A resilient Saudi warehousing sector is expected to continue its winning run in 2021 despite COVID-19 economic headwinds as e-commerce and megaprojects fuel demand for bigger spaces, according to industry experts.
Jonathan Briggs, Director, Advisory & Transaction Services at CBRE, said the industrial and logistics sector has managed to buck the downward pressure on rents witnessed in other real estate sectors.
He noted that warehousing demand is expected to only increase in the coming years to cater to a growing population and the planned mega projects in line with the Saudi Vision 2030.
"There remains an absence of speculative development, and without this, the shortage of supply will remain," said Briggs, adding that they are increasingly finding it challenging to find suitable premises for their clients (requirements ranging from 20,000 - 60,000 square metres).
He said the general lack of stock suited to higher-sqm requirements is not expected to change in the short-term, resulting in rental levels remaining 'as is' with a slight possibility of an increase in 2021.
Wissam Ghoussaini, Head of KSA Agency & Corporate Solutions at JLL, pointed out that mega-developments such as NEOM, the Red Sea Development, and Qiddiya are helping create demand for warehousing space outside the traditional hotspots of Riyadh, Jeddah, and Dammam.
The Kingdom's logistics and warehousing industry is mainly centred around the three cities of Riyadh; Jeddah-King Abdullah Economic City (KAEC), and Dammam-Al Khobar, which collectively have a supply of 72 million sqm.
The growth of online retail and e-commerce are also driving warehousing demand.
"When the markets started to open up again, they [e-commerce providers] witnessed a fast-paced recovery," said Ghoussaini.
Noting that most global players such as Amazon, Noon.com, and Jolly Chic have a strong presence in Saudi Arabia, he said overall demand for bigger space remains high but with emphasis on cost control through measures such as energy savings.
Fouad Abou Rafeh, Director, Advisory Services at Colliers International KSA, said COVID-linked movement restrictions and increased technology adoption had boosted omnichannel retail in the Kingdom.
Underlining that some retailers reported more than 200 to 300 percent online sales growth, he said warehouses would need to adopt IoT technology to cater to a data-driven, connected demographic efficiently.
"As a result, structural changes in the forthcoming warehousing stock will be focused on automation and leveraging technology. There will be likeability towards high specification storage facilities and fulfilment centres with allowance for more storage height," said Rafeh.
The growth of online retail will likely spur preference for facilities within specific consumer hubs in cities as well as self and micro storage facilities, according to Colliers.
"We see occupiers evolving from regular warehousing facilities and meeting this demand would require well designed suitable block sizes for developments and facilities to allow for advanced infrastructure and logistical capabilities," said Rafeh.
Apart from Internet retailers, food manufacturing/processing, building materials storage, and foodstuffs are expected to be the key demand drivers in the future, added CBRE's Briggs.
JLL's Ghoussaini pointed out that central kitchens are also driving demand for warehouses.
"Demand for these spaces is growing quickly as the consumer appetite for take-out food from their favourite restaurants continues to rise," he explained.
As the Saudi economy continues to open-up, Knight Frank expects FMCGs to be at the forefront of the demand for warehouses, mainly as regulations around foreign ownership are relaxed.
"In the longer run, I expect that we may see greater levels of demand come to fruition from international pure-play online retailers, and this will then be closely followed by multi-channel online retailers," said Taimur Khan, Associate Partner, Knight Frank Middle East.
Global logistics automation solution provider Swisslog said they expect an uptick in process automation in retail, e-commerce, e-grocery, and food and beverage sectors.
"Due to COVID-19, we see a clear slowdown in the investments, especially in the retail sector. However, the sectors which are doing well in the region and globally as well as in Saudi Arabia specifically, are e-commerce and e-grocery," said Alain Kaddoum, General Manager at Swisslog Middle East.
He said both sectors are expected to invest in state-of-the-art automated fulfilment centres in 2021.
Supply chain risks
Considering logistical implications of the COVID-19 pandemic, Colliers' Rafeh said they envision an increased demand for local solutions in the mid to long term as businesses look to mitigate risks by reducing international dependence.
"There should [also] be an increased focus on reducing the margin of error and optimising asset use (warehouses and distribution centres) and being more receptive to technological integration," he said.
While the jury is still out on long-lasting changes to supply chains due to COVID-19, Knight Frank's Khan said they have certainly seen re-risking in critical sectors such as the foods sector. "Many GCC countries have even begun entering the sphere of agri-business supported by technologies such as vertical farming and hydroponics," he noted.
The Saudi warehousing sector's resiliency hasn't gone unnoticed by institutional investors, with Real Estate Investment Trusts (REITs) showing a healthy appetite for investment-grade warehousing and logistics stock. In 2019, Derayah REIT acquired a logistics complex valued at 54.65 million Saudi riyals, while Al Mashaar REIT acquired warehouses in Riyadh valued at 129.15 million riyals.
Colliers' Rafeh said REITs have the potential to be used as catalysts for the development/financing of warehousing and logistics assets.
Knight Frank's Khan said the most significant challenge they [institutional investors] are facing is the lack of suitable stock, which is available and supported by suitable infrastructure.
"I think due to the regulatory structures and the infrastructure requirements in place, we may not see wholesale speculative development from institutional investors as yet, particularly as many other sectors remain fairly nascent in maturity and offer attractive returns."
"[However], the structural fundamentals underlying the requirement for quality logistics assets are steadfast, and we will see such real estate becoming a major holding in portfolios in the future," Khan concluded.
(Reporting by Syed Ameen Kader; Editing by Anoop Menon)
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