The law of supply and demand

Carefully assess the factors impacting demand and supply before investing in industrial propertyDarshan Shah

The value or price of industrial property, like any other asset class, is driven by the fundamental open market dynamics of demand and supply. The factors governing demand and supply affect the value of a property.

If these factors are going through a change, then the overall value of industrial properties is likely to adjust.

Factors affecting demand

The demand for industrial property may undergo a change due to the following reasons:

• Economic activities push up demand for industrial property. Improved economic prosperity helps raise corporate income, encouraging companies to expand, upgrade or diversify into other sectors. This, in turn, heightens demand for industrial assets to cater for increased manufacturing and logistical activities.

• Launch of new communication technologies and the opening up of new transport routes help open up remote areas to development. This gives rise to a demand for industrial land use in more outlying districts.

• Geographical factors, such as availability of raw materials, power, water and labour, drive up demand for industrial properties. Accessibility to raw materials is fundamental for the manufacturing sector and most industrial facilities are located within the reasonable reach of their requisite raw materials. A regular dependable power supply is another prerequisite in choosing a location. Availability of water and skilled work force are also critical factors in fueling demand for industrial land.

• A change in customer preferences and social circumstances may trigger new sets of demand for industrial property. For example, the recent  trend in the consumption of bottled water has increased the development of commercial water filtration and bottling facilities significantly.

Factors affecting supply

A closer examination of the supply-side of industrial property reveals the following key factors:

• In the short run, supply of industrial property cannot be increased. This is because the development of real estate is a time consuming process. Sudden rises in demand can create sharp price rises, even in the short run, as the gap between demand and supply quickly widens.

• There is also a limit to which industrial property supply can be increased even in the long run. With fixed land supply, increased demand may give rise to more exhaustive uses of land. However, since supply is ultimately fixed, prices will invariably rise under strong market conditions.

• If demand suddenly reduces after an industrial property has been developed, the supply cannot be altered. Developing industrial property involves significant capital investment and long gestation periods. There can be a fall in demand during the process of development, leading to a fall in property values. As the existing stock of industrial land cannot be reduced, a supply overhang can persist and create downward pressures on pricing.

• Supply of industrial property is dependent upon the availability of finance for development. If project financing is not available, or economic conditions for certain types of industries are not favourable, the supply of industrial property can be impacted.

• Zoning for industrial development is normally controlled by a  framework of development plans that allocate land for different uses. Thus, if restrictions are imposed on further development, prices of existing industrial properties may increase. More intensive development of existing industrial properties may also occur.

• Due to extensive urbanisation, areas, which were previously used for industrial development, may be considered for alternative commercial or residential purposes, thus reducing the overall supply of available industrial land.

While price changes due to a fall in demand are very noticeable, supply of industrial property is highly inelastic in nature. A change in demand has little effect on the supply. Also, it is difficult to bring about a reduction in demand in case the supply falls. Therefore, it can be concluded that price changes are more pronounced in industrial property upon a change in either demand or supply.

Let’s now consider the above driving factors to assess the demand and supply of industrial property in Dubai and Abu Dhabi.


The major industrial areas in Dubai are Jebel Ali Freezone (Jafza), Jebel Ali, Dubai Investments Park (DIP), Dubai Internet City (DIC), Al Quoz and the newly developed Dubai South.

As per ValuStrat’s research, industrial property has seen strong demand last year, with the average rate rising in the range of 5-10 per cent. While properties in lower price ranges can be found in the areas of Al Quoz, Ras Al Khor and Al Qusais, units in higher price ranges are available in DIP, Jafza and Jebel Ali, showcasing a healthy demand from investors for good properties. Also, as per our observations, the average rental rates range between Dh435 and Dh590 per sq m (Dh40 to Dh55 per sq ft).

Additional supply of industrial property in Dubai South, an area measuring approximately 145 sq km, is envisaged to create a shift in location for investors. Upon completion, this area will serve as a major industrial, logistics and transportation hub. The launch of Dubai Wholesale City, with an expected investment of Dh30 billion over a period of ten years, will also support the supply of industrial property.

Abu Dhabi

The major industrial areas of Abu Dhabi are Musaffah, Icad and the Khalifa Industrial Zone Abu Dhabi (Kizad). As per ValuStrat’s research, both Musaffah and Icad are the strong locations of choice. Hence, the demand for industrial properties in these two areas has continued to increase, with the average rental rates rising in the range of 7–11 per cent. ValuStrat notices that the development of Kizad will support the rise in the supply for industrial property. Also, due to the relocation of the container and Roll-on/Roll-off (Roro) vessel facility to Khalifa Port from the Mina Zayed Port, many logistics and automobile companies will have to shift their base to Kizad.

Source: Property Weekly


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