Dubai Industrial and Logistics Market 2018 Mid Year Review

DUBAI INDUSTRIAL AND LOGISTICS MARKET 2018 MID YEAR REVIEW

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Dubai Industrial and Logistics Market Report

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Š Cavendish Maxwell 2018 | cavendishmaxwell.com

Dubai Industrial and Logistics Market Report

DUBAI INDUSTRIAL MARKET

H1 2018 SUMMARY The principle market trends witnessed in Dubai throughout 2017 have continued into the first half of this year. Further softening of prices due to an increasing supply and dwindling demand has left many property owners struggling to compete against an expanding pool of motivated sellers. As such, the disparities between seller/landlord and buyer/tenant pricing aspirations have remained steadfast. Those capable are preferring to be patient, speculating a favourable shift in market conditions which inevitably increases the length of time a property sits on the open market.

Availability levels are continuing to rise across the majority of industrial areas as companies across a range of sectors struggle with financial, geopolitical and economic pressures.

Unfortunately, as properties continue to sit vacant, the cost of maintaining becomes a challenge for landlords and further deterioration of stock already considered dated is inevitable. While primary onshore areas offer a degree of resistance due to limited land supply, free zones are finding themselves most vulnerable in terms of vacancy. Occupiers within the heavy industry, automotive and oil and gas sectors are victims of wider economic issues, consolidating and relinquishing assets in an effort to reduce overheads. In addition to this, free zones are typically subject to higher land rents, although recent evidence would suggest such rates are no longer increasing at land lease renewal and in some cases softening for the issuance of new plots. Although oil price has rallied above $70 a barrel, we have seen a fractional increase in the number of occupier enquiries within this sub-sector.

On a more positive note, occupier enquiry numbers have increased approximately 30% for the duration H1 2018 in comparison to the 6 months leading up to the year end of 2017. However, such enquiries remain heavily disproportionate toward the small to midsized market sector with market requirements for 50,000 sq ft or less accounting for 80% of demand witnessed, a substantial increase of 17% on the figures quoted in our 2017 end of year report. A bearish response to the introduction of VAT, increased cost of borrowing and weaker market sentiment are likely contributors to this trend. The promising number of enquiries above this size, including big box requirements for over 100,000 sq ft have yet to materialise and are often contract led, while unsatisfactory quality of stock demanded by such occupiers also inhibits progress. As a result, build-to-suit options in alternative areas have remained a viable option for occupiers demanding higher specification facilities.

Leading factors influencing the market in 2018 have so far mirrored that of the previous 18 months. General trading and logistics sectors accounted for 56% of enquiries during H1 2018, while manufacturing accounted for 19% of enquiries, an encouraging jump of 3% since our last report. The fast-moving consumer goods (FMCG) and logistics industries are spaces to keep a close eye on for the remainder of 2018. Both sectors are poised for substantial change, driven by advancements in and adoption of technology, e-commerce, and bids to improve efficiencies. This has latterly placed a demand for European specification facilities and distribution centres aligned to their wider corporate objectives. Despite shortcomings thus far, this presents an excellent opportunity for developers to capitalise on this trend.

*Cavendish Maxwell Research

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Dubai Industrial and Logistics Market Report

UAE ECONOMY

REVIEW

According to the International Monetary Fund (IMF), 2018 growth projections for the GCC as a whole are bearish in comparison to 2017 forecasts. The UAE economy grew a nominal 0.5% in 2017, far below regional growth of 1.1%.

Despite Dubai having diversified its economy over the years, oil and gas performance continues to be a proxy to the overall health of the economy and performance of the industrial and warehouse real estate markets. The non-oil and gas sector however has continued to struggle against the headwinds of VAT, consumer confidence, unfavourable foreign exchange, and global trade protectionism. In spite of this, the outlook is encouraging and there are perhaps green shoots on the horizon. IMF predicts a rally of 2% GDP growth for the UAE during 2018 on the back of increased government spending, private sector initiatives, a closeto-balanced consolidated budget and radical measures to address red tape in public sectors.

IMF extends its positive sentiment specifically to the Emirate of Dubai, outperforming the wider UAE with predictions of the non-oil economy to record a 3.7% increase in 2018. This is largely driven by government spending on infrastructure, continuing investment diversification, as well as the direct and windfall gains from the ongoing Expo 2020 preparations, and the introduction of a 10-year residency visa.

Despite UAE’s passive spectacle of the verbal tariff threats between the US and China, the UAE must remain vigilant to avoid being caught in the crossfire. According to the Observatory of Economic Complexity (OEC), as of 2016 China is the UAE’s fourth largest export destination ($11B) while both the US ($17.2B) and China ($25B) are the top two import origins respectively. To provide context, the imposition of US tariffs will lead to an uplift in costs for domestic and foreign goods (inflation). As a counter punch, the Federal Reserve will elevate interest rates which will subsequently strengthen the dollar. For emerging markets, whose currency is pegged to the dollar and are heavily dependent on exports, they may find themselves exposed.

5.0

25.0

4.0

20.0

3.0

15.0

2.0

10.0

1.0

5.0

% of GDP

Real GDP %

UAE - GDP forecast

0.0

0.0 2016

2017

2018

2019

2020

Current Account Balance (as % of GDP)

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Dubai Industrial and Logistics Market Report

INDUSTRIAL

PROPERTY DEMAND 1% Dubai Industrial Park

8% 100,000+ 4% 75,001 - 100,000

2% National Industries Park

30% 0 - 5,000

8% 50,001 - 75,000

6% Other

8% Others

4% Engineering

5% Cold Store

42% Jebel Ali Free Zone

5% Food Production

3% Services 1% Oil and Gas

27% Dubai Investment Park

ENQUIRY SIZE REQUIREMENTS (SQ FT)

ENQUIRY LOCATION REQUIREMENTS

17% 25,001 - 50,000

ENQUIRY SECTOR REQUIREMENTS

19% Manufacture

41% General Trading

14% 5,001 - 10,000 15% Logistics and Distribution 17% Al Quoz

19% 10,001 - 25,000

2% Leisure/ Health Care

2% Dubai South

Source: Cavendish Maxwell research

INDUSTRIAL

PROPERTY SUPPLY(SQ FT) JAFZA

DIP

Al Quoz

NIP

DP

Sale

Lease

Sale

Lease

Sale

Lease

Sale

Lease

Sale

Lease

5,687,760

1,872,644

1,056,044

3,354,731

200,540

1,357,704

1,291,768

478,752

563,761

342,796

*The above figures refer to third party developments on leased land

Source: Cavendish Maxwell research

SALE ASKING PRICES Jebel Ali Free Zone

Dubai Investments Park

334

(DIP)

Locations

Average price AED / sq ft

234

(JAFZA)

Al Quoz

355

National Industries Park

227

(NIP)

Dubai Industrial Park

274

(DP)

0

100

200

300

400

500

600

700

60

70

LEASE ASKING PRICES Jebel Ali Free Zone

35

(JAFZA)

Dubai Investments Park Locations

Al Quoz

Average price AED / sq ft

41

(DIP)

50

National Industries Park

35

(NIP)

Dubai Industrial Park

29

(DP)

0

10

20

30

40

50

*The above figures reported are exclusive of master authority sub-leasing fees which can vary between 15 - 30%

© Cavendish Maxwell 2018 | cavendishmaxwell.com

Source: Cavendish Maxwell research

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Dubai Industrial and Logistics Market Report

MARKET CHALLENGES

AND OPPORTUNITIES There continues to be opportunity for developers/land owners to build European style warehouses, particularly in non-free zone locations. However, there is evidence to suggest that speculative development in free zones has been thwarted to reduce supply and aid a recovery in pricing.

Buyers/tenants are being more cautious and carrying out thorough due diligence on their available options prior to making real estate decisions. This is prolonging the timeframe to conclude a transaction however such characteristics also signal a more mature and stable market.

There remains an imbalance between landlord/seller expectations and the market prices which is stalling the market.

If landlords are willing to be flexible, they have a better chance of attracting initial interest and securing occupiers as a result.

The introduction of VAT, both for sale and lease transactions, has impacted cash flow and increased the cost of such transactions outside of free zones for the end consumer, both for the property itself and associated professional services.

While ground lease terms have shown change in the last 6 months, land rents remain high. In conjunction with further contraction across a range of industries, occupiers continue finding their balance sheets squeezed. There are signs master industrial authorities are pivoting to be more accommodating; this should aid with retention of investors and occupiers, if not encourage an increase in take up. Nevertheless these policy changes will take time to filter through to the market.

Q3/Q4 2018

MARKET OUTLOOK Sales and leasing transaction levels are expected to remain well below 2015 with a modest increase on 2017, but investment transactions should increase (subject to easing of sub-lease restrictions) given the emergence of more REITS. Despite financially attractive opportunities and increasing levels of enquiries the market is fundamentally different to that of three years ago, and potential occupiers are proceeding with caution. As a consequence of wider geo-political uncertainty, widespread quantitive tightening, and volatility in global markets, prospective occupiers will continue to conduct thorough due diligence, taking tentative steps rather than leaps of faith. This is most notable with European and US based companies, and we expect to see little activity outside of the logistics sector in this regard.

We have not seen the increase in occupiers relocating towards other emirates from Dubai on the same scale that we anticipated at the start of the year. While the quality of stock has room for improvement, it is superior to that across the wider UAE, while also benefitting from a very robust legal system, developed infrastructure, proximity to end consumers, suppliers and labour force. Alternative areas in Dubai, such as Dubai South and Dubai Investments Park will continue to receive well-deserved interest where quality of existing stock is superior, while land availability across free zones means occupiers can look at build-to-suit options.

Small to medium sized occupiers will be the principle driving force for Q3/Q4 take up, with the market for larger facilities being somewhat passive. We may see a modest increase in take up from oil & gas operators, although this is heavily dependent on oil price stability and we speculate many participants in this field will sit tight for the remainder of 2018 during this period of recovery before looking to invest and re-establish themselves in 2019.

Supply is likely to increase for the remainder of 2018 albeit at a slower rate than that seen in the first 6 months of 2018. Select master authorities are applying more rigid steps to those seeking land in an effort to ensure they are not a speculative developer. However, the impact of this is unlikely to have any immediate impact on market dynamics as supply continues to outweigh demand. This will be compounded by disparities between occupiers and landlords pricing expectations persisting, although we are of the opinion such differences will move in the direction of equilibrium.

Disclaimer Š Cavendish Maxwell 2018.

The information and analysis contained in this report has been obtained from or is based on information from a variety of sources generally regarded to be reliable and assumptions which are considered reasonable, and which was current at the time of undertaking market research. However, no representation is made, or responsibility accepted by Cavendish Maxwell in respect of the accuracy or currency of this information. Cavendish Maxwell do not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication.

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Š Cavendish Maxwell 2018 | cavendishmaxwell.com

Dubai Industrial and Logistics Market Report

INDUSTRIAL

INVESTMENT The market conditions experienced by the owner occupier market are analogous with the industrial investment market. Despite principle factors of influence aforementioned, such as a lack of tenant demand, rising interest rates and political uncertainty, Dubai’s investment market has seen strong regulatory progress and maturity in recent years.

While there has been an increase in investor interest with the introduction of more private equity funds and Real Estate Investment Trusts (REIT’s) within the region, there remains a chasm between seller and purchaser pricing aspirations.

Yields sought by sellers are considered low by investors and not reflective of the market, either due to poor asset quality, weak covenants or a lack of income growth potential. In turn, this has created a challenge between investors and occupiers but with appropriate advice from experienced real estate consultants there are deals to be made.

Through the lens of an investor, the increase in transaction costs, and running costs/risks associated with leasehold tenure have meant investors seek to maintain target yields by increasing income. However, occupiers are equally burdened by government/ local authority sub-lease fees (as high as 20-30%), and the increase in occupational costs can compromise the viability of their core business. Put simply the transaction fees and authority annual sublease charges means sub-optimal risk incurred for investor, tenant and seller, which is therefore stifling institutional investment in the logistics investment sector.

As neither party can benefit from changing their strategy while the other maintains their own, we find the market is confined to a classic Nash equilibrium. The gulf created by existing policy on landlord and tenant aspirations is difficult to narrow through negotiation, and therefore, investment transactions have become more difficult to structure.

In order to stimulate growth and to encourage institutional investment we are seeing authorities revisit existing policies. For example, local authorities may look to address land rents and the sub-lease fees imposed on landlords/tenants as a longer term solution. Decisions of this nature will take time to be scrutinised and implemented, but there have been short-term solutions piloted to provide the immediate relief desired by occupiers and investors.

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Dubai Industrial and Logistics Market Report

TRACK RECORD

JAFZA, Dubai Property search and acquisition instruction

January 2018 BUA: 61,326 sq ft Plot area: 109,350 sq ft Price: AED 13,600,000 Client: Confidential

June 2018 BUA: 80,000 sq ft Plot area: 120,000 sq ft Annual rental: Confidential Client: JAS Worldwide

Instructed by the client to identify and negotiate a price for a warehouse acquisition in JAFZA. Sourced an off market, brand new warehouse benefitting from racking and chemical storage approval beneficial for their logistics business. Deal concluded with 4 months of appointment.

Instructed by the client to identify and negotiate lease terms for a new logistics HQ in JAFZA. Worked closely with the authority to secure mutually favourable terms in a property which perfectly matched the client requirements.

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AS

LE SA FO R

FO

R

SA

LE

Identified a number of potential buyers and agreed Commercial Heads of Terms within 4 months of bringing the property to the market. The property transacted within 7 months of being brought to the market.

LE

Appointed by the landlord on an exclusive basis to market and dispose of the property on a for sale basis.

FO R

July 2017 BUA: 131,694 sq ft Sale Price: AED 36,000,000 Client: Confidential

E

LE AS ED

JAFZA, Dubai Property search and acquisition instruction

LD SO

Dubai Investments Park, Dubai Exclusive disposal instruction

LD SO

Below is a selection of transactions the team have concluded in the last 12 months along with some of our featured properties currently available.

Dubai Investments Park, Dubai Sale and leaseback opportunity

JAFZA, Dubai Warehouse disposal instruction

Dubai Investments Park, Dubai Exclusive leasing instruction

BUA: 75,000 sq ft Plot area: 125,000 sq ft Asking price: AED 53,700,000 Yield: 8%

Currently available BUA: 214,550 sq ft Plot area: 322,723 sq ft Price: AED 60,000,000

Cavendish Maxwell have been appointed to source a purchaser for investment purposes on a sale and leaseback basis for a high specification cold store.

Disposal instruction of a HQ distribution centre and office in JAFZA. The facility benefits from its high specification office including a theatre, gymnasium and recreation room.

Currently available BUA: 85,581 sq ft Plot area: 158,156 sq ft Asking rent: AED 3,423,240 (exc. of sublease fees) Cavendish Maxwell are pleased to have been exclusively instructed to identify an appropriate tenant to take occupation of a high quality manufacturing/storage facility in DIP.

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Dubai Industrial and Logistics Market Report

Property Consultants Middle East and Africa For any industrial and logistics advice or for any other commercial property advice, please contact one of the team members below.

Industrial & Logistics Andrew Armstrong BSc (Hons) MRICS Associate, Head of Industrial and Logistics T: +971 50 482 7934 E: andrew.armstrong@cavendishmaxwell.com R: RERA BRN 41705

Freddie Meyer BSc (Hons) Surveyor, Industrial and Logistics T: +971 50 261 0811 E: freddie.meyer@cavendishmaxwell.com R: RERA BRN 42210

Investment Andrew Love MA (Hons) MRICS Partner, Head of Investment and Commercial Agency T: +971 50 859 2734 E: andrew.love@cavendishmaxwell.com R: RERA BRN 29362

Office and Retail Adam Wynne BSc (Hons) Surveyor, Investment and Commercial Agency T: +971 50 117 5347 E: adam.wynne@cavendishmaxwell.com R: RERA BRN 42484

Aasish Thomas B.E MBA Commercial Consultant, Investment and Commercial Agency T: +971 50 117 5092 E: aasish.thomas@cavendishmaxwell.com R: RERA BRN 43216

INVESTMENT AND COMMERCIAL AGENCY

KEY SERVICES Market Research

Due Diligence for Land Acquisition

Asset Management

Joint Venture Structuring

Highest and Best Use Studies

Advisory Services

Š Cavendish Maxwell 2018 | cavendishmaxwell.com

Property Data

Site Analysis

Buyer Profiling

Feasibility Studies

Education Advisory and Valuation

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