starting new projects.”
Malls and hotels are the main value drivers for Emaar, whose projects span the Middle East, North Africa and Asia, Ahmed Badr said in a note on Oct. 27, when he was head of Middle East property research at Credit Suisse Group AG. He now works as an equity sales specialist with the bank.
Dubai, the second-largest of seven sheikhdoms that make up the United Arab Emirates, racked up US$129 billion in debt transforming itself into a tourist and trade hub. While many developments were canceled, attractions including Burj Khalifa and resort hotels like the Atlantis help bring in visitors who shop for goods that aren’t available in much of the region.
“The local population is wealthy enough to be able to keep buying and the tourism growth was very strong in Dubai last year,” said David Macadam, head of retail for the Middle East and North Africa at Jones Lang LaSalle Inc. He said Dubai shopping is bolstered by visitors from the Gulf region, Europe, China, the Indian subcontinent and the rest of the Arab world.
Dubai hotels reported an 11% increase in visitors in the nine months through September compared with a year earlier, according to the Department of Tourism and Commerce Marketing. Revolutions in Tunisia, Egypt and Libya and armed conflicts in Yemen and Syria mean that tourists in the region have fewer options for vacations.
Buyers spent US$114 million in the first week of Dubai’s month-long shopping festival, a 53% increase over the year earlier period, according to Karim Beg, Visa Inc.’s head of marketing for the Middle East and North Africa.
“Our marketing efforts have reached new markets in east Asia such as China and Japan and even though this strategy started only three years ago, we have seen its fruit already,” said Laila Suhail, chief executive officer of festival organizer Dubai Events & Promotions.
Dubai has 2.58 million square meters (27.8 million square feet) of mall-based retail space, according to a report by property broker Jones Lang LaSalle. About 173,000 square meters will be completed in the next two years, mostly in small shopping centers or strip malls, it said.
Banks wary of real-estate lending may make an exception if the business case for a project is clear and if adequate protection is put into place, said Raj Madha, an analyst at Rasmala Investment Bank Ltd.
Union Properties sold a building in the Umm Suqeim neighborhood for more than 140 million dirhams to supermarket operator Spinneys, Chairman Khalid Bin Kalban said in June 2010. Such transactions are rare in Dubai, where developers tend to hold onto shopping assets.
“It doesn’t make sense for owners to relinquish well- performing assets such as malls, which were great source of cash even during the crisis,” said Matthew Green, head of United Arab Emirates research at real-estate broker CB Richard Ellis Group Inc. “Also, when you look at mall owners they are generally companies that don’t have a pressing need to sell. Even if they wanted to sell, it won’t be prime assets.”
Majid Al Futtaim’s Mall of the Emirates, which contains an indoor ski slope, has a 99.8% occupancy rate, while the developer’s Deira City Center and Mirdif City Centre have rates of 98.8% and 96.9% respectively, according to the company’s prospectus.
Dubai’s mall vacancy rate stands at 20%, mainly because of smaller malls with low visitor numbers. Most big international brand retailers won’t open stores in small malls as they look for the most prestigious and high profile locations, Gaffney said.
After the sheikhdom first opened up its real-estate market to foreigners in 2005, developers focused on selling homes as speculation-driven investment drove up prices.
“At the time, it made more sense to sell land and residential units because it was less risky,” HSBC’s Gaffney said. Back then, developers couldn’t determine whether the location would be valuable by the time a shopping center was built, he said.