Rents in Saudi's warehousing, logistics markets fall due to COVID-19: Knight Frank

VAT hike, outbreak to further shrink demand in Saudi's industrial, logistics sectors

  
Image of Saudi port used for illustrative purpose.

Image of Saudi port used for illustrative purpose.

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Saudi Arabia’s industrial, warehousing and logistics sectors could face further challenges as a result of the coronavirus pandemic, compounded by the recent decision to triple the value-added tax (VAT).

In its new report released on Tuesday, Knight Frank said that demand from both businesses and consumers in the sectors is headed for further contraction over the short to medium term.

“With government finances being materially impacted, and the tripling of VAT and increases expected in customs duties, we are likely to see demand shrink from both the corporate and consumer sector,” the Saudi Arabia Industrial Market Review report said.

“For the prior, the sectors most likely to be impacted include automotive, construction, retail and manufacturing, which will in turn lead to a direct reduction in demand for industrial and logistics facilities.

Overall, the outlook for the said sectors in the kingdom is likely to be challenging, underpinned by lower levels of consumer demand amid expectations of a marked downturn in economic activity over the coming year.

Negative impact

Many businesses have severely suffered for the most part of the year, as demand fell and supply chains were disrupted amid surging coronavirus cases. The industrial, warehousing and logistics businesses are no exception.

In the United States, logistics activity in April took a negative turn, with the Logistics Managers’ Index (LMI) falling by 7.6 percent to an all-time low of 51.3. The index tracks inventory levels, costs, warehousing and transportation capacity.

In Saudi Arabia, particularly Riyadh and Jeddah, rental rates in the warehousing and logistics markets dropped by 5.4 percent and 4 percent in the year to the first quarter 2020, respectively. Occupancy in Riyadh’s warehousing and logistics sector dropped by four percentage points.

Relief efforts

The government has rolled out various stimulus packages to help the industrial and logistics sector battle the impact of the pandemic.

While these efforts are likely to provide some support to the sector, Knight Frank said the decline in demand is likely to outweigh government intervention.

“In the short run, Saudi Arabia’s industrial and logistics sectors face some considerable headwinds, namely as a result of COVID-19 and on the back of multiple reforms enacted by the Saudi Government,” the report said.

One of the reforms, the new 15 percent VAT in Saudi Arabia took effect on July 1. The decision to increase the VAT from 5 percent was announced in mid-May.

The kingdom’s GDP is forecast to drop by 6.8 percent this year on the back of strict lockdown measures, decline in oil prices and production cuts.

Something positive

Despite the headwinds ahead, the “development in regulations and soft and hard infrastructure” are set to provide “sizeable opportunities” for occupiers and investors in the sectors alike.

Saudi has earmarked vast areas for industrial activity. In Riyadh, about 50 million square metres of land has been set aside for industrial development. So far, 28 million square metres have been developed.

The city’s warehouse and logistics supply also stands at an estimated 23 million square metres of gross leasable area (GLA), which include spaces for dry storage, cold storage and open yards.

In Jeddah, at least four industrial cities have approximately 105 million square metres of land earmarked for industrial development. So far, 29 million square metres have been developed.

(Reporting by Cleofe Maceda; editing by Seban Scaria)

Cleofe.maceda@refinitiv.com

#RENT #SAUDI #LOGISTICS #COVID19

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