Logistics giants compete for space in Saudi Arabia

July 24, 2024, 3:36 AM

Multinationals ‘taking leap of faith’
Big demand for Grade A warehouses
Vision 2030 has changed industry

Global logistics companies are flocking to Saudi Arabia as the country’s socio-economic transformation drives demand for industrial and ecommerce buildings.

Last week DB Schenker, the logistics subsidiary of Germany’s rail operator Deutsche Bahn, signed a deal with Riyadh-based developer Kaden to construct warehouses in the kingdom.

At the end of May construction work started on DP World’s SAR900 million ($250 million) logistics park in Jeddah. The 415,000 square metre site is outside the company’s South Container Terminal at the city’s port.

A month earlier Panattoni, a multinational developer that specialises in industrial and logistics buildings, announced plans to set up shop in Saudi Arabia.

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Robert Dobrzycki, chief executive and co-owner of Panattoni Europe, UK, Middle East and India, cited the “supply-demand imbalance” in the country, “as evidenced by the strong levels of occupancy and rental growth”.

The three announcements reflect growing international interest in the logistics sector, which had been dominated by regional and local players such as Aramex and SMSA – until Crown Prince Mohammed bin Salman launched Vision 2030.

In the intervening years, Chinese logistics firms entered the market through local joint ventures, including J&T Express and AJEX, increasing competition, lowering prices and putting downward pressure on margins, according to Abhishek Rajput, engagement manager at management consultancy Redseer Middle East.

Today the traditional players, recent Chinese entrants, local startups such as Salasa and CloudShelf, and overseas powerhouses are all vying for their place in the logistics market.

“Of course a lot of investment is coming from PIF-backed assets, but there are players like Agility, which is Kuwait based, and other regional players from the UAE,” says Abhishek Mittal, head of industrial advisory for the Middle East and Africa at real estate specialist JLL.

Established regional businesses, recent Chinese entrants, local startups and multinationals are all vying for a place in the Saudi logistics market

“Recently Gulf Islamic Investments established a platform with LogiPoint to set up Grade A facilities in Riyadh and Jeddah.” GII is based in Dubai while LogiPoint operates out of Jeddah.

“Then you’ve also got more international players – from Europe, the US – eyeing the market, who perhaps were sitting on the fence, but are now taking that leap of faith,” Mittal says.

Industrial rents in Riyadh, Jeddah and Dammam – Saudi Arabia’s three logistics centres – increased by 8 percent, 3 percent and 4.6 percent respectively in the first quarter of this year, according to commercial property consultancy CBRE. Occupancy has been at a record high for more than six months.

Abdulaziz bin Abdullah Al Nowaiser, general manager of Aramex in Saudi Arabia, says the country’s logistics sector is projected to grow 6 percent annually over the next five years. Aramex plans to expand its domestic, freight, warehousing and express services.

“There is an increasing demand for dangerous goods warehousing and temperature-controlled storage for items such as perfumes and cosmetics,” Al Nowaiser says.

“The market is saturated with general cargo dry warehouses that meet minimum requirements. However, there is a lack of specialised warehouses, particularly those with pharma or cold chain capabilities and automated facilities.”

Medicines are made in sterile, temperature-controlled facilities – and need specialist warehouses too

As a result, new investments are largely focused on expanding the supply of Grade A logistics buildings. The demand for these facilities is increasing as Saudi consumers do more of their shopping online, particularly for groceries.

“A few years back there weren’t as many modes of entertainment for the Saudi consumer, and many people used to like spending a lot of time going to the supermarket,” says Redseer’s Rajput.

“But in the past three to four years new options have emerged. Because of that, consumers are more open to ordering groceries online.

“Grocery is growing faster than any other ecommerce sector.”

A container ship at DP World's Jebel Ali terminal 1. The business is building a logistics park in Jeddah

The retail, hospitality, industrial/manufacturing and healthcare sectors are also contributing demand, says Al Nowaiser.

Aramex typically does not own assets directly but relies on “build-to-suit warehouses tailored to specific client needs,” he adds.

“Incremental rental costs are significantly impacting logistics service providers. This increase in pricing is a growing concern,” according to Al Nowaiser.

Amazon, meanwhile, has taken matters into its own hands. The world’s largest ecommerce business has been directly increasing its warehouse square footage in Saudi Arabia over the past few years.

The need for higher-quality real estate in Saudi Arabia is not unique to logistics. It is also driving the residential and office markets, especially in Riyadh, thanks to strong demand and tighter regulations on sustainability.