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UAE VAT could hit retail footfall in 2018, says Al-Futtaim
07 March 2017
By Megha Merani
The introduction of value-added-tax (VAT) in the United Arab Emirates could initially impact retail footfall but experience-related attractions and anchor stores will continue to lure consumers in a tough retail environment, an executive at mall developer Al-Futtaim Group said.
Steven Cleaver, director for shopping centres in the UAE at Al-Futtaim Group Real Estate, also told Zawya Projects on Monday that the Dubai-based conglomerate had already begun preparing for the adjustment in its accounting processes ahead the introduction of VAT for both its real estate and retail business.
The UAE and other members of the six-nation Gulf Cooperation Council are aiming to simultaneously introduce five percent VAT at the start of 2018, a UAE finance ministry official said last month, as part of government efforts to diversify revenue streams under fiscal and economic reforms following the sharp drop in oil prices that started in mid-2014.
Cleaver, speaking on the sidelines of a press conference to announce a new retail project in Dubai, said there will be some impact on footfall until consumers, who are used to a tax-free environment, adjust to the new reality in the Gulf’s tourism and shopping hub.
“I think potentially prior to the implementation of VAT we’re going to see a surge and after (that) a little bit of a downturn,” Cleaver said in response to a question on whether VAT would alter initial footfall projections for the firm’s new 78,500 square metre (sqm) mixed-use retail project in Jebel Ali and other retail offerings.
He declined to share figures on footfall projections.
Al-Futtaim owns and operates other malls in the region, including Ikea-anchored Festival City malls in Dubai and Cairo, with another one in Doha due to open this year. The Dubai Festival City Mall completed a 1.5 billion dirham expansion last year to add a new waterfront extension. The company signed an agreement in February last year with John Lewis' home department open a new flagship Robinsons store in 2017. It is also working on co-developing mall projects in Muscat, Oman, and Casablanca, Morocco.
As ready as can be
The planned levy on consumer goods and services will be the first of its kind in the oil-producing region, but the five percent rate is relatively low compared to the double-digit tax levies in other nations such as the United Kingdom, which charges 20 percent VAT.
“Obviously it’s a lot lower than the UK or other countries, but when you’ve lived in a country without any kind of VAT for a long time, clearly there’s going to be a lot of discomfort and nervousness about what’s happening,” Cleaver said.
He said Al-Futtaim has been preparing for the introduction of VAT and that changes to the company’s enterprise resource planning (ERP) systems are in progress.
“We’ve got our real estate arm and our retail arm, so we’re looking at it from both points of view,” Cleaver said. “Al-Futtaim have a working party looking at VAT for about a year now, really to see how it can be implemented. We’re as ready as we can be at this stage.”
“We’re still waiting on further guidance from Dubai Government as well as to exactly how it is going to implement.”
Younis al-Khouri, under-secretary at the UAE finance ministry, told Zawya last month that the government was aiming for a five percent rate across the board but parts of seven sectors - education, healthcare, renewable energy, water, space, transport and technology - might get special treatment.
Dubai's tourism and retail sectors are among the emirate’s largest.
Retail environment tough
Cleaver said that a slowdown in economic growth had been challenging for retailers but that the downturn had not driven Al-Futtaim to drop its lease rents.
“Retail has been tough for a couple of years now and it’s going to continue through this year,” he said. “It’s not a case of being forced to reduce rents. It’s just (about) working closely with them (retailers) to make sure we are understanding how things are going to be in six months or a year, or two years, and understand how we can work to make sure everybody is surviving.”
But despite challenging market conditions, Cleaver said the company was confident about investing in the new mall at wasl Gate in Jebel Ali due to its proximity to the new Al Maktoum International Airport and the Dubai Expo 2020 site.
“Anchors are going to be a huge draw. The demand we’ve seen for IKEA in Dubai Festival City... it is very, very, busy all of the time... so it was time to put another one here and that really is going to be a huge point of difference,” he explained.
He said that a retail-only project was no longer enough to succeed in the UAE, which is home to lavish malls that offer attractions such as an indoor ski slope and one of the world's largest aquarium tanks.
“They (malls) can’t just be the same retail, there’s got to be some significant point of difference, whether it’s the largest tower or fountains or something. People will shop for convenience, if it’s close by and it’s convenient, that’s where they’re going to go unless there’s a particular destination or item that they’re going to travel for.”
He said the new still-to-be-named Al-Futtaim property in wasl Gate will offer more mid-market than luxury brands.
© Zawya Projects Interview 2017