With structural and cyclical trends favouring demand for spaces tailored towards unique storage needs, Industrial Warehouses are set to emerge as the strongest segment of the GCC real estate market. The growth of e-commerce volumes and newer concepts such as cloud kitchens are expected to be the main drivers of this segment.
The consumption, trade and supply chain reconfiguration continue to remain the core drivers of industrial warehouse demand. But the more recent source of demand growth in the segment will be expansion by 3PL Logistics and e-commerce companies, newer F&B models such as cloud kitchen and vertical farming will contribute to incremental demand in this segment, KAMCO Investment noted in its “GCC Real Estate Update,” yesterday.
Apart from the growth of 3PL logistics (third-party logistics), e-commerce volumes and newer concepts in F&B, industrial warehouses are witnessing significant additional demand for storage units from governments’ increasing focus for their strategic reserves of food, medicines and essential supplies, with the onset of Covid-19. Moreover, rising inventory for other sectors during this time are also sources of demand for warehouses across storage types. Prime GCC industrial warehouse yields in the GCC remain strong and above global averages with sustainable yield averages of 8 percent-9 percent possible for investors looking at prime assets, making them our preferred segment for GCC real estate exposure.
According to KAMCO analysts, the real estate equities plunged along with broader markets on fears of the spread of Covid-19 and the impact of lower oil prices on the GCC economy. The Refinitiv GCC Real Estate Total Return Index closed 23.6 percent lower YTD at the end of Apr-2020 while the MSCI GCC index which was down 22.6 percent over the same period. However, the Refinitiv GCC Real Estate Total Return Index remains 50 percent higher than its March-09 and March-11 lows.
“We expect the market to favour equities and REITs that are more exposed to prime industrial warehouses and residential, over ones that have exposure to the retail segment and commercial office segment. We also believe that real estate developers with strong placement capacity would continue to outperform other developers from their off-plan and on-plan sales”, KAMCO analysts noted.
The Covid-19 crisis and related shutdowns have affected end-user real estate demand, while oil price volatility further impacted demand outlook for the sector. The combined transacted value in the most active real estate markets in the GCC during the months of Mar-2020 & Apr2020 fell by 47.3 percent y-o-y, while the number of transactions dropped by 46 percent y-o-y over the same period.
Fewer transactions and lower visibility for sales prices could potentially now lead to rental recovery taking longer in most segments of the market, and pushing rents at least one-step back from their respective pre-Covid-19 stages in the rental cycle. Although there is no substantial overbuild across real estate segments as witnessed prior to the 2009 global financial crisis (GFC), we expect the retail segment and commercial office spaces to be affected by structural shifts in demand due to the impact of Covid-19 that would alter incoming supply going forward. Further, similar to past real estate cycles, we do expect to see opportunistic deals emerge for investors, both in terms of yield hunting and capital appreciation.
In the region’s residential market, unlike 2009, KAMCO Invest believes there would be more significant price declines going forward. For office spaces, lower utilization rates along with less than full potential business revenues due to Covid-19, and upcoming supply could push tenants to negotiate office space rents downwards with landlords.
Retail rents are likely to come under significant downward pressure from demand being affected by a drop in consumer spending, lower brick-and-mortar footfalls and sales conversions coupled with higher ecommerce sales contribution.
Source: Peninsula Qatar (Dated:13/06/2020)