Is industrial property the surprise winner in Dubai's real estate market?

The performance of Dubai’s industrial real estate was mixed in 2017. Even as achieved rents for grade-B stock fell significantly in 2017 and the first quarter of 2018, achieved rents of grade-A stock in Jebel Ali Free Zone and Dubai Investments Park grew by 16.7% and 6.7%, respectively, according to the latest issue of Knight Frank’s “UAE Industry and Logistics Market Review”. The analysis projects the trends in these two real estate classes to continue diverging in the near term.

Although these asset classes have not traditionally appealed to a broad range of investors, high-quality warehousing and on-site worker accommodation are producing double-digit returns for some owners. Investors may recognise further appeal in the market, as industrial real estate is generally much less volatile than commercial or residential property markets.

Per the Dubai Statistics Centre, manufacturing made up 9.4% of Dubai’s real GDP in 2017, making it the emirate’s third-largest sector, trailing only wholesale and retail, and transport and logistics, which comprised 26.6% and 18.5% of the economy, respectively. Each of these sectors relies heavily on industrial real estate for a range of activities, including manufacturing, assembly, warehousing and distribution, providing a foundation for additional growth in the property segment.

Growth Drivers

Dubai’s investments in air, sea and land transportation facilities, such as the expansions under way at Jebel Ali Port and Dubai World Central airport, are driving demand for logistical and warehousing premises of greater quantity and quality. The rise of e-commerce, which has developed more slowly in Dubai than in other global cities but is now gaining market traction, will also require substantial warehousing resources. Likewise, the implementation of Dubai Industrial Strategy 2030 is expected to create 27,000 jobs, add Dh18bn ($4.9bn) to GDP and increase total export value by Dh16bn ($4.4bn) by 2030, Investors hoping to leverage this growth often face high barriers to market entry. Few can afford to buy industrial-scale properties outright, and most do not have the time or expertise necessary to manage and advertise these facilities. Historically, non-Emiratis have faced an additional challenge in that they have been restricted to owning residential property. A Cabinet decision from May 2018 altered the law to allow foreigners to own 100% of some businesses outside of free zones, though details as to the types and locations of these businesses are not yet available.

New Instruments

Real estate investment trusts (REITs) provide one means to overcome these barriers. REITs own and manage portfolios of properties, allowing investors to participate in the market without the responsibilities associated with ownership and management. Investors receive regular dividends akin to collected rents, as well as profits from the properties’ capital appreciation. Dubai’s first such trust, Emirates REIT, was launched in 2010 and is mostly composed of commercial real estate assets. The market has grown since to include REITs that are specialised in health, hospitality, sports and, beginning in July 2018 with the formation of Manrre REIT, industrial properties.

Valued at Dh215m ($58.5m), Manrre REIT currently manages 19 properties across the UAE, spread across logistics (62%), industrial (23%), office (8%) and accommodation (7%) classes. Its owner, the Palmon Group, is looking to raise a further Dh330m ($89.8m) to expand its strategic acquisition of high-rent-yielding industrial properties. However, with a minimum investment requirement of $500,000, Manrre is only really accessible to institutions and wealthy individuals.

Recent growth suggests that REITs are likely to become more widely available both to investors who prefer less exposure and those who are only capable of meeting lower minimum investment requirements. Emirates REIT and ENDB REIT are already publicly listed on Nasdaq Dubai’s index, and Others are likely to follow in the near term, as Dubai Financial Market is preparing to launch a trading platform specifically for REITs.