When Georges Farha signed up with Emaar Malls to open a soup and sandwich restaurant in Dubai Mall, he was counting on about 100,000 people passing his shop each day. But after the global economic downturn hit, Mr Farha, one of the investors in the Dubai-based Intercat Hospitality, says there is only between 40,000 and 50,000 potential customers each day passing the Toast outlet, which for now is not generating enough sales to stay open. "I'm losing my shirt," Mr Farha says. "And all the other people who signed up, they're not doing much better." The first few months of this year has been tough for retailers in the UAE with fewer tourists, and shoppers going for cheaper items or curbing their spending until easier times. Faced with slow sales, retailers have been cutting costs and some have started approaching mall developers to renegotiate rents. Last week, Mr Farha says he and 26 other retailers signed a petition asking Emaar, the developer of Dubai Mall, to discount their rents, which were priced when Dubai's retail market was at its prime. "At the time, the way it was sold, we were all excited. Dubai was on this big boom," he says. "Now you don't have the spend, you don't have the traffic, you don't have the footfall." Mr Farha says the retailers asked for the payment terms to be switched to a percentage of sales, or even for a grace period. He says about 80 per cent of his sales revenue goes towards paying the rent. An Emaar Malls spokesperson said they were taking steps to strengthen customer traffic to boost sales through campaigns such as the recent month-long shopping festival at Dubai Mall. "The relationship between Emaar Malls and the retailer is defined by the legal terms stated in their lease agreements. We do not have plans to amend these agreements as of now. Emaar Malls works with all retailers to ensure their long term sustainability," the spokesman said. Mr Farha says he believes the mall will be incredibly successful in five or so years but for now it is a struggle. As retailers prepare for the traditionally slow summer, he says action must be taken. "We've got six months of bleeding ahead." Walid Hajj, the chief executive of the retail group Cravia, which owns the local licences for Cinnabon and Roadster Diner, says the informal group of retailers did not specify a discount in their petition to Emaar. They have had a meeting with Emaar but no adjustments have been made, Mr Hajj says. "We're just saying this is a situation that we have to sit down and talk about because something has to happen." Retailers around the world have adopted the same tactic. Starbucks, the world's largest coffee shop operator, last month began asking its landlords in the US for as much as a 25 per cent reduction in rents, according to Bloomberg. The move was part of the company's plan to trim overall expenses, a spokeswoman said. It seems to be working. The property consultancy Colliers International says the lease rates of prime retail real estate worldwide have fallen by as much as 50 per cent. According to its spring retail global highlights report released this month, the cost per square foot (sq ft) a year on Fifth Avenue in New York dropped 15 per cent, from US$1,650 (Dh6,058) early last year to $1,400 this year. On Bond Street in London, lease rates for each sq ft a year fell 31 per cent from $1,047 last year to $726 this year. In Moscow, the rate on Tverskaya Street dropped from $1,467.61 a sq ft last year to just $349 this year - a 76 per cent fall. But in the UAE, retail rents rose in the same period, some by more than half, according to Colliers. The annual cost of retail space on Sheikh Zayed Road in Dubai rose 55 per cent from $70.84 a sq ft early last year to $110 this year. In Abu Dhabi early last year, it cost $55.66 a sq ft for a retail shop on Khalifa Street. This year, a shop on Hamdan Street is priced at $103 a sq ft annually, about 85 per cent more. This is about to change as retail rents in the UAE have reached a "tipping point", says Craig Plumb, the head of research for Jones Lang LaSalle MENA. The population of the UAE has grown rapidly in the past five years and there has not been enough retail supply to satisfy demand, making it a landlords' market. "That all changed over the last year," says Mr Plumb. "Now, the market, it would be fair to say, has hit a tipping point. It was a market that was very much in the landlord's favour, [but] is now more in the tenant's favour." The biggest addition to the retail market was Dubai Mall, one of the largest malls in the world at 1.12 million square metres, which opened last November. At least three other malls have opened since then: Arabian Centre, Dubai Marina Mall and Bawadi Mall in Al Ain. Mr Plumb expects rental rates to start falling in the short term. "It's inevitable, given three things: the large amount of new supply in the market over the last year; the reduction in tourist arrivals in Dubai; and the stabilisation of the population," he says. Mr Plumb expects the drop in retail rents to be "significant, given the falls across the other sectors in the last six months". Mr Hajj says mall landlords have been slow to react because they are the last to feel the pinch. Retail rent contracts are often signed for three to four years, or as long as 20 years, and paid in advance, he says, and that is what makes it more difficult for retailers in tough times. "Some of these payment terms are ridiculous," Mr Hajj says. "You pay cheques for three years, sometimes one cheque per year, which is really harsh on your cash flow." But Shahram Shamsaee, the senior vice president of retail for Majid Al Futtaim (MAF) Shopping Malls, says that while retailers in the UAE have slower sales, revenues are higher than for those in Europe and North America. Last year, the Mall of the Emirates posted $2.1 billion in sales, making it the highest grossing mall in the world, Mr Shamsaee says. Many retailers at Mall of the Emirates signed their leases five or six years ago, he says, and benefited from an annual sales growth of 20 per cent while their rents had minimal, government-regulated rises. On global average, retailers spend between 12 per cent and 14 per cent of their revenues on occupancy costs, Mr Shamsaee says, but at MAF's malls the ratio of sales to rent is about 7 per cent. "Even if you had some adjustments in 2009 as far as sales goes, sales productivity is still very high comparative to global standards." Mr Shamsaee says MAF does not plan to reduce rent at its malls and some contracts that are up for renegotiation after four or more years may need to be raised. Majid al Ghurair, the chairman of the Dubai Shopping Malls Group and the president of BurJuman shopping centre, agrees. "There is a big rumour in the market that shopping malls charge high rents. That's not true," Mr al Ghurair says. He says BurJuman, which has many luxury boutiques, will not be reducing rents. Many of the tenants are doing fine and some are even expanding. But if a retailer is truly struggling and the tenant is valuable to the mall, developers should discuss a possible rent discount, he says. "It depends, every mall has its own situation. But definitely, always, good management of a mall will sit with their retailers and see how they are doing." Sales across malls in Dubai have dropped between 20 per cent and 25 per cent in the first quarter of this year compared with the same period last year. In April and May, sales fell by 10 per cent compared with last year, he says. Mr Shamsaee says retailers have become accustomed to extraordinary sales levels and need to adjust their expectations to normal growth rates. "The compound annual growth in retail sales in Dubai has been incredible and it's not sustainable," he says. "So, it's about people getting used to growing at a reasonable percentage." aligaya@thenational.ae
