Long term forecast for Saudi Arabia's industrial property market remains bright

Market fundamentals underpinning a growing industrial and logistics sector remain strong, despite challenges in the short-to-medium term

Ships docked in Jeddah Islamic Port. Indistrial land makes up more than 23% of Jeddah's footprint. (Salah Malkawi/ The National)

Saudi Arabia's industrial and logistics sector faces some headwinds in the short term due to the Covid-19 pandemic but the development in regulations and infrastructure initiatives provide plenty of investment opportunities, according to a new report.

The kingdom's strategic location, sizeable domestic economy and flexible regulations are among the strong market fundamentals that underpin the sector's growth in the long-term, consultancy Knight Frank said in its Saudi Arabia Industrial Market Review. In the short term, demand for space is likely to be dampened by weaker consumer sentiment during the coronavirus crisis.

"The outlook for Saudi Arabia’s industrial, warehousing and logistics sector is likely to be challenging in the short-to-medium term," Taimur Khan, associate partner at Knight Frank Middle East, said.

"This trend is likely to be underpinned by lower levels of consumer demand – a trend which is likely to be further exacerbated by the tripling of VAT – amid expectations of a marked downturn in economic activity over the coming year as a result of the Covid-19 pandemic."

As a result of these challenges, rental rates and occupancy levels are expected to soften over the course of the next year, according to the consultancy.

The Covid-19 pandemic has upended the world economy, disrupted global supply chains and dealt a blow to key sectors including aviation, shipping and logistics. In the first quarter of 2020, Riyadh and Jeddah’s warehousing and logistics markets faced similar economic headwinds and structural challenges, according to Knight Frank.

Rental rates in Riyadh and Jeddah have fallen on average by 5.4 per cent and 4 per cent respectively in the first three months of the year, the report showed.

Occupancy in Riyadh’s warehousing and logistics sector fell by 4 per cent in the year to the first quarter, where occupancy stood at an estimated 90 per cent.

Occupancy in Jeddah’s warehousing and logistics sector rose by 3 percentage points during the same period, where occupancy reached about 93 per cent.

"Low-quality warehouses are expected to see reduced levels of demand in the coming years, as prospective tenants will more likely demand better designed, sustainable, high-quality premises," the report said. "The potential growth of e-commerce is expected to become a major driver of change in the logistics sector."

To ease the impact of the crisis on its private sector and citizens, Saudi Arabia rolled out massive economic stimulus packages and measures including rescheduling loan payments for small and medium enterprises.

The government has identified the industrial and logistics sector as one of the key components in its plans for economic diversification, with ambitious plans to develop its manufacturing capabilities and transform into a global logistics hub.

It has rolled out a National Industrial Development Logistic Programme (NIDLP) to boost the industrial and logistics sectors in the kingdom, offering incentives including financing and infrastructure development.

It is also looking to improve soft infrastructure, such as research, innovation and training to make it easier to do business in the kingdom.

In the World Bank's Doing Business 2020 report, Saudi Arabia was the world's most improved in the annual ranking of 190 countries. It climbed to 62nd place in 2020, from 92nd in 2019.

The kingdom's industrial property market is currently divided into two types of development – those overseen by the Saudi Authority for Industrial Cities and Technology Zones, known as Modon, and those run as private industrial cities, which only make up a small portion of the market, according to Knight Frank.

Modon currently has 35 industrial cities that are either completed or under development, comprising almost 200 million square metres across the kingdom. In key commercial cities such as Riyadh, Dammam and Jeddah, industrial land comprises about one-fifth of a city's entire footprint, the report said.