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While Dubai continues to be a haven for residential property investment, other types of real estate assets are now being targeted by a growing number of investors. According to CBRE's Europe, the Middle East and Africa (EMEA) Investor Intentions Survey 2015 released in April, there is strong investor preference for logistics assets, but the report also states that demand level is much stronger than supply.
lryna Pylypchuk, Director of Global Capital Markets Research at CBRE, says the growing popularity of logistics assets is a global trend. "Logistics has been identified as one sector within the global real estate [industry] that is underinvested, which is why a lot of new capital is looking at it," says Pylypchuk. "It is making a natural progression from being a smaller niche market to a much broader institutional market. It still has a way to go even in the Americas and EMEA. It is growing as a component of the institutional market, so it may be a while before it takes off in a big way in the Middle East."
Pylypchuk says logistics assets are not just industrial or manufacturing units. "We are talking about the logistics space, for instance, for just-in-time delivery and developments linked with e-retail. It is the commercial side of logistics, not the single tenant type, with individual investors," she explains, referring to "large logistics parks where a number of tenants and a number of investors are active and it operates and serves quite a lot of different customers. It is just more upmarket, institutional type of product rather than small single unit".
Non-shiny real estate
In Dubai, the demand is more spread out across different sectors. The increased focus on submarkets other than residential is an eye-opener for the developer community in the UAE. While retail real estate has been a key focus, experts say the lack of good-quality commercial space, including warehouses, logistics facilities and offices, is matched by an increasing demand for them.
Analysts also say that offices and affordable staff accommodation are part of the demand. David Godchaux, CEO of Core Savills in Dubai, says better yields make alternative assets attractive.
"Industrial yields are very high currently, and we are speaking about 200-300 base points higher than office yields, at a much lower risk," says Godchaux. "And there is also demand for warehouses and logistics [assets], which is massive and absolutely not addressed.
"Prime office is also very safe in Dubai, but industrial [real estate] is even safer because there is shortage of supply. Pretty much everything you build here will be leased with a long-term tenant with very high returns. It is of course not shiny enough."
Distinguishing shiny from non-shiny real estate, Godchaux adds, "There is more demand for things that are less attractive for most of these developers, which probably should be addressed over the next few years. These are logistics and less shiny developments rather than very nice villas or labels, but they are critical for Dubai."
Last year furniture major Ikea announced its regional distribution centre at the Dubai World Central (DWC) Logistics District. This is Ikea's first direct investment in the region, where it is already present through its partners. Scheduled for completion in September, the centre will initially employ 230 people and handle 50,000 20-foot equivalent unit containers per year, increasing to 70,000 within three years. The new facility will enable Ikea to deliver fast-moving products more efficiently to stores across the GCC.
Not just for tourists
Given Dubai's efforts to be a business hub and its focus on creating infrastructure for businesses and trade, the growing demand for industrial property is not a surprise. Brett Schafer, CEO of DIFC Properties, in the statement about the CBRE report, said, "The Middle Eastern region has diversified its economy to curtail dependence on hydrocarbon and contain the growing demand of travel, trade and tourism. Sustained investor interest to expand their global outreach in the fast-emerging Middle Eastern market has steered the growth engine of the real estate sector too. With strengths in tourism, logistics, health care, connectivity and transport, Dubai's commercial real estate market is one of the most lucrative ones for foreign investment."
Dubai has always envisioned itself to be a haven for trade and business. Given the instability in other parts of the region and the continued development of the emirate, there is much scope for industry and business growth. "Dubai cannot only be a place for tourists and it is not," says Godchaux. "Dubai International Airport beats London [in terms of traffic]. You have Jebel Ali Free Zone and you have ports. All these are steps towards developing a major logistics platform.
"We see a lot of demand in general for industrial and warehouses in Dubai. It is obvious that one has to invest in this sector. We see a few small developers looking at doing something with their land plots in Jebel Ali"
Godchaux says the market environment is largely driven by a vision rather than individual developers. "Dubai had to be on the world map," he says. "Projects such as Dubai Marina and Downtown Dubai really positioned the emirate as a corporate hub. With all this instability in the region you would not want to be anywhere else but in Dubai."
Godchaux says occupancy is quite high for prime stock in the corporate segment compared with residential property. "There is a lot of demand to be absorbed in the next few years," he says. "This is not necessarily in the prime market. There is very strong demand from corporate occupiers from anywhere around the world if they want to be in this part of the world - India, Africa, Middle East – they will want to have one of their headquarters and regional offices here."
Corporate occupiers have been making their presence felt. For instance, developer Omniyat. which has re-strategised to focus on the residential market, says it's seeing heightened demand for offices. "The demand for commercial spaces went down in 2008-09 for sure, "Mark Phoenix, Managing Director of Omniyat, tells PW. "But in Business Bay there seems to be demand for completed, good-quality office, especially because there isn't so much of it available." Phoenix says its newer projects in the pipeline have an office component.
For its part, Knehne + Nagel, the first global logistics company to become fully operational at DWC in 2009, has increased its footprint in the Logistics District and made Dubai its regional hub. "We moved from Istanbul to Dubai in 2009-10," Peder Winther, President, Kuehne + Nagel Middle East and Mrica, tells PW. "In 2013, we decided to merge Africa with the Middle East region [operations]. So now our Dubai office is for the Middle East and North Africa."
From a smaller facility in Deira, the company has moved to a space near the World Trade Centre. "We needed to find a place that is central to everyone and closer to areas such as DWC and the new airport, which will be relevant for us," says Winther, speaking on the sidelines of an event celebrating Kuehne + Nagel's 125th anniversary.
Hospitality and other sectors, which are also contributing significantly to the economic growth, come with their own demands. Affordable housing for staff for instance, is being discussed across the board. Godchaux says, "'We need more development for affordable accommodation that is not met in Dubai. When I speak about staff accommodation, I don't necessarily mean labour camps, but hotel and airline staff accommodation - all industries that cater to tourism, which is not addressed in Dubai and Abu Dhabi. There is very strong demand for that."
The market bears this out. In Ras AI Khaimah's industrial zones staff housing is a part of the deal. In the Logistics District in DWC, staff housing has been included in project plans.
Mohsen Ahmad, Vice President of Logistics District at DWC, tells PW that an announcement will soon be made about staff housing for tenants and investors. "We have staff accommodation coming up," says Ahmad. "Now the numbers justify the investment needed to build these for companies in close proximity. The staff don't have to drive through the city. This is a place where you live and work. It's to serve the logistics sector. We are also looking at the hospitality sector.”
Omniyat officials, meanwhile, are conducting an initial study on the possibility of creating staff accommodation, especially in light of the group's various hotel projects. "We're looking at different mixes - for instance, hotel staff accommodation. We are doing initial investigation on this because we have hotels coming up that will have a lot of staff and [we want to determine] if it's better for us to build accommodation rather than rent space.”
Source: Shalini Seth, Special to Property Weekly