- Broker Directory
- My Tools
- News & Advice
- Market Trends
- Other GN Sites
News that the Dubai Government is preparing to construct a new 'Wholesale City' next to Dubai South and Jebel Ali Free Zone should not have come as a surprise to anyone. Dubai's position as a global logistics and manufacturing hub is well known throughout the world.
There is no clearer evidence of this than during the current oil crisis, where the price of a barrel is only just starting to show signs of recovery after a turbulent couple of years.
This has had a negative impact on some GCC countries, who rely heavily on the oil industry and who have had to adjust budgets accordingly. Just 6 per cent of the total revenue of Dubai is now derived from hydrocarbons, while the manufacturing, transport and logistics sectors combined as the largest contributors to GDP, accounting for around 30 per cent of all income.
Industrial — and, in particular warehouses — is really the backbone of everything else in the city… most other sectors of the economy rely on there being a strong logistics sector.
Unfortunately, as great as the infrastructure and momentum is, private investment is lacking in the logistics sector. To be fair, the skeleton is fantastic and the Dubai Government has done more than its fair share of work over the past 40 years, transforming the emirate from a small trading port serving the Gulf states to a global hub for trade, manufacturing and logistics.
The framework is there, with prime geographical locations and very good infrastructure. It is home to the busiest international airport in the world handling around 78 million passengers annually. And Jebel Ali is now the largest man-made port in the world (ranking ninth in terms of freight volume handled).
Al Maktoum International Airport is already one of the world's 20 busiest international cargo airports and, upon completion, will be the biggest airport in the world, capable of handling 200 million passengers per annum.
What this fantastic infrastructure has created is a strong demand for quality logistics space. However, there is a significant lack of quality supply made available for occupiers to lease, as if private investment had not been able to build enough meat and muscle around the strong supporting bones.
This has driven very significant price increases, coupled with very low vacancy levels over the past few years, even for relatively poor quality warehouses, by international standards, just because of the imbalance between overall supply and demand. And in the kingdom of the blind, the one-eyed man is king.
What that means is: Firstly, there are tremendous opportunities for investors here, whether it is build-to-suit, or sell and lease back arrangements with occupiers.
Secondly, and this sounds like a paradoxical situation, as new quality stock will finally come to the market over the next few years. And provided this stock is created by investors as opposed to end occupiers, we should see further rental and price increases in the prime market segment that will be able to differentiate itself from average facilities, which should see their rents decreasing relatively.
It seems we're in a situation where the market lacks a proper prime rental segment. This is not saying that there is not a lot of prime logistics properties in the market, but most of these properties, unfortunately, are not offered for rent to end user occupiers, rather being purpose built and owner-occupied.
Fast rental growth
In other words, there is a very strong underlying demand for facilities that are almost non-existent — or at least non-existent on the rental market.
When this much needed proper prime rental market appears, there should be a relatively massive shift of occupiers that today need, but cannot find, these type of facilities, triggering fast rental growth in this new segment and then creating a gap in rent between these two new sub-markets — prime and less-prime facilities.
The other interesting paradox is that we have something similar in play for investors. You would typically see yields compressing as more investors are entering the market.
But I don't believe this will be the case, as you would see such a mechanism in play if all other things were equal. But things are not equal as in this scenario, with powerful underlying interest in quality space, offer should create its own demand.
As new quality supply appears, demand should only get stronger, and I cannot see strong yield compression happening.
This is good news for the market and again should provide the additional visibility investors are looking for.
Source: David Godchaux, Special to gulfnews.com
The writer is the CEO of Core, the UAE associate of Savills