Challenging times for UAE retailers, but Dubai well positioned
Challenging times for UAE retailers, but Dubai well positioned
The crash in oil prices has had a trickle-down impact on the Gulf state’s retail markets, hitting consumer confidence, consultancy group Euromonitor International said — although others see signs of hope on the horizon.
Faisal Durrani, a senior partner at Cluttons real estate consultancy, said there are uncertainties ahead flowing from “the introduction of VAT, rising interest rates and inflation which is nudging up.”
But Dubai, with its more diversified economy, is in a much better place than Abu Dhabi, Durrani emphasized, with the latter more dependant on economic growth from hydrocarbons.
“About half the Abu Dhabi economy has relied on the hydrocarbon sector for growth which means we’ve seen oil and gas companies returning office space to the market,” Durrani told Arab News.
“In retail, if you are seeing a decrease in rate of job creation at the top end, that trickles through to retail.”
Footfall and occupancy rates in prime retail space in Dubai have showed no sign of weakening, said Durrani. Prime space occupancy is at about 100 percent, he added.
However, at secondary or tertiary retail properties, there have been signs of softness, according to property consultancy JLL.
Even larger malls in the emirate had recorded declines of between 3-5 percent in headline rents on a quarterly basis, according to JLL’s Dubai Real Estate Market Overview that covered the third quarter of 2017.
Rents are expected to remain under pressure over the next 12 months given the large volume of potential new supply due to enter the market, said JLL.
Regional gross domestic product (GDP) levels have tumbled since the oil price rout of 2014 — and this is bound to produce losers. Among those feeling the heat is Dubai retailer Marka which recently posted deepening losses for 2017 with income down 68 percent. The company has failed to turn a profit since listing on the Dubai stock exchange in 2014. It said in October it had “taken steps to sell or close the vast majority of fashion and sport brands whilst also undertaking a significant reduction in overhead costs.”
Marka expanded rapidly into the retail, food and beverage segments, but has built up indebtedness as well as being by hit by falling consumer disposable income since the collapse of the oil price.
Majid Al Futtaim Group (MAF), the company behind Ski Dubai and operator of 22 shopping malls across the Arab world, saw earnings growth slow according to a statement from the company on Jan. 31.
Earnings before interest, tax, depreciation and amortization (Ebitda) were up just 1 percent to AED 4.2 billion. But the outlook for 2018 was said to be bright.
Alain Bejjani, the chief executive, said: “Majid Al Futtaim’s diverse businesses and the markets in which we operate are experiencing rapid change and new innovations. At the same time, our region continues to face volatility, our competition is becoming global and the needs of our customers continue to evolve.”
He added that the company wanted to become as prominent digitally as it was physically, in order “to drive our resilience and competitiveness.”
Majid Al Futtaim’s slow Ebitda growth predominantly resulted from a change in business mix across the portfolio, with food grocery retail growing at a faster rate than the higher margin properties businesses, according to the company.
Certainly, MAF is not in the doldrums; it is making good profits, as is Emaar Malls.
Fears that there could be an oversupply of prime retail and hospitality in Dubai were dismissed by Durrani. “In Dubai, there are rising tourist numbers as it is now much easier for visitors from China, India and Russia to get visas. And there is Expo 2020 coming up,” he said.
More generally, for the region as a whole, Durrani said that “perhaps credit card spending and larger purchases would be stalled and local investments may look more attractive than overseas ones (because of the weak dollar). On the other hand, with growth expected to pick up in the Gulf this year, that could lead to more job security — and perhaps higher pay rewards.”
But a Euromonitor International report on the UAE retail sector, published this month, said: “In line with most retailers’ expectations, 2017 continued to be impacted by lower oil prices, regional and global macroeconomic factors impacting consumer confidence and expenditure patterns. Whilst many retailers report that growth tends to pick up during the last quarter of the year, mid-year months such as June and August were highly unsatisfactory.”
Others were more optimistic, particularly about Dubai. Knight Frank, in a 2018 look-ahead report penned by senior analyst Taimur Khan, said: “The weaker macroeconomic conditions and the growth of e-commerce in the UAE in the form of Amazon (Souq.com) and Noon, have proved to be a strong headwind for the retail sector in the UAE. However through a range of ‘Super Sale’ promotions, a weaker US dollar and continued growth in levels of tourism from more diverse range of source markets means the sector has battled back somewhat.”
Khan added: “Demand from international brands to open outlets in the UAE remains strong with the UAE ranking as the 7th most popular destination of choice for expansion among international retailers, with many preferring Dubai as an entry point into the region.”
Iran looms large over OPEC summit
- Saudi Arabia only country in Mideast, and perhaps world, with enough capacity to keep market supplied, say experts
- At Algiers, Opec and leading non-Opec countries are expected to discuss how to allocate supply increases to offset a shortage of Iran supplies
LONDON: The Opec summit in Algiers on Sunday meets amid widespread fears of a supply crunch when a forecast 1.4 million barrels a day of crude is lost from Iran in November when US sanctions kick in.
If, on top of that, more supply shocks hit the market in worse-than-expected disruption from Libya and Iraq, the price of crude could surge, said Andy Critchlow, head of energy news at S&P Global Platts. “At the moment, the market looks finely balanced,” he said.
There isn’t a lot of slack in the system. As Critchlow points out: “Upstream investment in infrastructure and new wells is historically low and it will take a long time to turn that around.”
At Algiers, Opec and leading non-Opec countries are expected to discuss how to allocate supply increases to offset a shortage of Iran supplies. The gathering comes after a tweet by President Trump on Sept. 20 calling on Opec to lower prices. He said on Twitter that “they would not be safe for very long without us, and yet they continue to push for a higher and higher oil price.”
Critchlow reckoned KSA still had spare capacity of about 2 million bpd. And KSA would get oil back as they go into winter as it had needed 800,000m bpd merely to generate electricity for the home market to meet heightened demand for air conditioning in the summer.
But there is uncertainty about what will come out of Algiers. For a start, the Iranians say they will not attend. That could be tricky in terms of an Opec communique at the end of the meeting as statements need unanimous support from member nations. And Iran has indicated it will veto any move that would affect Iran’s position, ie, one where other countries absorb its market share as sanctions bite.
Jason Gammel, energy analyst at London broker Jefferies, said: “The magnitude of the drop in Iranian exports is likely to be higher than any hit in demand as a result of problems linked to emerging market currencies, or trade wars. That’s why we expect oil prices to continue to strengthen. The Saudis and their partners will keep the market well supplied, and I think the issue is that the level of spare capacity in the system will be extremely low. Any threat or interruption will mean price spikes. Possibly by the end of the year demand will exceed supply; for now, the market remains in balance, but threats of supply disruption will bring volatility.”
Under the spotlight in Algiers is a production cuts accord forged by Opec and 11 other countries in 2016 which has been extended to the end of this year. The agreement helped reboot prices and obliterate inventory stockpiles that led to the crash in crude prices nearly three years ago. But how long will the agreement last? Algiers may kick that one into the long grass.
Thomson Reuters analysts Ehsan Ul-Haq and Tom Kenison told Arab News: “OPEC members would like to maintain cohesion within the group around supply ahead of Iran sanctions and declining Venezuela production, However, they are expected be in favor of maintaining stability in prices while doing so. On the other hand, they need to find a consensus around how their market share would be affected by a decision to pump more oil in the market. Any decision around production will likely be offset until the November meeting.”
Critchlow said that it is what KSA and Russia say and do that matters. “They speak for a fifth of the global oil market, producing a combined total of 22m bpd.” Together, they are the swing producers when it comes to crude production and supply.
Another factor about Algiers is that it is a meeting of the Joint Ministerial Monitoring Committee, which is not a policy-making forum. Big policy statements may have to wait for the main Opec summit in Vienna at the end of year. That said, there will be some very high-level delegations in Algiers, including the Saudi oil minister and his Russian counterpart.
A statement about the demand picture could emerge, especially as there are fears about the impact on the global economy from the US-China tariff war.
Looking to the future, Critchlow thought the Opec production cuts accord would carry on into 2019. “Oil priced between $70/bbl and $80/bbl is a sweet spot for Middle East producers. Its’s good for Saudi as it helps stop further drainage of their foreign reserves and moves the budget back toward balance. Do they want (the price) to go higher? I think that would cause a lot of political problems for them.”