Knight Frank says outlook for Saudi Arabia’s industrial property market remains bright
Saudi Arabia’s industrial and logistics sector faces some headwinds in the short term due to the Covid-19 pandemic, but regulatory and infrastructure developments provide plenty of investment opportunities, according to a new report.
The kingdom’s strategic location, sizeable domestic economy and flexible regulations are among the strong market fundamentals that underpin the sector’s growth in the long term, consultancy Knight Frank said in its Saudi Arabia Industrial Market Review.
In the short term, demand for space is expected to be dampened by weaker consumer sentiment due to the coronavirus crisis.
“The outlook for Saudi Arabia’s industrial, warehousing and logistics sector is likely to be challenging in the short-to-medium term,” said Taimur Khan, associate partner at Knight Frank Middle East.
“This trend is likely to be underpinned by lower levels of consumer demand – a trend which is likely to be further exacerbated by the tripling of VAT – amid expectations of a marked downturn in economic activity over the coming year as a result of the Covid-19 pandemic.”
These challenges mean rental rates and occupancy levels are expected to soften over the course of the next year, the consultancy said.
The pandemic has affected the world economy and disrupted global supply chains, dealing a huge blow to sectors such as aviation, shipping and logistics.
In the first quarter of 2020, Riyadh and Jeddah’s warehousing and logistics markets faced similar headwinds and structural challenges, Knight Frank said.
The report showed an average fall in rents in Riyadh and Jeddah of 5.4 per cent and 4 per cent, respectively, in the first three months of the year.
Occupancy in Riyadh’s warehousing and logistics sector stood at 90 per cent after it fell by 4 per cent in the first quarter.
Occupancy in Jeddah’s warehousing and logistics sector rose by 3 percentage points during the same period to about 93 per cent.
“Low-quality warehouses are expected to see reduced levels of demand in the coming years, as prospective tenants will more likely demand better designed, sustainable [and] high-quality premises,” the report said.
“The potential growth of e-commerce is expected to become a major driver of change in the logistics sector.”
To soften the blow of the crisis, Saudi Arabia unveiled huge economic stimulus packages and measures that rescheduled loan payments for small and medium-sized enterprises.
The government has identified the industrial and logistics sectors as important to its economic diversification and tabled ambitious plans to develop its manufacturing capabilities and transform the kingdom into a global logistics hub.
It also launched the National
Industrial Development Logistic Programme that offered financing and infrastructure development incentives.
The kingdom is also looking to improve soft infrastructure such as research, innovation and training to make it easier to do business in the country.
In the World Bank’s Doing Business 2020 report, Saudi Arabia was the world’s most improved on an annual ranking of 190 countries. It climbed to 62nd place this year, from 92nd in 2019.
The kingdom’s industrial property market is currently divided into two types of development – those overseen by the Saudi Authority for Industrial Cities and Technology Zones, known as Modon, and those run as private industrial cities, which only make up a small portion of the property market, according to Knight Frank.
Modon currently has 35 industrial cities that are either completed or under development, comprising almost 20,000 hectares across the kingdom. Industrial land comprises about a fifth of the total area of commercial cities such as Riyadh, Dammam and Jeddah, the report said.
The kingdom’s strategic location, big domestic market and flexible regulations are a big draw for investors