Saudi Arabia’s warehouse rentals boosted by strong growth in manufacturing sector

Rents in Riyadh and Jeddah jumped 22% each in the third quarter of 2022, Knight Frank says

A warehouse in Riyadh. The demand for warehouses in Saudi Arabia is increasing as it invests in various sectors to nurture a local manufacturing industry. Reuters

Warehouse rents in Saudi Arabia’s cities Riyadh and Jeddah jumped 22 per cent annually in the third quarter, driven by increased activity in the manufacturing and logistics sectors.

The growth in rentals comes as the country continues to diversify its economy away from oil and invest in various industries to nurture a local manufacturing industry.

The coronavirus-driven boom in online retailing is also contributing to the higher demand for warehouse units in the two cities, global consultancy Knight Frank said in a report on Monday.

Rents in the capital, Riyadh, currently stand at 250 Saudi riyals per square metre ($67). In Jeddah, warehouse rents averaged 179 riyals per square metre ($47.73) with occupancy levels of about 96 per cent at the end of the third quarter.

“The manufacturing sector is fast emerging as a key pillar in the government’s industrial strategy, now accounting for 8.3 per cent of GDP [gross domestic product],” said Faisal Durrani, partner and head of Middle East Research at Knight Frank.

“Government-led incentives to boost domestic production of goods [are] attracting local and international investors, as well as boosting overall activity in this sub-sector.”

Saudi Arabia, the Arab world’s largest economy, is expanding its industrial, manufacturing and mining sectors as part of its Vision 2030 strategy that aims to reduce its reliance on oil revenue and diversify its economy.

Last year, the kingdom launched the National Investment Strategy, which seeks to attract 388 billion riyals in foreign direct investments annually, according to the state-run Saudi Press Agency.

Earlier this year, Lucid Group, the car maker backed by Saudi Arabia's Public Investment Fund, announced plans to set up a factory in the kingdom.

US-listed Lucid has signed agreements with the Ministry of Investment of Saudi Arabia, the Saudi Industrial Development Fund and the Economic City at King Abdullah Economic City (Kaec) for development of the factory.

In April, Saudi Arabian Military Industries (Sami) also signed a preliminary agreement with Boeing to form a kingdom-focused joint venture to localise manufacturing and create more jobs in the country.

Last week, the kingdom launched its first electric vehicle brand “Ceer”, which is set to contribute to its car manufacturing sector.

Saudi Arabia also plans to build three iron and steel projects worth 35bn riyals as it seeks to develop its industrial sector as part of its economic diversification agenda.

The government-led initiatives to boost the manufacturing sector “are also contributing to the mismatch between demand and supply, particularly for internationally specified, high-quality warehouse facilities and last-mile logistics facilities”, Mr Durrani said.

While demand for logistics centres is driving the demand, other manufacturing industries such as the pharmaceuticals and car production are also contributing to rising levels of warehouse requirements, the report said.

“The sustained growth in warehousing demand will maintain upward pressure on rental rates, which is unlikely to reverse until better quality stock enters the market,” said Andrew Love, head of Middle East capital markets and occupier-landlord strategy and solutions at Knight Frank.

“Subject to the speed of construction and assuming there are no delays in announced schemes, we expected a marginal 5 per cent increase in Riyadh’s warehousing supply by 2025.”

Pointing to rapid changes in the industrial sector, Knight Frank said the Saudi Ministry of Industry and Mineral Resources set up a programme to automate 4,000 factories.

Meanwhile, as part of Vision 2030’s aim to use cleaner energy sources, several industrial tenants in Saudi Arabia are also installing solar panels as they begin the transition to greener energy sources, the consultancy said.

A case in point is Al-Munaijam Foods, which installed more than 3,500 solar rooftop panels on their temperature-controlled warehouse in Riyadh to help the kingdom become carbon neutral by 2060, it said.

Saudi Arabia's economy strongly rebounded from the pandemic-induced slowdown on the back of higher oil prices and government initiatives to support the economy.

The kingdom's economy expanded by 8.6 per cent in the third quarter of 2022, according to the flash estimates by the kingdom's General Authority for Statistics last month (Gastat). It is forecast to grow 7.6 per cent this year, according to the International Monetary Fund.