Does Dubai really need the world biggest mall? Again?

A tourist boat sits in the lagoon outside the Dubai Mall during an evening light show at the Burj Khalifa tower, center, in Dubai, United Arab Emirates, on Monday, Nov. 10, 2014. The United Arab Emirates' central bank limited mortgage lending and required larger down payments, and the Land Department doubled transaction taxes early last year as policymakers tried to avoid a repeat of a property bubble in 2008 that caused values to slump by about 65 percent. Photographer: Chris Ratcliffe/Bloomberg

Stuck for somewhere to shop this weekend? Probably not, if you live in the UAE, given the mass of megamalls, luxury retail outlets and penchant for “world’s largest” accolades.

The place just shouts, “do buy”, writes Ben Flanagan.

Given the existing choice, the ambitious scale of new shopping centres planned or under construction in the UAE may come as a surprise. These include Dubai’s Mall of the World, which is set to be – you guessed it – the biggest on the planet.

Numerous smaller retail developments are also in development, will millions of square feet of leasable space set to enter the market over the next five years. Yet this prompts the question: Is it all too much? Is this another bubble waiting to burst?

Perhaps surprisingly, the answer of local analysts is a resounding “no”. Despite large-scale centres such as the Dubai Mall – the world’s biggest shopping centre by total size, at 12.1 million sq ft, but not by gross leasable area, at 3.8m sq ft – the retail market is relatively underserved, they say.

In Dubai, the amount of retail space per capita is actually below that in many western markets, said Diana Jarmalaite, retail analyst at Euromonitor.

“Keeping in mind the population growth as well as the expected tourist flow, the current size of existing selling space per capita is… more than two to three times lower compared to the mature markets in Europe or America,” she said. “The market still has room for expansion.”

And expanding it is. Dubai Mall, Mall of the Emirates and Ibn Battuta all have extension programmes underway; there are two shopping centres planned on the Palm Jumeirah; and a number of smaller community malls are being built. In neighbouring Abu Dhabi, megamalls are planned on both the Al Maryah and Reem islands.

But it is Dubai’s proposed Mall of the World development that marks the most ambitions new venture. The $6.2bn project, being developed by Dubai Holding, is set to span 8 million sq. ft. and be part of a 48 million sq. ft “temperature-controlled city” that will also include an indoor theme park – the world’s largest, naturally.

The overall development is hoping to pull in a whopping 180 million visitors a year – more than double Dubai Mall’s 80 million in 2014 – according to the government’s announcement of the project in July 2014.

“The growth in family and retail tourism underpins the need to enhance Dubai’s tourism infrastructure as soon as possible,” Sheikh Mohammed bin Rashid Al Maktoum, ruler of Dubai, said at the time.

Matthew Green, the head of research and consultancy for the UAE at CBRE Middle East, said tourism was a big factor in the demand for such megamalls.

“Over the past decade Dubai has established itself as a retail tourism destination, attracting a significant number of visitors from the GCC, Europe and Asia, with the Russian and Chinese renowned for spending big in the emirate’s luxury boutiques,” he said.

The decline in Russian tourists to Dubai due to the falling rouble will have a big effect on some individual luxury retailers – but a negligible impact on the market as a whole, said Ms Jarmalaite.

“Some particular retailers have been very negatively affected. [But] within the overall retailing industry their impact is much lower in comparison to other visitors, for instance Saudis or Indians,” she said. “Declining sales to Russian tourists are more than offset by increasing sales to Chinese, Australians, and Indians to name just a few.”

Euromonitor expects the gap between supply and demand for Dubai retail space to narrow, but says the risk of the market overheating is “negligible over next five years, providing there are no unpredictable external shocks.”

“Lack of sales tax, low labour costs and general ease of doing business makes the retailing industry in the UAE more profitable than global averages. So even with declining demand, retailers would still have relatively high profit margins,” said Ms Jarmalaite.

International brands are certainly queuing up to get exposure to Dubai’s retail market. According to CBRE, the emirate is the second most important international shopping destination globally when ranked by the presence of foreign brands.

“Dubai continues to progress, attracting a host of new international brands each year, and this trend shows no signs of slowing down,” said Mr Green.

“Whilst we are still a little way behind London, we do see a time when Dubai will challenge London for the top spot,” he added. “The emirate has already established itself as a stepping stone into the wider region, with most retailers choosing to test the market in Dubai before rolling out store concepts into other Middle Eastern locations.  This position is unlikely to be challenged by any other location in the region.”

That said, greater demand for retail space is also seen in Abu Dhabi, where Mr Green said the market “has been undersupplied for a number of years”. That is in spite of the November opening of the giant Yas Mall, close to Abu Dhabi’s Formula 1 circuit.

But despite there being room for growth in the UAE retail market, it won’t be all plain sailing.

Building colossal shopping centres such as Mall of the World comes with its challenges, said Ms Jarmalaite.

Smaller retailers, for example, can be lost in such environments. The gold souq in Dubai Mall closed for nine months after dozens of individual jewellers said they couldn’t survive on a trickle of visitors each day. The area reopened in May 2012, rebranded as ‘The Souk’, which did away with the labyrinthine corridors that had made some shops hard to find.

“The bigger selling areas require more efforts to attract customers,” said Ms Jarmalaite. “‘Footfall efficiency’ might be achieved by the smaller-scale selling areas rather than bigger.”

With that in mind, Euromonitor expects the bulk of individual new malls in Dubai to be smaller shopping centres, rather than the likes of Mall of the World.

“Convenience [is] the core trend related to the opening of the new shopping centres,” said Ms Jarmalaite. “The majority of planned malls in Dubai are expected to be community shopping centres, as for instance The Circle Mall due in 2017 or Nakheel Mall due in 2017.”

So while bigger may not always mean better for the UAE retail market, the demand for more and more stores remains. There will certainly be more choice of destinations for that weekend shop in the years to come.