The strengthening trade relations between the UAE and China is driving demand for warehouses and logistics solutions in the emirate, and Chinese investors are showing greater interest in leasing and building industrial and logistics assets.

Despite a subdued market, investment appetite for industrial and logistics assets remains strong in the UAE, from both institutional and private investors.

China continues to be Dubai's largest trading partner, contributing 109 billion UAE dirhams ($29.68 billion) in the first nine months of 2019, a six per cent increase over the same period in 2018, according to latest official figures.

This, along with rising e-commerce demand ahead of 2020 Expo, is translating into higher interest for warehouses and other cost-effective logistics solutions particularly from the Chinese investors, Lootah Real Estate Development had said in a press statement last year.

The company had said it receiving good interest from Chinese investors for its first lease-to-own warehouse concept, Senaeyat, and expects businesses from China to grow further in the region with the increase of e-commerce.

Trade between the UAE and China has received a fillip in recent years, with the emirate agreeing to deals worth of $3.4 billion at the Belt and Road Forum held in Beijing last year.

China and the UAE have made 'solid steps' under the Belt and Road framework and yielded remarkable achievements, Chinese Ambassador Ni Jian said in an interview to state news agency WAM last year. He said Chinese presence in the UAE has been growing by leaps and bounds as the emirate has become an important partner in the Belt and Road co-operation.

2019 challenging year

However, Dubai's industrial and logistics micro-markets had a challenging 2019, as the supply and demand mismatch put pressure on property rentals, according to Dubai Industrial Market report released by Savills in June last year.

Real estate consultancy firm Knight Frank attributed the sector's subdued performance to "the challenging global economic backdrop and lackluster growth in the UAE's economy", which had, in turn, impacted consumer consumption.

Taimur Khan, Associate Partner at Knight Frank Middle East, said the industrial and logistics sectors faced challenging trading conditions, with difficult global macroeconomic scenario leading to firms holding off of any expansion decisions, limiting new global occupier growth in the short run.

"Take-up from new entrants had been limited. This relatively anaemic growth in demand coupled with greater levels of supply is likely to exert pressure on industrial real estate," he said in an email interview with Zawya Projects.

Fundamental changes

Industry experts say there are fundamental changes that affected the industrial and logistics sector.

"First, as the practice of dual licensing becomes more prevalent, we are beginning to see greater levels of consolidation in the market as occupiers look to increase the efficiency of their real estate portfolios," said Khan.

Dual licensing is a system offered by some UAE freezones providing freezone companies with the ability to extend into the mainland 'onshore' UAE.

Given general market conditions, he points out that occupiers are using this as an opportunity to upgrade to higher specification units that comply with the standards followed in leading industrial centres. "These trends mean that we are likely to see rents continue to remain under pressure over the short term," he said.

Demand from e-retailers

The industry sees greater levels of demand from e-retailers looking to access the GCC market (as opposed to covering the market from their home bases) and general trading firms given the infrastructure advantage the UAE holds compared to regional rivals.

"E-retailers will be looking for small to medium-sized units which are modern to start operations, with easy air/sea port connectivity and relatively low levels of capital expenditure requirements," noted Khan.

According to Khan, "demand from e-commerce companies is likely to sustain from new market entrants and expansion by existing players, while the manufacturing sector in Dubai is likely to witness heightened activity, especially from Chinese investors."

Real estate advisor Savills had predicted in a report that companies from the e-commerce, manufacturing and 3PL (third-party logistics) sector to remain active and drive demand. As the Dubai Silk Road strategy continues to take shape, Savills said it anticipates a spike in demand for warehousing and industrial space in the city.

in a December 2019 statement carried by state news agency WAM, Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, Crown Prince of Dubai and Chairman of Dubai Executive Council, said that government teams are going above and beyond to develop new initiatives that will fast-track trade growth.

"These include the Dubai Silk Road project, which will enhance Dubai's position as a leading trade and logistics hub. We are working on a virtual trade zone, the first of its kind in the world, which will considerably boost the development of e-commerce regionally and globally," he said.

Lootah Real Estate Development CEO Saleh Abdullah Lootah agreed that the growth of e-commerce is one of the main factors that drive the expansion of the warehouse leasing market.

"The number of consumers who prefer online shopping continues to rise, especially in the UAE, which enjoys the world's highest mobile phone penetration, high purchasing power per capita, and large consumer spending. Therefore, the demand for storage houses or fulfillment centres in the UAE grows exponentially," he told Zawya Projects in emailed responses to a questionnaire.

Global real estate services and investment firm CBRE said there is limited speculative development in the logistics sector as the specifications required by many operators differ.

"However, scalable units are certainly in the development pipeline allowing customisation to service medium to large operators with high eaves to allow modern automated racking systems with space suitable for adaption to both ambient and cold storage," said Simon Townsend, Head of Strategic Advisory at CBRE MENAT in his emailed responses.

According to Knight Frank, there is a considerable amount of space which is due to enter this segment of the market such as Dubai Airport Free Zone's 2.7 billion dirhams, 2.1m sq.ft, Dubai CommerCity, the first Free Zone dedicated to e-commerce in the MENA region and Dubai South's EZDubai, a dedicated e-commerce Free Zone.

Private participation

The growth of the industrial market is also restricted by the lack of private sector involvement, according to global real estate service firm JLL. "This limits interest from institutional investors looking to expand into the sector," said Dana Salbak, Research Director at JLL MENA in her emailed responses to Zawya Projects.

However, she pointed out that more recently the sector has seen the relaxation of some regulations. "The Jebel Ali Freezone Authority (JAFZA) recently allowed greater flexibility in sub-leasing standards and relaxed the distinction between onshore and offshore warehousing. With this, more investment from the private sector can be expected," she said.

Despite a more subdued market, Khan pointed out that investment appetite for industrial and logistics assets remains strong in the UAE, from both institutional and private investors.

"This is driven by the sector's favourable long-term outlook, particularly as a result of the rapid growth in sectors such as e-commerce and third-party logistics, where demand stems from the UAE and the wider GCC region. Easing of regulations relating to customs clearances and dual licensing are set to facilitate this growth further," Khan said.

Townsend agrees what they are seeing is private sector interest in providing build to suit opportunities as well as investing in funds or structures underpinned by logistic real estate.

"There are a number of ongoing purpose build-to-suit facilities either being discussed or under construction for larger logistics service providers," he said.

One of the key changes Townsend said they are witnessing is the expansion of smaller distribution hubs closer to areas of higher populations to ensure faster delivery to meet the growing demands of consumers.

Modern warehouses

In line with the developed markets, the UAE's rising e-commerce is expected to drive demand for modern warehouses with advanced IT and digital solutions.

"We live in an exciting era for the warehousing and logistics industry," said Miroslav Kafedzhiev, Vice President and General Manager, Middle East, Russia, Turkey and Africa (MERTA), Honeywell Safety and Productivity Solutions in an email interview with Zawya Projects.

He said the Middle East's e-commerce market is expected to grow in value to $48.6 billion in 2022, up from an estimated $26.9 billion in 2018, citing a BMI Research report released in 2018.

Logistics and warehouse automation provider Swisslog noted that an increasing number of FMCGs, which are typically a significant contributor to economic growth in the region, is also expected to increase the demand for modern warehouses.

"This is likely to transform warehousing services in the region, specifically in areas of inventory management, cargo loading, order picking and real-time monitoring of stocks," said Alain Kaddoum, General Manager, Swisslog Middle East in an email interview.

His company recently launched a robot-based solution ItemPiQ, designed for repeated picking of a wide range of items to execute fast delivery of orders at low operating costs.

With picking and palletising making up to 60 per cent of warehouse operational costs, he said ItemPiQ robot can handle a wide variety of common products in retail, e-commerce and pharmaceutical industries weighing up to 1.5 kg and can reach 1,100 mm.

With consumer demand increasing and pressure on both delivery time and costs, it has become essential for companies to embrace new technologies, Townsend said.

"The logistics sector is one of the leading real estate sectors for technology adoption across the UAE relating to the physical operations of logistic real estate," he said.

Technology adoption

Some of the other trends the UAE market is witnessing are robotics; focus on supply chain visibility and orchestration; and smart last-mile fulfillment, according to Kaddoum. "Technology will continue to be a truly disruptive force in how the modern supply chain is shaped, defined, and explored," he added.

Over the next few years, agreed Kafedzhiev, several trends will continue to affect and drive changes in warehouses and distribution centres across the UAE and the wider Middle East, as online retailers increasingly introduce 'same day' and 'next day' delivery service.

To succeed, he points out that warehouses and logistics providers need to deploy technology to maximise worker productivity and to gain more insights into their facilities' operational performance.

Kafedzhiev gives the example of IIoT-enabled warehouse which can continuously monitor activities in real-time and notify operators when errors arise.

His company offers guided work solutions which is a fully integrated voice-directed productivity offering for workers. It provides distribution centre customers with improved productivity, accuracy and safety, he said.

JLL's Salbak points out that scaling requires a different business model which includes more complex supply chain webs. "This also means incorporating technology in last-mile delivery, such as automated delivery mechanisms (drones and driverless vehicles), to improve delivery service levels and potentially reduce costs," she said.

(Reporting by Syed Ameen Kader; Editing by Anoop Menon and Bhaskar Raj)

(anoop.menon@refinitiv.com)

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