The continuing strong economic conditions of the UAE and other GCC economies has led to an upsurge in consumer spending in recent years. With retail sales in the region expected to reach US$284.5 billion by 2018, the need to meet the growing demand for consumer goods has led to a boom in planned shopping mall developments in the Middle East.
Dubai might be the world’s most visited retail destination thanks to The Dubai Mall, which attracted nearly 80 million visitors last year, but it’s not the only GCC city investing in the retail industry: in Abu Dhabi, 8 new mega shopping centres are to be constructed over the next three years; in Doha, a QAR1.65 billion contract was awarded in 2014 for the construction of the mega Doha Festival City development; and in Jeddah, Al Futtaim Group will partner with Kayannat Real Estate Company to build and operate the SAR6 billion Mall of Arabia.
Many of these mall developments are financed through a combination of debt and equity, allowing lenders to mitigate their exposure and ensuring sponsors hold enough risk to be incentivised to deliver a successful project. Below are five key considerations to note when financing shopping malls in the region:
- Market Knowledge: Lenders will typically require a market study as part of their due diligence. Recently, in Saudi Arabia there has been a gap in the market for luxury malls and lenders have generally been happy to fund these projects absent the need for a market study.
- Tenant Profiles: The most successful mall developments have an anchor tenant profile comprised of (i) a mixture of brands with an established track record in other malls in that market and/or region and (ii) high profile brands and franchises which are new to the market. To successfully commit financing, a developer needs to secure leases from a select basket of anchor tenants for a period of time at least as long as the tenor of the financing.
- Financing Structure: Mall developments have typically been structured as structured financings rather than project financings. Key structuring aspects to note include:
Sponsors are required to contribute equity up-front and to cover cost-overruns. Occasionally, there may be cost overrun facilities (but with increased pricing). Sponsor guarantees cover completion of the project, cost overruns and amounts due to lenders under the financing and are usually in place for the tenor of financing. Stringent account waterfall structures (often with cash-sweeps) are documented with security granted over accounts. Security will also be taken over shares in the project company, all real property, rights over tenancy contracts and other material contracts, performance bonds, insurance policies and other significant income streams.
In light of the sponsor support identified above, the covenant and reporting regimes tend to be lighter than those documented in a project financing.
- Construction Risk: The support arrangements described above also means that limited (if any) due diligence is performed on the construction contracts.
- Zoning and Permitting Issues: Zoning, permits and utilities are key; these can be time consuming to obtain but are required as a condition to funding.