RIYADH: Saudi capital Riyadh recorded a 22 percent growth in annual warehouse rental rates at the end of the third quarter of 2022, as the Kingdom is witnessing a strong demand for high-quality and specialized facilities, revealed the latest data from global property consultant Knight Frank.
This comes as Saudi Arabia is seeing increasing activities in the manufacturing and logistics sectors amid the Kingdom’s push to develop a local hub as part of its strategy to diversify its economy away from the oil industry.
“The manufacturing sector is fast emerging as a key pillar in the government’s industrial strategy, now accounting for 8.3 percent of GDP (Gross Domestic Product).
The government-led incentives to boost domestic production of goods is attracting local and international investors, as well as boosting overall activity in this subsector,” said Faisal Durrani, partner – head of Middle East Research at Knight Frank.
He added: “Separately, the pandemic fueled a boom in online retailing which is fueling an ongoing buoyancy in warehousing requirements. And in Saudi, the same trend has taken hold, with a 90 percent increase in online shopping volumes/values over the last 12 months.”
Warehouse rents in Jeddah also increased by 22 percent over the same period and now average SR179 ($48) per square meter, with occupancy levels of around 96 percent at the end of their quarter, revealed Knight Frank data.
Durrani pointed out that government-led initiatives to boost the manufacturing sector are also contributing to the “mismatch between demand and supply”, particularly for internationally specified, high-quality warehouse facilities and last-mile logistics facilities.
“Unsurprisingly, when combined with the severe shortage of high-quality warehouses, rents in cities like Riyadh now stand as high as SR250 per square meter, representing an increase of 22 percent over the last 12 months, with occupancy standing at 96 percent,” he added.
The increase in demand for high-quality spaces is driven by multiple sectors including pharmaceuticals and automobiles as the Kingdom pushes to become a logistics powerhouse, with the value of re-exports rising by 23 percent during 2021 alone, Knight Frank noted.
“Indeed, demand for logistics hubs is now a significant driver of demand. Other manufacturing industries such as the pharmaceuticals and automobile production sectors are also contributing to rising levels of warehouse requirements,” said Harmen de Jong, partner – Real Estate Strategy & Consulting at Knight Frank.
He pointed out that the lack of supply has been a legacy issue for the market and as the economic transformation accelerates, the shortage of high-quality warehousing is sustaining upward pressure on rents. “As more retailers strengthen their online presence, the challenge to find high-quality warehouses will only grow more acute.”
With the sustained growth in warehousing demand, Knight Frank expects the market to continue to face upward pressure on rental rates, “which is unlikely to reverse until better quality stock enters the market.”
“Subject to the speed of construction and assuming there are no delays in announced schemes, we expected a marginal 5 percent increase in Riyadh’s warehousing supply by 2025,” said Andrew Love, partner – Head of Occupier-Landlord Strategy & Solutions and Head of Middle East Capital Markets at Knight Frank.
He added: “As things stand, the city’s existing stock consists mainly of low quality, aging warehouses located near the city’s dry port, which is at odds with what occupiers are looking for: high quality, modern facilities, built to international specifications.”
Market trends
Saudi Arabia’s industrial sector is undergoing rapid changes, with the emergence of automated facilities. The Saudi Ministry of Industry and Mineral Resources launched a program to automate 4,000 factories with an aim to elevate the standard and ensure that factories are built with the best global requirements, according to a Knight Frank press release.
“Industrial occupiers have also been transitioning into cleaner energy sources, such as the installment of solar panels. Businesses are expecting to reduce operational costs as well as contribute to the Kingdom in achieving its 2060 net-zero target,” explained Durrani.
As part of Vision 2030’s aim to use cleaner energy sources, Knight Frank said, several industrial occupiers are installing solar panels as they begin the transition to greener energy sources. Al-Munaijam Foods installed over 3,500 solar rooftop panels on their temperature-controlled warehouse in Riyadh that will reduce up to 38,000 tons of carbon emissions per annum and 30 percent of the total energy requirements.
This is part of a strategy to move away from traditional energy sources to renewables as the Kingdom looks to achieve its 2060 net-zero target, while also reducing operational costs for businesses.
