“The retail sector is vital to the growth of Dubai,” said the chairman of the powerful state-owned ports-to-real estate conglomerate Dubai World, Sultan Ahmed Bin Sulayem, when he opened an industry showcase for investment and development of retail real estate earlier this year.

His comment should not be taken lightly: a plank of Dubai’s tourism and business hub strategy rests on the provision of a host of retail tourism opportunities through Dubai Summer Surprises, a remarkably successful ploy to fill hotel rooms during July and August, when the scorching heat of the desert sun deters even the most hardened of sun-seeking tourists.

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Dubai is streets ahead of the rest of the region and the other emirates when it comes to retailing – an advantage that continues to yield new retail real estate opportunities. Others are working hard to catch up, not least in other parts of the UAE, but Dubai does not intend to lose its leading position in terms of shopping malls and other facilities (see table 1).

In April, Dubai’s Festival Waterfront Centre opened, featuring 550 shops, including 25 anchor stores, 90 restaurants, cafés and bistros, a 12-screen cinema, a 10-lane bowling alley and a vast entertainment centre. The world’s largest Marks & Spencer store outside the UK is also there.

Soon two new malls will open. Emaar is developing Dubai Mall, one of the world’s largest shopping and entertainment destinations. And the Ilyas and Mustafa Galadari Group is developing the Mall of Arabia, a huge mall to be built as part of the City of Arabia in the Dubai Land theme park. With a gross leasable area of 10 million square feet (sq ft), two levels of retail and entertainment, rooftop hotels and numerous leisure facilities, it is set to become the world’s largest mall.

These three developments will add 12.9 million sq ft of retail space. More specialist malls are opening, including the Outlet mall and Times Square mall, which offers a wide range of electronic merchandise.

Abu Dhabi plays catch-up

Abu Dhabi is gaining ground, and is expected to double its gross leaseable area of retail space between 2006 and 2008.

Aldar Properties is spearheading the city’s Central Markets rejuvenation, which will redevelop and expand the old souk. The development will add to the city’s residential, leisure and commercial stock. The tallest, 88-storey tower will be for residential use and there are plans for a 55-storey five-star hotel tower with 279 rooms and 132 serviced apartments. An office tower will offer 58 storeys of prime office space and a 16-storey tower will be a four-star hotel with 212 rooms.

Retail analysts are keeping an eye on the world’s major supermarkets, such as the UK’s Tesco and the US’s Wal-Mart, which do not have a presence in the UAE, perhaps deterred by the requirement for retail businesses in the federation to be 51% owned by a local entity. But France’s Carrefour has 10 supermarkets in the UAE in a joint venture with the local Majid Al Futtaim and it may face some competition if ownership laws are eased.

New mall space is envisaged in Ras Al Khaimah (RAK), where a 130,000 sq ft shopping mall features in the northern emirate’s ambitious plans for a Dh850m ($231.5m) theme park with a host of attractions, including the largest man-made waterfall in the world. The 120-acre WOW RAK park, under construction in the Khor Qurm region, is being promoted by Polo RAK Amusements, a joint venture company between Polo Amusement Park from India, RAK Investment Authority and RAK Properties.

WOW RAK will include two adjacent theme parks, Ice Land Water Park and Planet Earth Theme Park, with a capacity for 15,000 visitors a day. The water park will be ready for the public by May 2008 and the entire theme park will be completed in two years. The project is part of the RAK government’s strategy to transform the emirate into a premier tourism destination.

Mixed developments

The scale of some of the UAE’s real estate projects means that it is impossible to define them as either residential or commercial plays. Major projects are routinely mixed use, and property developers must think about more than bricks and mortar. As well as locations, developers have to consider providing services such as the shops, schools and healthcare facilities required by new residential or commercial districts.

“Developers are not just building homes or offices, they’re building communities,” says Blair Hagkull, managing director for the Middle East and north Africa at Jones Lang LaSalle.

Aldar Properties has branched out to the provision of education. The Abu Dhabi-based developer says that education provision will be a core part of all of its future residential developments and it is considering diversifying into hotel management and healthcare, too.

Office blues

More conventional commercial space is also being developed in RAK at the Julfar Towers development overlooking the creek and mangroves at RAK city. It consists of two 43-storey towers, one residential with 349 apartments and one office tower with 468 offices. Small offices are available on a freehold basis, typically selling for Dh518,664 for 635 sq ft to Dh896,839 for 1076 sq ft.

Rising land prices coupled with dynamic economic growth means that office rents in the region have been rising even faster than residential rents. Rents in prime commercial properties in Dubai’s central business districts are among the highest worldwide and rents in Abu Dhabi are among the world’s fastest growing.

According to real estate services firm CB Richard Ellis, office occupation costs in Abu Dhabi in the year 2006-07 increased by 102.9%, which is steep even compared with other fast-growing city economies worldwide. Rental costs rose by 79.1% in New Delhi, India, and by 53.6% in Singapore in the same period.

Abu Dhabi office space is “significantly under supplied”, according to a report by HSBC’s Middle East equity research team. It said only 1% of the emirate’s office space is vacant despite an increase of 220% in total retail space in the emirate since 2000. The research also found that rental yields of 8% in the office property market in Abu Dhabi were among the world’s highest.

The pace of office construction in Dubai is fast, probably third fastest in the world after Moscow and Shanghai. According to Emirates International Bank, office capacity in Dubai is about 16 million sq ft and 27 million sq ft is estimated to be under construction. But the pace of construction is not quick enough to meet demand.

Firms that are driving demand and rental costs steeply upwards in Dubai include some of the world’s major financial institutions. Office space at the flagship Dubai International Financial Centre is very hard to come by.