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The price of industrial warehousing in the UAE is a product of supply and demand. There are many factors determining the price of land and facilities, not least location, specification and tenure. In our opinion, while these factors are important, the availability of bank finance and ease of credit, along with the balance of supply and demand, are the underlying thread that determines price.
In established free-market economies, demand driven by a variety of macroeconomic factors determines price, with the supply of land being fixed. Increases in the supply of land for development are fairly minor in comparison to the overall supply of land and, therefore, have little impact on the price.
The situation in Dubai is altogether different with the supply of land being closely regulated by government entities such as Wasl Properties and Dubai Real Estate Corporation or quasi-government organisations and investment zones such as Dubai Investments Park (DIP), Tecom Investments, Jebel Ali Freezone (Jafza) and Dubai World Central (DWC). Furthermore, in a competitive banking environment like the UAE, interest rates are at an all-time low, which, combined with the availability and ease of securing finance, also plays a large part in the price of land.
Industrial land in Dubai is largely leasehold, with the majority owned by the government with only a limited number of plots held on a ''private'' or ''gifted'' freehold title (owned by a private individual or company in perpetuity). Traditionally, companies would lease land from the government in a designated leasehold area, paying annual ground rental calculated against the plot area. Under this model the leaseholder could build a facility on the plot that could then be sold or subleased to another, but with the land still owned by the government.
Historically, constructing a purpose-built facility on a leased plot is less expensive than buying a completed facility on the secondary market and ensures that the end user has a premises fit for purpose. There are, of course, additional complexities such as the build cost, project management and construction period to be considered when constructing a facility. However, on the whole it can be more attractive financially for companies, particularly if a plot can be obtained for free from the government or acquired at a low price in the secondary market.
Supply and demand
The current situation in onshore locations, with a fixed supply of industrial land, is that there are few or no available land plots to lease from the government directly. In custom-bonded free zone areas such as Jafza and DWC there are plots available to lease directly from the authorities, albeit availability has decreased in the last 12 months, with the authorities now being more stringent on the parties they wish to issue land to. Indeed, the availability of government leasehold land is at its lowest.
A company wishing to enter the market in an onshore location will either have to buy a second-hand completed facility or a bare plot from an existing leaseholder on the secondary market. The creation of a secondary market in turn creates upward pressure on the rental and sales levels of both development land and industrial facilities. The implications are that rents and capital valuations are steadily increasing in areas where there is shortage of suitable land. Nowhere is this trend more apparent than in established areas such as Al Quoz, Umm Ramool and DIP, where we are now seeing an all-time high in rental and sales levels, in part due to the lack of land and facilities.
Last year DIP saw demand for land and facilities strongly outstripping supply, creating upward pressure on the capital and rental values. Now any end user or developer wishing to acquire land in DIP will expect to pay a premium (also known as key money) to the leaseholder of around Dh70–Dh100 per square foot (calculated against the plot area) to acquire the leasehold interest. In the past land would have been granted directly from the authority for free, in return for an annual ground rental. Since all plots have been allocated by the authority in DIP, we can see how the finite supply of land has created value in leasehold assets, particularly for those who successfully managed to secure such plots for free. Put simply, bare, unencumbered leasehold (non-free zone) industrial land is now a valuable commodity.
From the government's perspective, increased demand and absorption of industrial leasehold land results in higher ground rentals. While the supply of land is fixed or limited, this can only place further upward pressure on prices. You only have to look at a map of Dubai or head away from the city and into the desert to realize that there is almost limitless land available for development, which can be released at any time when existing areas have reached saturation. However, Cavendish Maxwell is not aware of any new government-backed industrial zones, and with the price of private freehold land, it is unlikely any developer would chose to zone a commercial plot for industrial use since the returns would not be comparable to other sectors such as labour accommodation, mixed-use or residential.
The true impact of the recent release of leasehold land in DWC, Technopark, and Dubai Industrial City in terms of better infrastructure, transport links and connectivity is yet to be felt. Early indicators signal that end users are once again looking to lease land from the government to construct new purpose-built facilities, thus cutting out the secondary market. While capital values and rental levels are presently holding in established onshore areas, we believe going forward that the slowdown in demand will lead to declining capital values as leaseholders adjust their expectations.
For leaseholders of development plots in established industrial onshore areas, the time is right to sell the land on the secondary market, while the supply and demand is at a disequilibrium, and finance remains inexpensive. Should a leaseholder choose to retain and develop the plot, it will likely still enjoy a profitable speculative development, due to the high prevailing rental values and low construction costs, particularly the price of steel.
However, as the price of oil continues to remain low and the possibility of the first government fiscal deficit since 2009, it is likely that the ease of securing money and trade credit will become tighter. This, coupled with the increase in Eibor rates and recent shrinking in government bank deposits, will play a part in the downward correction of land prices over the next 12-24 months.
In all instances, it remains vital to build a facility that is fit for purpose. All too often we see developers, land owners and contractors getting it wrong, with the end product becoming unleasable with length void (vacancy) periods despite a positive market sentiment. Furthermore, there will remain an additional threat to leaseholders who could find their land value wiped out should the government create a new industrial onshore zone where land will be readily available.
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Source: Andy Love, Special to Property Weekly
The author is Head of Investment and Commercial Agency at Cavendish Maxwell