With the increase in warehouse rents in Riyadh and Jeddah are plans to implement automated factories
Increased activity in the industrial and logistics industries is a strong driver in Saudi Arabia's high demand for specialized and high-end warehouse facilities. As a result, towards the end of Q3 2022, the annual change in rent in cities like Riyadh was 22%. This is highlighted in the most recent analysis by international real estate company Knight Frank.
Saudi Arabia's manufacturing sector is rapidly emerging as a crucial component in the industrial policy of the kingdom's government, accounting for 8.3% of GDP. Government incentives to increase domestic production of goods are luring domestic and foreign investors. But they are also having an overall positive impact on the sector's overall activity.
Separately, the pandemic fuelled a surge in online retailing that is continuing to support demand for warehouses. The same trend has also been observed in Saudi Arabia, where online shopping volumes and values have increased by 90% over the past 12 months.
The imbalance between supply and demand is partly a result of government-led attempts to support the manufacturing industry, notably for last-mile logistics facilities and warehouses that meet international standards for quality and specification. Rents in cities like Riyadh are currently as high as SAR 250 per square meter, reflecting an increase of 22% over the last 12 months, with occupancy at 96%. This is understandable given the severe shortage of high-quality warehouses.
Knight Frank also highlights a 22% increase in warehouse rent rates in Jeddah during the same period. These rents now average SAR 179 per month, with occupancy levels of 96% at the end of Q3 2022.
MULTIPLE SECTORS AND FACTORS CONTRIBUTING TO GROWTH
The lack of high-quality warehousing is keeping rents from declining. So, finding reputable warehouses will become increasingly difficult as more retailers boost their online presence.
Re-exports are also increasing, with a value increase of 23% in 2021 alone as the Kingdom establishes itself as a logistical powerhouse. Undoubtedly, one of the main drivers of demand today is the need for logistical hubs. But also, KSA’s extensive expenditure in its real estate and infrastructure is playing an impactful role in growing demand too.
At present, Riyadh's current warehouse inventory mostly consists of ageing warehouses close to its dry port, which is contrary to demand. Conversely, there’s strong demand for high-quality, contemporary warehouses that adhere to international standards. So, with a lack of supply of warehouses that meet these criteria to fulfil demand, warehouse rents and overall values are likely to continue increasing.
FUTURE PROSPECTS FOR WAREHOUSES IN SAUDI ARABIA
Concerning overall market trends, Knight Frank highlighted the industrial sector's speedy developments. The Saudi Ministry of Industry and Mineral Resources started an initiative to automate 4,000 factories. The main goal here is to raise the bar and make sure that factories are constructed per the finest international standards. Equally, the automated component of these new factories will help reduce labour costs and likely increase production efficiencies.
Knight Frank also emphasises that industrial occupiers are installing solar panels as they start the move to greener energy sources as part of KSA’s Vision 2030's goal to employ cleaner energy sources. To support the Kingdom's efforts to become green, Al-Munaijam Foods, for example, installed over 3,500 solar rooftop panels on its temperature-controlled warehouse in Riyadh. Up to 38,000 tons of carbon emissions per year and 30% of the total energy used are reduced via this solar panel installation.
The clear advantages of converting to renewable energy completely or as a way to assist conventional energy sources would help the Kingdom reach its net-zero goal by 2060. It will also help to lower operational expenses for businesses too.