Riad Mannan investigates the increased demand for logistics and warehouse facilities in Saudi Arabia and the key macro elements contributing to the growth
In Saudi Arabia over the past few years there has been a significant growth in the logistics sector in general and warehouse occupancy in particular. The market maintains solid performance reflected in low vacancy levels and steady growth in rentals. However, the growth is softening relative to previous years due to the slowdown in economic activity and government spending as the result of subdued oil prices.
Nevertheless, Riyadh, Jeddah, and Dammam are key warehouse and logistics clusters in Saudi Arabia given their large population base, high spending power, and availability of multiple modes of transportation (rail, ship, and truck). Jeddah and Dammam in particular have always been first pioneers in offering large-sized Distribution Centre (DCs) as they are home to the two largest ports in the country.
There are three key macro elements driving the increased demand for logistics and warehouse facilities in the Kingdom of Saudi Arabia.
The first is that the country plays an important role on global movement of goods. By virtue of their location, the country offers a route for manufacturers and distributors alike, not just within the GGC, but to Asia in the east and Africa in the south.
Secondly, the ongoing diversification of the Kingdoms trade away from an oil-based economy has been a boon to non-energy industries like infrastructure, construction, real estate and manufacturing. This diversification was underlined recently by the Saudi Government setting an objective to increase industrial contribution to GDP from 10% to 20% by 2020.
Thirdly, but of no less importance, is that with the largest economy in the Middle East and 20th globally, the Kingdom has a growing middle class population, with increased demands for finished products; vehicles, consumer goods, machines, electronic equipment being among the top imports.
All these elements bode well for the supply chain sector and by inference the logistics and warehouse marketplace. With the continuing expansion of roads, airports and seaport infrastructure, Saudi Arabia is already a major player in regional logistics. Importers, exporters and end-user companies in the country now have an increased need for world-class logistics in Saudi Arabia and, as a result, there have been a growing number of investments into the logistics and warehouse market with millions of square feet being added every year.
Currently more than 60% of goods flowing into the Kingdom come into the country by road from container ports in other countries on the east coast of the Arabian Peninsula. This has resulted in the need for increased warehouse space whether its the storage of raw materials, packing materials, spare parts, components, or finished goods.
Imad Damrah, Saudi Arabia MD for Colliers International, a global leader in commercial real estate services notes: Import and export activities have been a major occupier of warehouse space to store and distribute products such as fast moving consumer goods, household items, equipment and machinery.
Highlighting another factor driving the growth of the warehouse market, he adds: The number of manufacturing operating factories has been growing rapidly at c. 6% over the last 10 years which in turn has increased the need of storage and warehousing space for finished goods and products.
Apart from these sub-sectors, the logistics and warehousing for heavy cargo is another key area set for expansion in the Kingdom. Almajdouie Logistics Company (MLC) manages and operates a total area of 2 million square meters of terminal and storage facilities in Saudi Arabia (covered and open yard terminals).
They have become specialist in handling and transporting large or heavy cargo and provides services of freight forwarding, terminal and warehousing. Commenting on the healthy and sustained growth of the heavy logistics market in Saudi Arabia, Dudi Hermanto, its general manager for the Logistics Business Development, says: We are strengthening our position in the region, especially with the strategic increase in projects. Not only have our scopes amplified across the Gulf, but we also have existing offices in Kuwait, Dubai, Abu Dhabi and Bahrain and expanding operations in Oman
and Qatar.
Challenges and demands
As the logistics and warehousing market matures in Saudi Arabia, owners and operators have to differentiate themselves in order to compete with new entrants – for example, Urjuan Property Developers and Audi Capital are teaming up to set up the first real estate funded development of a modern logistics park on 300,000sqm of land in South of Riyadh.
For new entrants and existing operators alike challenges remain in having the right local transport infrastructure supporting warehouses and the quality of the warehouses themselves.
As Damrah notes: Substandard quality of warehousing developments available in the market for lease, relative to other regional cities such as Dubai, is affecting the business operations in terms of efficiency and type of services offered. Also, poor infrastructure and unavailability of affordable industrial land parcels along major logistics corridors, forcing operators and occupiers to expand their operations away from the city.
Although changing, a lot of Saudi Arabias older warehouses are simply not high enough and many do not have a sufficient amount of loading bays. As a result, warehouses in Saudi Arabia fall short in their quality standards in terms of clear heights, automated racking, receiving and dispatching facilities, integration with other uses such as office space, insulation and value-add supporting services.
Future growth and the e-commerce factor
Despite the challenges, there is optimism that the logistics market will grow even further. The burgeoning e-commerce market is reshaping warehouse operations as they have to modify their offerings in terms of automation and distribution capabilities. This trend is expected to further shift demand from traditional warehouses into modern Logistics and Distribution (L&D) facilities.
Damrah says: The strong potential growth of the e-commerce sector in the future will likely create demand for urban warehouses that will shorten delivery routes and will be able to provide quick delivery services for on-line customers allowing retailer to make same day delivery.
Additionally, new legislations such as the recent one introduced by the Saudi Food and Drug Authority has created new opportunities for warehouse operators to offer higher specification facilities to FMCG manufacturers and retailers.
The future of logistics and warehousing looks bright for the Kingdom. Apart from of e-commerce, the increase in infrastructure project spending and new logistics corridors will drive the evolution of the warehouse market in KSA. One of them is the development of logistics hubs like the KAEC including plans for the Warehouse Park within the Industrial Valley including 12 inter-connecting units, each with 910 sqm of flexible space for storage, office space or light manufacturing.
As Damrah concludes: There will be vast growth potential for large-scale distribution and fulfilment centres that are well connected to logistics corridors, new transport infrastructure projects, and manufacturing hubs.