2018 - A YEAR IN REVIEW
FOREWORD Cavendish Maxwell is a highly respected independent firm of chartered surveyors and property consultants, focusing on property services throughout the Middle East and Africa. Established in 2008, Cavendish Maxwell is now one of the most influential property consultancies in the region. As a fully qualified member firm of the Royal Institution of Chartered Surveyors (RICS), and with extensive knowledge of the region, Cavendish Maxwell has the necessary experience, expertise and insight to deliver property advice of the highest standard. Our reports are used for loan security, audit, insurance reinstatement, dispute resolution, risk management, debt recovery, performance analysis, project financing, development strategy and government initiative implementation. We provide a comprehensive range of property services across all our departments, each of which is headed by highly skilled, experienced and fully qualified RICS chartered surveyors. Our various teams provide valuation, agency, advisory, management, capital investment, research and building consultancy services across all property types and sectors. Our 2018 report provides a summary of the industrial and logistics sector of Dubai’s real estate market, as well as insights into the growth of the e-commerce sector and the market challenges and opportunities. The report also includes a comparison of Dubai’s competitivity as a logistics hub with other top cities in the world, highlights industrial property supply in onshore and free zone areas of Dubai, sector-wise distribution of demand and price comparisons.
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Dubai Industrial and Logistics Report
2018 - A YEAR IN REVIEW
Dubai Industrial and Logistics Report
CONTENTS 4
Industrial Market Summary
5
UAE and Dubai Economy
7
Market Challenges and Opportunities
8
E-commerce Focus
9
Investment in Industrial and Logistics Sector
10
Dubai’s Global Competitivity
11
2019 Market Outlook
3
2018 - A YEAR IN REVIEW
INDUSTRIAL M A R K E T S U M M A RY Since our last annual report, industrial and logistics real estate market conditions have remained relatively stable, particularly over the six months leading up to 2019. However, increased flexibility in pricing from vendors and landlords acted as a catalyst for increased transactions. Overall, the market remains challenging, with a widening gap in the local two-tier market as a result of occupiers continuing to seek better value. There has been a continued flight-to-quality with pricing for modern, high quality and well-specified assets remaining stable, both for rentals and sales. Older, dilapidated properties that no longer comply with current legislation and requirements (such as those of Dubai Civil Defence) have continued to feel negative pressure on capital and rental values, and we expect to see further declines in this segment. Enquiry levels were strong in the initial six months of 2018. However, these figures tapered off through the second half of the year, registering a 17% decrease. The logistics/distribution and general trading industries have remained the most active, accounting for over 60% of enquiries received throughout 2018. Demand was consistent with that of the initial six months, with opportunities below 50,000 sq ft accounting for 80% of enquiries. Supply has outstripped take up, albeit at a slower rate than 12 months ago. This is partly due to subdued speculative development, and partly as a result of policy changes and government actions to help stimulate an increase in occupancy levels, such as TECOM Group’s move to allow subleasing within its Dubai Industrial Park (DP) community. A common theme discussed in previous editions of this market report has been the increasing transaction time as a result of more extensive due diligence and analysis conducted before an occupier commits to a property. The entire procedure, from initial discussions and identifying the specifics of an occupier’s requirements, to property selection and concluding a transaction, can now comfortably take 9-12 months, or longer in certain cases.
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Dubai Industrial and Logistics Report
Dubai Industrial and Logistics Report
2018 - A YEAR IN REVIEW
I N D U S T R I A L P R O P E RT Y S U P P LY ( A E D ) SALE (SQ FT)
HIGH (PPSF*)
LOW (PPSF)
AV E R A G E (PPSF)
LEASE (SQ FT)
HIGH (PPSF)
LOW (PPSF)
AV E R A G E (PPSF)
JAFZA
7,607,331
311
93
175
2,556,053
40
14
25
DIP
1,802,003
643
200
280
3,062, 637
52
18
31.50
AL QUOZ
334,428
1,042
130
250
1,416,644
60
17
41
NIP
1,519,937
423
186
240
183,949
47
25
30
DP
866,976
386
188
220
375,445
40
23
28.50
(*AED Price per sq ft)
I N D U S T R I A L P R O P E RT Y D E M A N D BY SIZE (SQ FT) 6%
7%
0-5,000
25%
5,001-10,000
7%
10,001-25,000 25,001-50,000 50,001-75,000
13%
75,001-100,000
Figures demonstrate that demand is being driven by SMEs across Dubai, many of which are seeking opportunities to relocate and benefit from the softer market conditions in an attempt to reduce their occupational costs. Requirements at the other end of the scale are often limited to large regional and multinational organisations, many of which have postponed requirements due to challenging economic conditions.
100,000+ 22% 20%
B Y L O C AT I O N Onshore Free zone
Demand between onshore and free zone areas is nearly balanced, with DIP being the primary choice among onshore locations in terms of demand, and Jebel Ali Free Zone Area (JAFZA) being the primary choice for free zone requirements.
52%
48%
BY SECTOR 6%
4%
4%
General trading Manufacturing
7%
Logistics/distribution 49%
14%
The logistics/distribution and general trading industries have consistently accounted for over 60% of demand, with manufacturing also showing positive enquiry levels, testament to the competitiveness of Dubai for business.
Food production Engineering Services Others
16% 5
Dubai Industrial and Logistics Report
2018 - A YEAR IN REVIEW
UAE AND DUBAI ECONOMY Despite the current challenging business conditions, the outlook for the UAE economy is positive, with the International Monetary Fund (IMF) projecting the UAE’s GDP to grow to 3.7% and 3.6% in 2019 and 2020 respectively, up from 2.9% in 2018. This economic growth is being bolstered by government initiatives such as granting long-term visas to certain expatriates, reducing government fees and offering employees bank guarantee refunds and replacements via a low-cost insurance scheme (AED 2.4 billion is expected to be released for the logistics and manufacturing sectors alone).
in oil prices, which have fallen back to $60/barrel from the almost four-year high seen in early October 2018, at just over $85/barrel.
In September, the government announced the largest federal budget in history for 2019, a 17.3% increase from 2018 at AED 60.3 billion – a budget which is designed to support GDP growth in non-oil sectors. This is a significant and highly welcomed move, given the instability
Geopolitical factors remain a concern for many, with continuing tensions in the US-China trade war, re-imposed US sanctions on Iran and the UK’s withdrawal from the European Union, all influencing market conditions.
At an emirate level, buoyed by government spending in preparation for Expo 2020, Dubai’s economy remains on track to grow by 3.3% this year, and increase further to 4.1% in 2019, as reported by the IMF. Emirates NBD’s Economy Tracker Index advises that growth of the private sector in Dubai, while remaining positive, has declined to the lowest level in more than two-and-a-half years.
UAE GDP GROWTH 4 3.5 3
Growth %
2.5 2 1.5 1 0.5 0
2017
2018
Growth per year (%)
6
2019 (F*)
(*Forecasted)
2020 (F)
2021 (F)
Source: IMF
2018 - A YEAR IN REVIEW
Dubai Industrial and Logistics Report
MARKET CHALLENGES A N D O P P O RT U N I T I E S Numerous companies withheld investments pending further details on new regulations regarding 100% foreign ownership of onshore companies. While this is expected to affect only select industries, the announcement could spur increased foreign investment into national and regional economies. It is also likely that these new policies could positively impact the real estate market and a range of asset classes. Established regional occupiers that have withheld completing acquisitions due to softening market conditions, are now beginning to become active in anticipation of the ‘bottoming out’ of prices and rents for certain types of properties. Businesses that attempted to weather the downturn are now succumbing to market conditions and adjusting their targets accordingly. The number of such businesses is growing, and some have turned to very motivated sellers to match their requirements. Amongst onshore locations, a number of developers have designed speculative schemes that will break the mould of what has typically been available in these areas. We expect the market to react positively to these offerings upon availability. They will provide occupiers within the logistics and general trading sectors with operational and volume efficiencies that are not possible from the traditional, more common light industrial compounds. Global and local trading conditions continue to financially affect a significant number of companies across the UAE, especially the everpresent and growing challenge of occupational costs, specifically, land lease rates or sublease charges. This is an opportunity for the authorities to review and revise their policies relating to these costs, which, in the short term, will assist companies in financial hardship, as well as help stabilise and promote the recovery of pricing and future investment into their respective communities in the long term. The slowdown on global trade has undoubtedly had an impact on logistics operators in the region, with many having relatively low occupancy levels compared to 2015. With numerous parties bidding for the same contracts, the real estate aspect of the logistics service is often being conceded at a loss (in some cases, as low as 50 fils per pallet), with operators seeking to create margins on additional services, such as freight forwarding, repackaging and handling. These trading conditions may be too challenging for some of the smaller, local logistics companies. Accordingly, we expect closures, more mergers and consolidation. Accounting for approximately 10% of the UAE’s economy, the logistics and transport industry’s market share far outperforms the wider region. Ranked 11th on the Logistics Performance Index, the UAE is the best placed among the other GCC nations with Qatar next in 30th place, and Oman in 43rd completing the top three. The UAE’s significant investment into this sector should provide the platform for future growth and ensure the industry continues to play an important role in the economy.
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Dubai Industrial and Logistics Report
2018 - A YEAR IN REVIEW
E-COMERCE FOCUS 34%
60%
$300
70%
of e-commerce transactions in the UAE are via mobile platforms
average spend for cross-border purchases in the UAE
The e-commerce industry continues to be a driving force in the industrial and logistics real estate market, as retailers adapt to the ever-evolving demographics and shopping habits of their customers. Globally, e-commerce is growing at a rate of 25% Compound Annual Growth Rate (CAGR), with retail via mobile platforms accounting for 34% of e-commerce transactions, according to Middle East Logistics. Locally, e-commerce is the fastest growing business, increasing in value by 1,500% in the last decade, and expected to reach $10 billion this year, and then double again by 2020*. Existing retailers and new entrants to the market are investing heavily not just in real estate, but across the whole supply chain, to provide customers a wider selection of products, more targeted sales and improved delivery times. The last mile delivery aspect – considered the costliest of the supply chain – has been a focal topic in the UAE’s logistics industry. With increasing investment into technologies and a younger population in the UAE (approximately 64% under the age of 31) who are more accustomed to the many platforms available to them, improving last mile delivery standards is vital to the sustained growth of the sector. E-commerce provides opportunities to shop 24/7 and customers increasingly expect instant gratification through same-day delivery. A major challenge for e-retailers is finding cost-effective solutions to be able to satisfy this demand, while keeping last mile delivery costs down. As a response to this increased demand from the e-commerce sector, authorities, including those from JAFZA, Dubai South and Dubai Airport Free Zone Area (DAFZA), have been developing schemes and working with relevant government departments such as Dubai Customs to support business growth, reduce restrictions and increase ease of access to Dubai’s market. The products these free zones are delivering will help e-commerce industries to better address cross-border e-commerce transactions, particularly when almost 60% of UAE residents buy from other countries online, with an average spend of over $300 per transaction. As the e-commerce market share grows, we expect more space rationalisation from retailers reconfiguring their existing outlets to provide additional storage to assist last mile delivery and provide
(*admitad.com, Annual Report 2017-2018) 8
of UAE residents order products from overseas
of e-commerce transactions in the UAE comprise people under the age of 31
collection points for click-and-collect orders. Consequently, we expect increased demand for industrial and logistics properties. The significant growth expected in the e-commerce sector is not without challenges. The lack of PO boxes, combined with developing infrastructure in the region, results in a protracted delivery process, often with the delivery driver having to call the customer to confirm the time and location of delivery. The logistics industry in the Middle East serving the e-commerce sector is currently subject to a relatively unique issue of low order quantities, resulting in couriers taking low numbers of parcels out on a delivery route, subsequently leading to increased costs. These two characteristics contradict the growing expectations from customers for quick and free delivery. Additional challenges include the common practice of customers paying cash-on-delivery and returning products. The return rate of e-commerce (30-35%) is much higher than that of purchases for traditional brick-and-mortar shops (8%). This creates an additional cost hurdle for returns as retailers have to not only provide a cash refund to customers, but arrange for the return of purchased products as well. In 2018, uptake of warehouse space by e-commerce and e-retailers was almost 2 million sq ft, double that recorded in 2017. We believe this trend will continue going forward, albeit not at these levels, given that most e-commerce and e-retailers now have sufficient infrastructure and warehouse assets.
Dubai Industrial and Logistics Report
2018 - A YEAR IN REVIEW
R E A L E S TAT E INVESTMENT Funds, Real Estate Investment Trusts (REITs) and high-net-worth individuals looking for opportunities are driving appetite for investment in the industrial and logistics sector of the property market. However, barriers preventing such deals also remain, including non-investor friendly land lease terms and expensive sublease charges. In the absence of good quality investment opportunities, investors with cash to spend are increasingly reviewing options that would not have been considered 12-18 months ago. These high-yielding
opportunities inherently carry more risk, with the underlying occupational lease being to a poor covenant, sometimes overrented, or on a short unexpired term. With lending now more expensive and more difficult to obtain, investors may look at alternative ways to enter the market, and to fill this void by providing private development finance or forwardfunding projects, supported by continuously improving transparency in the market along with changes in regulation.
INVESTMENT CASE STUDY – LOGISTICS SALE AND LEASEBACK A longstanding client approached Cavendish Maxwell to review their existing real estate holdings. The client aimed to move toward an asset-light business model that allowed them to focus their core business and avoid any potential balance sheet fluctuations.
to re-invest back into their core business and facilitate expansion without requiring additional external debt financing.
Cavendish Maxwell advised and structured a sale and leaseback, the first of its kind in the region. The structure allowed the client to sell the real estate elements, but remain in occupation as an operational entity by simultaneously leasing back the premises at the time of transfer. The transaction allowed the client to free up a substantial amount of previously indisposed equity, allowing them
Location: Dubai Price: Confidential Yield: 8.25% Use: Records Management Built-up area (BUA): 75,000 sq ft Purchaser: Institutional Closed Ended Fund
Details of the transactions were as follows:
WA R E H O U S E S A L E A N D L E A S E B A C K
To learn more about sale and leaseback or income-producing assets, please contact us at agency@cavendishmaxwell.com
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Dubai Industrial and Logistics Report
2018 - A YEAR IN REVIEW
DUBAI’S GLOBAL COMPETITIVITY The UAE ranks 17th on the World Economic Forum’s Global Competitive Index 2017. With Dubai contributing approximately 27% of the UAE’s GDP, it plays a significant part in its position globally. In the following charts, we look at how Dubai (UAE) compares against the top 10 nations on the World Bank Logistics Performance Index (LPI), and in terms of rentals and investor yields of prime industrial and logistics properties.
GLOBAL COMPETITIVENESS VS LOGISTICS PERFORMANCE Finland Germany Hong Kong Japan Singapore Sweden Switzerland Holland UAE (Dubai) UK USA 0
2
4
6
8
World Bank LPI Ranking
10
12
14
16
18
Global Competitive Index Ranking
80
8
70
7
60
6
50
5
40
4
30
3
20
2
10
1
0
Dubai
Geneva
California
Singapore
Amsterdam
Rental Rate (AED/sq ft) 10
Munich
Hong Kong
Stockholm
Prime Yield (%)
London
Tokyo
Helsinki
0
Yield (%)
AED
GLOBAL PRIME INDUSTRIAL RENT VS YIELD
Dubai Industrial and Logistics Report
2018 - A YEAR IN REVIEW
2019 MARKET OUTLOOK We expect logistics/distribution to continue to be significant drivers in the growth of the e-commerce industry’s market share. There will also be a growing need to mitigate challenges like sourcing existing suitable properties to satisfy demand and meet operational requirements similar to those offered in more developed markets. We also expect further realignment on pricing aspirations, with more discounts being applied to the poorer quality assets in both free zone and onshore locations. Meanwhile demand for modern, good quality properties should stabilise. The negative pressure on these second-tier properties, many of which could be considered to have reached the end of their economic life, may present an opportunity for redevelopment, especially in prime industrial areas where undeveloped plots are scarce or non-existent such as Al Quoz, DIP and JAFZA North. Business and industry await
further details on the policy allowing for 100% foreign ownership of onshore entities in select sectors in the UAE, as this could potentially drive substantial foreign investment into the country, with a likely knock-on effect on the real estate market. SMEs will continue to capitalise on the slower market conditions, either by relocating or renegotiating terms with their existing landlords in a bid to reduce occupational costs. We anticipate that landlords will have to offer more incentives, such as rent-free periods, multiple rental cheques, or capital contributions, or come up with more inventive solutions to provide would-be occupiers with more value and better service. In return, landlords will be expecting tenants to sign longer-term leases, therefore mitigating void periods and providing a more secure income.
INVESTMENT AND COMMERCIAL AGENCY KEY SERVICES
INDUSTRIAL AGENCY
OFFICE AGENCY
DEVELOPMENT LAND
CAPITAL MARKETS
RETAIL
Disclaimer: The information and analysis contained in this report has been obtained from is based on information from a variety of sources generally regarded to be reliable and assumptions which are considered reasonable, and which was current at the time of undertaking market research, but no representation is made as to their accuracy or completeness. We reserve the right to vary our methodology and to edit or discontinue the indices at any time, for regulatory or other reasons. The report and analysis does not purport to represent a formal valuation of any property interest and must not be construed as such. Such analysis including forward looking statements are opinions and estimates only and are based on a wide range of variables which may not be capable of being determined with accuracy. Variation in any one of these variables can have a material impact on the analysis and we draw your attention to this. Cavendish Maxwell does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this report. 11
info@cavendishmaxwell.com
www.cavendishmaxwell.com
Andrew Love MA (Hons) Partner Head of Investment and Commercial Agency T: +971 50 859 2734 E andrew.love@cavendishmaxwell.com
DUBAI
ABU DHABI
M U S C AT
2205 Marina Plaza Dubai Marina P.O. Box 118624 Dubai United Arab Emirates
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T: +971 4 453 9525
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