_Key Takeaways from the UAE Industrial and Logistics Market Review Q1 2020
Despite this shock, the long-term fundamentals underpinning the industrial and logistics sector in the UAE remain steadfast. The UAE continues to be an attractive proposition for global businesses looking to extend their footprint into emerging markets by using the UAE as a regional supply and re-distribution gateway.
In addition to continuous improvement in the UAE’s soft infrastructure over the last year, we have also seen the enactment of stimulus packages by the governments of Abu Dhabi and Dubai alongside a range of measures taken by the UAE central bank to help support the economy through the COVID-19 outbreak by reducing the costs of doing business and easing regulations. The manufacturing and logistics sector has been a particular focus in both stimulus packages.
As a result of these physical and soft infrastructure fundamentals, which are being supported by existing and upcoming new modern warehousing and logistics supply, we are expecting to see continued growth in this economic sector. Data from Oxford Economics shows that over the 10-year period to 2030, the UAE’s industrial sector is expected to grow by 18.4%.
On the back of the projected economic growth in these sectors, employment is also expected to grow with employment in the UAE’s industrial sector expected to increase by almost 256,000 over the 10-year period to 2030.
Occupier Market Trends
The UAE’s industrial and logistics sector continues to face challenging trading conditions on the back of lacklustre global economic growth, a more challenging local economic backdrop and due to recent structural regulatory changes in the UAE. These challenges, alongside an increasingly competitive market, have caused market performance to continue to soften and fragment further.
As a result of this more sluggish backdrop, average headline industrial and logistics rents in Abu Dhabi and Dubai fell by 11.9% and 3.2% respectively in the year to Q1 2020
Prime and Grade A stock in the logistics-warehousing segment of the market has, in particular, seen a strong level of taking up from both e-commerce firms and from third-party logistics operators. In comparison to Prime and Grade A stock, Grade B stock continues to witness limited levels of demand due to the lack of quality stock. Currently available of stock in this segment of the market is of sub-standard quality and as most of this had been speculatively constructed, prices remain considerably above-market rents.
Investment Market
Investment appetite for industrial and logistics assets remains strong despite the barriers to entry faced by third-party developers.
Whilst there is a clear requirement and demand for high quality industrial and logistics centres, most of this requirement is in areas which are in close proximity to airports or ports. However, such locations tend to be in Free Zone ownership therefore those undertaking construction of a speculatively built asset, would in most cases, be subject to subleasing fees. These subleasing fees can affect the financial viability of some investments, particularly those looking for a medium-term return on investments.
Investors who are willing to undertake projects to supply the undersupplied Prime and Grade A market, with a long-term view, are likely to be able to attract new demand at a premium to the market.
Outlook
Looking ahead, the short-term outlook for the industrial and logistics sector is expected to be challenging, not in the UAE alone but globally, due to the COVID-19 pandemic and the impact that this continues to have on global supply chains and consumption.
Given these challenges and the intrinsic level of competition in the market, we expect that rental rates will continue to soften over the course of 2020.
Taking a longer-term view on the sector, we note there is a gap for international quality Prime and Grade A stock in a number of industrial and logistics areas in the UAE. We are witnessing growth in the level of demand for modern warehousing and logistics solutions, which are priced at competitive rates, across a range of size requirements. However, due to the competitive nature of the market today, investors looking to fill this gap will need to be willing to have a medium to the long-term investment horizon.