_UAE Industrial & Logistics Market: Macroeconomic and sector overview

Over the 10 years to 2017, the UAE’s industry sector (which consists of the extraction, manufacturing, utilities and construction sectors) has grown by 31% and is forecast to grow a further 34% in the next 10 years to 2027, according to data from Oxford Economics. Over the same 10 year period to 2027, Abu Dhabi’s industrial sector is forecast to grow 56% and Dubai’s by 51%, up from 13% and 6% over the decade to 2017 respectively. Presently this sector employs over two million people which accounts for around a third of total employment within the UAE.

Given the strategic location of the UAE - which provides access to over three billion people within the MEASA region and up to five billion people within an eight hour flight time - aided by the country’s modern infrastructure (Figure 2, The Knight Frank Hub Report also provides a more in-depth benchmarking report of the UAE’s industrial sector). It comes as the little surprise that many multi-national firms are continuing to use the UAE as their regional supply and re-distribution gateway (Figure 3).

For many global industrial and logistics firms, the traditional entry point to the market has been through the various Free Zones which have been set up in Abu Dhabi and Dubai (Figure 3). These have allowed firms to keep 100% ownership alongside other benefits such as tax advantages and exemptions from customs and excise duties. However, there are some limitations of operating purely in a Free Zone (offshore) namely that offshore firms are limited to operate only within the Free Zone boundaries - that is they are not able to trade with mainland UAE firms or bid for government contracts. The alternative is to set up an onshore business, however, this requires an Emirati partner to hold majority ownership within this business, something which most global firms are still not comfortable with.

To try and overcome the barrier, we have seen the introduction of dual licencing which allows firms to operate onshore (with an Emirati partner for this portion of the business) as well as offshore without the requirement of onshore business premises. Whilst we have seen this practice introduced in the likes of Abu Dhabi Global Market, Dubai International Financial Centre and Dubai Airport Free Zone, it has not become widely available in the other industrial and logistics Free Zones. The more rigid structure may have contributed to the tame growth rates we note above, compared to growth rates witnessed in other business sectors. For example, the business and financial services sector’s growth registered at 46% over the last decade compared to the aforementioned industry growth of 31%. To address this barrier which may be stifling foreign investment and to encourage further investment from multinational firms, the UAE Cabinet has approved a range of legislation which will ease investment laws in all of its seven Emirates. Announced by HH Sheikh Mohammed bin Rashid Al Maktoum, the Vice President and the Prime Minister of the UAE and Dubai Ruler, the changes of note include allowing 100% foreign ownership of firms within the UAE outside of dedicated Free Zones.

Whilst the details of the proposed legislation are still to be released, such as the industries which are likely to receive 100% onshore ownership permissions, there are indicative signs that it is fairly likely that the industrial and logistics sector will be chosen as one of the selected sectors. Given the UAE’s status as a global hub and overall business-friendly environment, alongside the continued growth of the industrial and logistics sector both regionally and globally where the UAE is ranked first in the World Bank’s ease of doing a business survey across the Middle East and Africa.

These changes are likely to fuel demand for multi-national firms to set up regional operations to service not only the GCC countries, but also the wider MEASA region, particularly in the e-commerce sector as trends shift more towards online retailing. Whilst the above factors have impacted the sector, it is important to note that there have been other factors which may have also contributed to this slower than expected growth rate. Given the sharp fall in commodity prices from 2014 to early 2016 and lacklustre global economic and trade growth over the same time period demand for industrial and logistics facilities was particularly sparse. Most existing occupiers adopted a wait-and-see approach before committing to any expansion plans. 

However, mid-2017 seems to have been a turning point for the global economy which in turn has underpinned the growth in global trade volumes. This positive economic climate looks set to continue on the back of stronger global growth forecasts by the IMF, up 0.2% to 3.9% for both 2018 and 2019. This combined with 100% foreign ownership legislation, recent fiscal stimulus packages in both Abu Dhabi and Dubai, easing of business regulations and reduction in government fees for businesses, easing of residency and investment laws in the form of visas up to 10 years may mean we will see an increase in demand from residents and foreign investors. We expect to see this reflected in longer lease term commitments as a result of companies and investors committing to the region owing to the more generous visa opportunities for certain sectors. In turn, this will allow for mature investors such as REIT’s and funds to look more seriously at the region. As a result GDP growth for 2018 for the UAE is forecast to register at 3.3% up from the estimated 1.7% registered a year earlier. This is likely to be further supported by higher oil prices which reached up to US$80 in May, the highest level since November 2014.