The opening of Ski Dubai in 2005 was a turning point for the Middle East. The construction of an ice cold winter resort in the middle of the desert meant Dubai had conquered the unconquerable, and there was no stopping the region’s most ambitious developers from then on. Indeed, when Saudi Arabia said recently it planned to build the world’s first underwater mosque, it came as no surprise to expatriates and those who have visited the Gulf states before, many of whom were already familiar with the region’s love of innovative ideas.
UAE-based developer Majid Al Futtaim (MAF) Holding, the company behind Ski Dubai and Mall of the Emirates, has continued to profit from its wintry investment ever since. Not only does the company now have a reputation as an expert mall and resort builder, but it has also enjoyed a healthy and regular income from the retail side of the business. Today, it is eyeing a whole host of shopping centres and novel entertainment concepts across the Middle East and Africa, quite possibly including more ski resorts in the Arab world’s biggest markets.
“We’re looking at around ten or eleven malls in the next five to seven years,” says Peter Walichnowski, head of Majid Al Futtaim (MAF) Properties, from the MAF headquarters in Dubai. Sitting next to him is Iyad Malas, the CEO of MAF Holding. He explains how MAF Properties is the division responsible for building the company’s malls, hotels and mixed-use developments, but in truth all aspects of the business including MAF Ventures and MAF Retail, have their part to play. Walichnowski adds: “We’re not only concentrating on very large malls like the Mall of the Emirates; we’re also looking at neighbourhood and community malls.”
Certainly the concept of neighbourhood shopping is becoming more popular in the region, with several rival retail conglomerates announcing similar plans. According to Walichnowski, a neighbourhood mall has approximately 20 shops whilst a community mall will have around 100.
“Over the next few years there is a plan to potentially, subject to finding the right land, at the right price and in the right place, spend around about AED3.5bn a year over the next two to three years,” says Malas. “Neighbourhood investments are small investments, between AED70 and AED100m each, so we can certainly do a number of those without a significant increase in our capital requirements.”
The final outcome will of course depend on timing and availability of land; the company could have five super regional malls or 50 smaller ones. The main aim is to double the size of the company within the next decade. Some developments are already in the pipeline, the rest are undecided. In large and densely populated markets like Saudi Arabia and Egypt, MAF executives are looking at building super regional malls, whilst in lesser markets plans are for smaller centres. In Abu Dhabi, the company is currently looking for land to build the emirate’s first major shopping centre.
“We are having discussions with several potential sites,” says Walichnowski. “We’re keen to do something in Abu Dhabi but we have to take our time because the people we’re talking to have their own expectations on land price, their own programme, and what they want to do with the land. Some land is too small for what we want, so it all takes time. Our target is to have [the site] tied up by the end of the year.”
Opportunities in Saudi Arabia and Egypt are also red hot, he says.
“Saudi is where we believe that the market is right for us to go in and build a number of malls, particularly in Riyadh. That is where we’re likely to see the first projects announced. We would certainly want to secure at least one regional mall or super-regional mall, and on the back of that we would look at some smaller malls.”
Asked whether the firm would build any more ski slopes — MAF having already embarked on its ‘Ski Egypt’ project — Walichnowski hints at plans for a ‘Ski Riyadh’. “We don’t have any more ski slopes planned yet, but who knows, maybe in Saudi Arabia. It’s a concept we know works, and how to run it profitably, so it could pop up again.”
The rest of the GCC is also an attractive market, but could be harder to break into, he says. “The GCC is a big market; it is clearly attractive for us to be in every city at the macro level. But at the micro level you’ve got to see what’s already there, the planning restraints, what land is available, and the price of land. When you overlay these kinds of filters, Kuwait is quite a difficult city to get into for a large mall. Qatar is also difficult. So we continue to talk, search and meet people in those markets, but they’re more difficult for us to plan for expansion.”
In the UAE, the company has a presence in every emirate bar Ras Al Khaimah and Umm Al Quwain. Could there be plans here? “Yes, they will not necessarily be next but we will look at sites for neighbourhood and community malls in those emirates. They won’t be regional, destination malls, just because of the nature of the market.”
In addition to new developments, MAF will also be looking at completing its existing projects, some of which were slowed down in the wake of the regional unrest last year. Inspired by an uprising in Tunisia, pro-democracy protests which swept the Arab world quickly unseated regional businesses.
In Egypt, where sales at MAF’s existing malls plummeted amid the troubles, the company experienced some minor delays with its ‘Mall of Egypt’ project, but has since made clear its commitment to the country and plans to complete the development by 2014 in spite of the situation. It is currently in the process of arranging a loan of $500m with Egyptian banks to finish the project, and has been in talks with authorities about “significant” investment in the future. It currently operates two shopping malls and eight Carrefour supermarkets in the North African state, valued at EGP2.5bn ($413.56m).
“Egypt was impacted even more than Bahrain in terms of the Arab Spring,” says Walichnowski. “It was a difficult two quarters in 2011 when the revolution was taking place. We saw a recovery in the last two quarters of 2011 and improved performance in the first quarter of this year, but both footfall and sales are still below pre-revolution levels.
“With Mall of Egypt we are ready to start construction. We’ve been out to tender, we just have one hurdle to get across before we can start, which is finalising our planning permission. The change in government slowed down the approval processes through the local authorities. Some time this year we expect to get the green light to go ahead. We have received tenders and are negotiating with the two lowest bidders. Within three to six months we will award [the contract].”
In Bahrain, where MAF has just one mall in operation, the continued social unrest means the outlook is slightly less positive. “There wasn’t any physical impact or damage to the mall there, but clearly the amount of tourists going to Bahrain fell off and this is still having an impact on the mall’s performance,” Walichnowski explains. “Also, the resident population is more cautious about where they go out. So we have seen a drop off both in terms of sales and footfall during 2011 of about fifteen percent. We are seeing some slight recovery now but depending on what happens in Bahrain, we are probably going to have a pretty subdued 2012.”
Syria has also been difficult. Though MAF has not witnessed an impact on sales or footfall, since it has no malls in the country, progress on its planned mixed-use mega project, the Khams Shamat tourism development, has been slow. The company, which first drew up plans for its Syrian mega project in 2008, dubbing the country a “hungry market” with a lot of “pent up demand”, said it planned to invest an initial AED3.67bn ($999m) into the project, which it would build in phases over ten years. The first phase, which included a super-regional mall, was originally expected to be completed within eighteen months, but is yet to get off the ground. Walichnowski says MAF has no plans to exit the country, and the project remains ongoing.
“We always saw Syria and that project as a long-term project. We own the land, so we’re a long-term investor and we’re currently in the design phase. The construction start isn’t really tied to the troubles, because Damascus is relatively quiet relative to other parts of the country.”
He adds that the final date for construction is yet to be decided given the need for authority approval and an appropriate contractor. “This is probably going to be the largest construction project in Syria, and there aren’t that many big contractors there that can do this sort of project because the procurement methodology is very complex. So we expect Syrian companies to form partnerships with foreign companies. So it’s not really under our control when we start — it depends when the construction companies are formed.”
Bolstering revenues in the shorter term are MAF’s other business divisions; MAF Ventures and MAF Retail, which Malas says are less capital intensive but yield less profit. Each arm is an important part of the wider retail offering, he says, with MAF Retail working as the franchise partner for the French supermarket chain Carrefour in the region, and MAF Ventures overseeing the firm’s entertainment arm, cinema division (in partnership with VOX Cinemas) and fashion segment (franchise partner to international fashion brands such as Juicy Couture). Given each division’s role in the shopping centres, it is inevitable that these aspects of the business will also grow as the company strives to boost its project portfolio.
“MAF Ventures and MAF Retail are supportive to the core offering,” Malas says. “In terms of leisure entertainment the whole market is always changing, and so we have to change the design and the offering based on what you see in the market. We continue to look at new concepts.”
Given the need for fresh mall tenants, the company is also open to new partners and opportunities for fashion brands. It is potentially looking at a food and beverage offering, given the high penetration of US fast food brands in the region, and will also grow its retail offering as Carrefour embarks on an aggressive regional expansion drive.
“We are already operating in thirteen countries,” says Malas. “But we have just added four new countries to the franchise agreement with Carrefour — Kazakhstan, Azerbaijan, Georgia and Armenia. This year we will be opening our first store in Georgia, we opened our first store in Iraq in January and we will obviously continue to expand. We have 45 stores now, we have already opened three this year, and we expect to open another nine or ten hypermarkets this year. Then you have supermarkets too. We expect to open another fifteen supermarkets.”
As for financing, Malas says the firm has secured all the funding it needs for mid-term growth, and will not be announcing any new loan facilities, bond issuances or IPO plans in the near future. At the end of January it issued a $400m sukuk, on top of an existing $2bn bond programme.
“There are no plans to IPO. Today we have at least three good sources of debt financing; those being cashflow generation from existing assets, bank funding and the debt capital markets.
“Our business is quite unique, it can sustain its cashflow generation, therefore the banks are very eager to lend to us. We did the bond issue not because we were not getting access to the banks but because banks themselves have more difficulty raising money, especially long-term capital. Our projects tend to be long-term in nature so we need to finance them with five-to-ten year money. All the money coming from banks today will be up to three years.”
On plans to raise future cash, Malas says he will assess the situation as and when further funding is required.
“I haven’t tapped anything under the $2bn bond programme and actually today our net debt is less than $2bn, so in reality once we start using that programme, once we reach $2bn, we can decide if we need more. But I can’t see us raising much more than that, even over a five-year period. And because the sukuk programme is a $1bn programme, under which we have raised only $400m, we still have the capacity to raise more under the sukuk programme too.”
Looking at the year ahead, MAF is bullish, eyeing sales growth of fifteen to 20 percent in its UAE malls, and an increase in footfall of five percent. Its biggest challenge will be to keep up with the ever changing nature of the retail market, Malas says, keeping its malls fresh and using store space productively. Walichnowski stresses that MAF has already begun investing in mall upgrades.
“During 2011 we made significant investment in Deira City Centre. We’re upgrading the metro entry some time this year, we’re refurbishing the food area called City Walk, and we’re always investing in Deira City Centre in terms of bringing new brands. We’re also going to be rebranding the mall in terms of changing the outside and putting more lights in. So we do keep our assets up to date.”
Maintaining a good relationship with tenants will also be important, especially in light of the ongoing dispute between retailers and mall owners over high rents. But Walichnowski is not worried about this. Asked whether MAF will be increasing its rates this year, he says they will.
“Yes, [rents will increase in 2012] because our first quarter of this year is already up sixteen percent in sales so that will translate into improved returns for retailers,” he says. “We have never dropped rents. Rents are a function of turnover and our turnover is going up. In Dubai, our retailers are very happy. We have waiting lists on all our malls, so there is no shortage of retailers wanting to get in.”
No one can predict how the market will evolve, with talks of a rent cap and a glut of retail supply also threatening to put downward pressure on rates. But with a stream of Chinese tourists to Dubai increasing in number and consumer spending continuing to rise, our guess is that MAF could remain in a good bargaining position for some time.
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