Retail with a chain tenant in Dubai: how the numbers are actually built

A retail unit let to a well-known chain is the most reassuring-looking income in property: a familiar logo on the shopfront and a signed lease. Whether it is actually good income depends on four things, none of which is the logo.

Who signed the lease

A brand and the entity on the contract are frequently different. In this region an international name is often operated by a local franchise holder, and the covenant is theirs, not the brand's. Ask which legal entity signed, whether there is a parent guarantee, and how long that entity has traded. A famous facia over a thinly capitalised operator is an ordinary credit risk wearing a costume.

How long, and what breaks it

The unexpired term is the asset. A ten-year lease with a tenant break at year three is a three-year lease for valuation purposes, and it should be modelled that way. Read the break provisions, the notice period and any penalty — and then ask what the rent looks like against market at the break date, because that is when the tenant decides.

Rent against turnover

The most useful sanity check in retail. Rent as a percentage of the tenant's turnover tells you whether the lease is sustainable: too high a ratio and the tenant leaves or renegotiates at the first opportunity, regardless of what the contract says. Turnover-linked rents, common in malls, make this explicit — and if the tenant will not discuss the ratio at all, that silence is informative.

Location inside the location

Retail is decided at a resolution finer than a district. Footfall past the door, visibility from the main circulation route, proximity to an anchor, whether customers pass on the way in or on the way out, parking, and servicing access. Two units fifty metres apart in the same development can differ twofold in trade. This is why retail cannot be valued from a spreadsheet without the site visit.

What the buyer should ask for

• The lease in full, not a summary: term, breaks, review mechanism, service charge liability, reinstatement.
• Payment history on the current tenancy.
• Service charge in dirhams per year, and who bears increases.
• Comparable rents for units in the same scheme, achieved rather than asking.
• What happens to the pitch if the anchor nearby leaves — the question most retail buyers do not ask until it happens.

The summary

Retail let to a chain is not a bond. It is income backed by a business, in a location whose trade can change, on a lease with a date on it. Priced with that understood it can be the best risk-adjusted return in commercial property; priced off the logo it is the most disappointing.