Undersupply of quality warehouses in Abu Dhabi

There is a significant undersupply of quality warehouses in Abu Dhabi with no Grade A space currently available.

According to a report by DTZ, there has been a limited amount of "good quality" warehousing over the past couple of years. The about 600,000 square metres of such space is just six per cent of the total current stock.

"However, much of this is occupied space, which means there is a significant undersupply of quality stock in the market," said Joseph Garwood, Associate Director at DTZ.

According to the report, the economic development and diversification strategies of the UAE and other GCC countries have generated the need for more advanced logistics capabilities as countries within the region are on course to significantly increase their production and manufacturing bases.

The logistics sector, the report said, will have a significant impact on the demand for warehousing space.

"Re-exporters as well as third party logistics supplies (3PLs) are predominantly seeking warehouse space within free zones and despite numerous announcements of large-scale new developments, there has been a limited delivery of completed projects," said the report.

DTZ estimates there is approximately 9,460,383 sqm of warehouse stock (all grades of quality) in Abu Dhabi. The majority of this stock is of low-grade quality, built over the past 20 years. This is characterised by a high percentage of single-storey garage type buildings with corrugated iron roofs and rudimentary loading and access provisions.

Unlike Dubai, Abu Dhabi does not yet have any industrial free zones, although Abu Dhabi Airports Company is set to establish a business and logistics park next to the airport that is planned to operate as a free zone.

There are three main existing industrial/warehouse locations in Abu Dhabi – Mina Zayed, Mussafah Industrial Zone and Industrial City of Abu Dhabi (ICAD) I and II.

Mina Zayed currently has extensive storage and cold storage facilities with a capacity of 20,000 tonnes. However, Mina Zayed will be redeveloped and Abu Dhabi's main port will be relocated to KPIZ in Taweelah. Once the new port is operational, some of the existing tenants of Mina Zayed will relocate. For the other tenant's, relocation to KPIZ may not be feasible, so they will be looking for warehouse space elsewhere in Abu Dhabi.

The Mussafah Industrial Area is managed by Abu Dhabi Municipality and is adjacent to Mussafah Port. Most of the warehouses are custom-built by the occupiers on land leased from the municipality. However, there has been some speculative development by individual owners within Mussafah.

ICAD I and II is the main modern industrial area in Abu Dhabi and is operated by the Higher Corporation for Specialised Economic Zones (Zonescorp). Traditionally land has been made available for occupiers on a long-term basis to construct their own facilities.

Mina Port and select developments within Mussafah contain good "first generation" warehouse accommodation, with ICAD and the airport containing the most modern of industrial and warehouse accommodation within Abu Dhabi.

The two schemes that currently represent good quality stock in the market are: Abu Dhabi Business Hub (Phase 1) in ICAD with a built-up area of 67,000 sqm that has a 35 to 40 per cent take-up rate and Abu Dhabi Logistics Centre located at the airport, with a built-up area of 30,600 sqm that has a 100 per cent take-up rate.

The report said that vacancy rates have traditionally been very low in Abu Dhabi due to the limited amount of speculative stock brought to the market. Also each industrial zone leaves the construction of warehouses to owner occupiers. Accordingly, there is a very low vacancy rate within Mina Zayed, with the majority of tenant's having been in occupation for more than 15 years.

Warehouses available to rent in Mussafah are generally stand-alone and second-hand, although there is not a wide selection and quality is highly variable. ABDH (ICAD I) has warehouse availability in addition of 40,000 sqm available to lease.

The report also said that there is about 365,000 sqm of development pipeline over the next 12 to 48 months. Planned pipeline is unlikely to oversupply the market at this stage of the development cycle.

As the market matures, the trend is moving away from owner occupiers dominating the market to more international quality warehousing supplied by developers.

The challenge for many landowners and developers is getting utilities connected, which will hinder future supply and make it difficult to lease the schemes.

A demand study undertaken by DTZ, based upon the current number of industrial workers, estimates the total average floor space demand to be 8,917,822 sqm. A significant amount of Abu Dhabi's demand for stock is generated by 3PLs seeking to service contracts with companies in the following sectors: heavy industry, oil and gas, retail, construction, automotive services and aerospace. Prior to the economic downturn, the limited availability of warehousing space, along with increasing storage costs, had led to a steady increase in outsourcing to 3PLs. These firms currently account for a significant share of total available warehousing space.

The majority of the UAE's key logistics players station their hubs for the Middle East in Dubai. Warehouse sizes range from 25,000 sqm to 65,000 sqm. However, a number of these operators also have a presence in Abu Dhabi, albeit occupying smaller spaces ranging from 3,000 sqm to 20,000 sqm.

Demand from 3PLs has slowed over the past 18 months as businesses put expansion plans on hold or retrench staff. Reports from 3PL's suggest business volumes have dropped by almost 30 per cent due to a decline in imports of construction material and luxury goods. Reportedly, profit margins have also dropped by almost 50 per cent.

However, in global terms, the Middle East has been least affected by the economic downturn with Drewry's predicting a seven per cent decline in container shipments over the next year as opposed to a 10 per cent decline globally.

It is anticipated that worldwide container volumes will continue to fall in 2010, but will reach a growth level of six to eight per cent by 2015. If this happens, the region will need new port capacity. This will have a knock-on effect on the property sector and the need for additional warehousing is expected to increase.

DTZ see a trend in companies increasingly outsourcing their logistics operations to 3PLs as they cut costs and focus on their core offerings. That coupled with the need for occupiers to upgrade and /or consolidate the properties into one warehouse will also drive the need for new accommodation.

"DTZ considers Abu Dhabi to have significant potential in the medium term due to its underlying wealth and political standing within the UAE. The oil and gas industry as well as the significant infrastructure investments Abu Dhabi is planning to deliver as part of the Abu Dhabi 2030 Plan, such as the new port, expansion of the airport and the new freight rail and highways, will drive demand. Furthermore, the general quality of warehousing is likely to improve, mirroring a similar trend that Dubai has experienced over the past five to 10 years," said Garwood.

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