Dubai: Going for size does pay dividends ... even in the toughest of times. Dubai’s emphasis on building up its industrial and warehousing real estate is winning itself a lot of favour.
Last year, enquiries from the industrial and manufacturing sector were up 18 per cent for suitable locations in some of the emerging industrial free zones, according to a new update from Knight Frank, the consultancy. “There has also been strong demand for warehousing from the fast moving consumer goods general trading sector, particularly for Grade A specification properties, with built-up areas greater than 100,000 square feet. Enquiries from general trading companies encompass approximately 18 per cent of total interest in 2016.”
Mid-sized facilities in comparison had a tougher time of it to fill up space. Demand actually subsided for warehousing space that only offered around 50,000 square feet, with “occupiers postponing new purchases and requirements for new facilities that require substantial investment.”
Dubai Industrial City and Dubai Wholesale City will remain major beneficiaries going forward, alongside pockets of the city’s more established belts for industrial activity. But, with the older areas, they better have assets offering significant capacities.
Institutional investors continue to pick up industrial assets for which ready-made end-user demand exists. Last week, Bahrain’s Arcapita, an alt-investment firm, announced that it picked up a set of “income-generating” logistics assets in Dubai, in a transaction valued at $150 million. The 10 units together offer 1.2 million square feet. (The deal follows another Arcapita did last year in Dubai, featuring logistics units in the Al Quoz area.)
“We aim to capitalise on the burgeoning logistics sector of the UAE, which is increasingly being driven by the growth of e-commerce and the increase in regional trade,” said Atif Abdulmalik, Arcapita’s CEO, in a statement.
The Knight Frank report does reiterate that point, and notes these assets’ “perceived resilience to adverse economic conditions”.
Land tenure issues
Also last year, the London listed fund Rasmala acquired 72 tenanted warehouses, covering 600,000 square feet in Dubai Investment Park for Dh300 million.
But the report states that it could have been even better if more investment-grade industrial properties were available. This “remains an issue for investors,” it adds. “Land tenure issues also present challenges to the institutional investor in this sector.”
Also, there are policy changes that free zone authorities are enforcing. For instance, “Government and government-backed masterplanners — with the exception of Dubai Investments Park — attempt to dis-incentivise sub-leasing in the secondary market through sub-lease fees, which can range from 15 per cent to as high as 50 per cent in Jafza,” said Charles Swanson, Surveyor — Commercial Leasing, Knight Frank. “Therefore, occupiers looking to sub-lease warehouses have the option of leasing pre-built government owned stock [usually light industrial units] or entering into a build-to-suit with a long-term lease commitment.”
“New locations have not yet managed to soften lease terms, mainly because of the lack of supply within them at present. Over time, with greater competition from a variety of industrial zones, this is likely to change. We are already seeing anecdotal evidence of occupiers looking to relocate to newer industrial areas, whether seeking better infrastructure, connectivity or lower prices.”
According to the report, “There is a lack of European quality specification warehousing across the Dubai industrial submarkets across all size ranges,” the report says. Demand from FMCG, logistics, e-commerce and general trading sectors, for such property, keeps grade A rents flat in an otherwise challenging market.
“The lack of quality warehousing supply may prove to be a constraint for growth in the short to medium term. Businesses looking for such premises today are faced with the option of building their own facility, [entering into a build-to-suit with a master-developer] or seeking options on the secondary market.”
Well-established industrial zones
In Abu Dhabi, the situation on the supply side is even more acute. A “lack of sufficient high quality warehousing space constrained occupier movement and kept rents flat throughout the year in the majority of industrial areas,” Knight Frank states. “Occupancy rates in well-established industrial zones such as Abu Dhabi Airport Free Zone continue to be strong.
“Areas with poorer quality warehousing and infrastructure such as Musaffah, have seen declines in rent in the region of 9 per cent in 2016. As new industrial areas such as Kizad continue to gain traction it is expected that it will trigger a flight to quality as has been seen in Dubai.”
Also, with the decline in demand from the hydrocarbon sector, the tenant mix interested in Abu Dhabi’s industrial property is also undergoing a change. The maximum enquiries for Knight Frank’s services last year were from the general trading sector. “It is interesting to note that in 2016 we received no enquiries from the oil and gas services sector, when in previous years this made up at least 25 per cent of total interest.”
The times ... they definitely have changed.
Factbox: Industrial real estate in the UAE is seeing some heavy lifting
* Abu Dhabi’s Kizad will continue to draw in significant investor and end-user interest. It continues to invest heavily in “world-class infrastructure and terminal capacity”, states the Knight Frank report. Phase one of their light industrial park has been leased out and phase two has launched, providing “high quality terraced warehouse units from 12,000 square feet”.
* Last year saw further development in Masdar City with the launch of the Eco Logistics Park. The Eco Logistics cluster will hand over a number of “high quality logistics units from 22,550 square feet in fourth quarter of 2017”.
* Last year, Knight Frank recorded the greatest number of enquiries for JAFZA and Abu Dhabi’s Mussafah area facilities. Based on enquiries by size requirement, Dubai South and Kizad saw interest from occupiers looking for large plots, “which they would struggle to obtain in more established industrial areas”.
