This article appeared originally in Gulf News: link to original article
With low interest rates and rents dropping across the board, it is an ideal time to further nurture the business environment for start-ups in the UAE, and to ensure that they have got what they need to succeed in their early years.
In most cases, SMEs (small and medium enterprises) fail not for lack of effort or ingenuity, but for problems with their cashflows. Besides establishment costs and high fees that need to be paid, rents can make or break an SME.
The growing availability of retail space in the UAE exerts downward pressure on rents. This should make it easier for SMEs to lower costs in their inception years, which are the most critical. What I am suggesting here, though, is not lower rents for SMEs because of market conditions and corrections.
Why not offer it free?
I am suggesting that major retail spaces, with high footprints, allow specific locations to be used for free by newly established SMEs for a number of years in light of the above.
The logic is quite straightforward, and similarities can be found with pop-up shops. Those shops rent a place for a few months before moving to a whole different location or, sometimes, change the concept of the store altogether. The idea is to be malleable to market conditions and consumer demand.
A concept SME in the UAE will follow a similar path, except with longer durations and the prospects of a permanent establishment if all goes well.
So, how will it work? The first step will be for a retail operator to designate certain spaces in its malls etc. for those concept SMEs to be rent-free for X number of years.
Secondly, the retail operator will do its due diligence in vetting out applications for those rent-free spaces, which they do anyway for new businesses seeking to rent retail spaces from them. The third and final step is to allocate the space and to then monitor how well the concept SME is doing over the rent-free duration decided by the retail operator.
Get to choose
At the end of that period, the retail operator will be faced with three choices. One, to extend the rent-free period if the concept SME requires a longer period to breakeven based on business type, or if the SME is generating a different kind of traffic to the mall or retail space that the retail operator is interested in having.
Two, introduce a lease contract and make the concept SME’s presence permanent. Three, terminate the concept SME agreement and allocate the rent-free space to another concept SME in the queue.
Such an arrangement is a win-win for both the retail operators and the SMEs. For SMEs, they get to experiment with their ideas without the financial burden of expensive rents. For retail operators, those SMEs could easily become long-term tenants, creating their own kind of traffic unlike traditional shops with branches in every single small.
The economy is also a winner here by introducing a measure that promotes growth in the start-up and SMEs sector, which, no doubt, will play a prominent role in driving the UAE’s economic growth. There is no harm in the government taking the initiative towards supporting those SMEs by finding common ground with various retail operators, achieved through partial subsidisation of rent-free retail spaces.
In conclusion, the inception years for SMEs are key in determining their survival, or not. As rent is a major component of operations and cashflow, those SMEs could fail due to any other factor but lack of ingenuity. Therefore, allowing for a rent-free experimental environment can create win-win-win situations for SMEs, retail operators, and the UAE’s economy.
The last thought that I want to leave you with: Should the idea of concept SMEs be constrained to low demand times or be all-year long?