Colliers International Survey June 2020
KSA Warehousing Sector COVID-19 impact, industry evolution and city overview
COVID-19 SURVEY RESULTS 2 Introduction Advances in technological applications, increasing levels of technological integration, economic reforms and rapidly evolving demand drivers are further accelerated by COVID-19. The Kingdom’s diversification efforts are creating an ecosystem where non-oil economies will thrive. Potential influx of FDIs paired with investments in infrastructure and logistics capabilities & capacities will provide new opportunities. Q1 2020 | KSA: Warehousing Sector Warehousing Q1 2020 | KSA:
23% Survey contributors 31%
Covid-19 Impact, industry evolution, KSA Market Overview Market KSA evolution, Impact, industry Covid-19 Landlord Occupier Service provider 31% 15% Investor Survey contributors are leading players across the major cities in KSA. DAK
Madinah Riyadh 3% Survey contributors by city KAEC 6% Riyadh Jeddah 9% Jeddah Makkah 35% DAK Makkah 24% Madinah KAEC 24%
Source: Colliers 2020
This paper examines the key drivers and factors We expect the warehousing sector to embrace structural influencing the evolution of KSA’s warehousing industry. revisions as a response to rapidly changing demand drivers and technological advances. This paper will Colliers conducted a survey in May 2020 to anonymously additionally capture the demand-supply dynamics gather and provide real data to capture market sentiment and drivers in the cities of Riyadh, Jeddah and DAK on the COVID-19 impact and the potential future of the (Dammam and Al Khobar). This paper will briefly touch Kingdom’s storage solution sector. on logistics and supply chain disruptions while in-depth details on logistics implications will follow on a future publication. 3 COVID-19 impact, industry evolution, city overview Q1 2020 | KSA: Warehousing Sector
Evolution of Warehousing Services
The warehousing industry is exhibiting healthy growth, while technological advances continue to be a key driver. The rise of automation and value-added services to attain competitive differentiation is changing the way warehouses operate, leading to a dynamic future across the globe.
Key Trends Saudi Arabia
We see organisations embracing automation by leveraging on Only a small percentage of responses indicated technology in data-driven capacities as well as infrastructure, a high level of automation take-up. This could indicate and big data to minimize errors and improve space utilization. investment opportunities within this spectrum. These technologies assist with all aspects of warehousing tasks to increase productivity. Automation take-up 9% (rough percentage estimate) The focus is on connectivity supported by API’s (Application 0% Program Interface), which allow applications to collect data from 24% warehousing information systems. This ultimately allow the 7% logistics market to capitalize on multi-modal optimization through integration with the participants of the supply-chain. 0% – 25% 50% 26% – 50% The adaptation of IoT (Internet of Things) focuses on 51% – 75% 43% communication and collaboration, in order to provide real-time 76% – 100% data to improve efficiency. IoT adaptation improves inventory Source: Colliers 2020 management, maintains a clearer chain-of-custody, supports real time tracking, scans barcodes, tracks, and reports to support end- to-end supply chain. Home Centre KSA has commenced construction of its first fully automated national distribution On-demand/pop-up warehousing is a relatively new business center in Sudair. It operates Automated Guided model which allows access to warehousing solutions without Vehicles (AGV) in conjunction with automated the need for long term commitments. On-demand marketplaces conveyor systems. It sits at a site area of operate a network of warehouses or fulfilment centers. For 150,000 sq. m. on a lease from the MODON example, companies can choose to lease non-operational industrial area, with a BUA of 45,000 sq. m. warehousing space during off-seasons (ex: non-holiday) and Source: Arab News, 2019 when experiencing demand reductions 4
Key Drivers of Change KEY Government
Saudi Arabia’s non-oil GDP is recorded at a 3% appreciation DRIVERS for 2018 which is the fastest pace since 2015. 2020 brings a challenging economic climate and the importance of monetary, fiscal and structural policies aimed at the expansion of the non-oil OF CHANGE sector over the medium term is realized. Regulations to improve standards such as removing height Q1 2020 | KSA: Warehousing Sector Warehousing Q1 2020 | KSA: restrictions, new storage tracking & hygiene measures on FMCG and Pharmaceutical products would lead to requirements for high-spec warehouses.
Covid-19 Impact, industry evolution, KSA Market Overview Market KSA evolution, Impact, industry Covid-19 2030 Vision, an initiative to identify and create growth The 4 key drivers identified opportunities, stimulate the private and public sectors and attract Foreign Direct Investments (FDIs) while focusing on improving within this section of the infrastructure and ultimately bring new players and innovations report will have a potential into the market. The government will provide additional support to SME’s which impact on all sectors of the will potentially lead to growth in demand for alternative storage economy: ’s solutions such as on-demand warehousing/pop-up warehouses/ government flexible spaces and so on. increased focus on non- oil sectors, embracing technological advances, Ongoing Efforts to achieve implementation of omni- the Vision’s 2030 Goals
channel networks, and National Industrial Development and Logistics supply chain revisions will Program was announced by the government in 2019 to position KSA as a logistics hub. ultimately reflect structural Increase in fiber-optic network capacity to cover changes in the storage 700,000 houses across the Kingdom in 2018. solutions industry as the Extended wireless broadband coverage to include market continues to evolve. 128,000 houses in remote areas.
Al Khomrah Logistics Zone Project was announced by Ministry of Transport in Jeddah.
The Integrated Logistic Bonded Zone (ILBZ) at King Khalid International Airport to deploy new intelligent logistics solutions.
The capital of the Saudi Industrial Development Fund (SIDF) has been increased by SAR 6 bn in 2019 to help finance the Kingdom’s industrial sector, including entry into new industries. 5
Key Drivers of Change COVID-19 impact, industry evolution, city overview Q1 2020 | KSA: Warehousing Sector Retail Omni-Channel
The increasing adaptation of e-commerce as a result Key Drivers of Change of restrictions posed by the COVID-19 pandemic will potentially shape buyer-behavior in the mid- long term. Big retailers such as Carrefour and Abu Dawood are reporting an increase in online sales Technology of up to 200% - 300% and expecting an escalating growth trajectory in the mid-term. Connectivity driven by internet has led to more efficient flow of goods and faster problem solving. ‘Same-day delivery’ is implemented The population in Saudi Arabia can be characterized as a response to changing demands, while the as a young, technologically literate group with high rise of automation software has impacted most spending power. According to the General Authority industries across the globe. for Statistics (GaStat), mobile phone usage in KSA reached 99.61% in 2018 and the average time spent We can foresee a scenario where adaptation online per day by consumers in the Kingdom was of IoT will be prevalent across the industry, as 6 hours and 45 minutes, which is 15 minutes more the focus on customization and providing real- than the average American consumer. time data increases. Investment in streamlining processes through leveraging tech integration will be an area to monitor moving forward. 7992 7260 7245 6773 6076 4930 4168 3076
2017 2018 2019 2020 2021 2022 2023 2024
Saudi Arabia E-commerce Market Cap & Projection ($ USD mil) Source: Logistics IQ, 2020
E-commerce in Saudi Arabia has shown positive growth trajectory since 2014 and this trend is expected to continue. 6
Key Drivers of Change Supply Chain
The global focus to reduce supply side risks and increase diversification of supply has led to the development, implementation and management of business continuation strategies.
More than 200 of the Fortune Global 500 firms have a presence in Wuhan, the city where the COVID 19 outbreak Q1 2020 | KSA: Warehousing Sector Warehousing Q1 2020 | KSA: originated. Companies whose supply chain is highly dependent on service providers and suppliers in China are facing disruptions.
Covid-19 Impact, industry evolution, KSA Market Overview Market KSA evolution, Impact, industry Covid-19 The impact of COVID-19 has highlighted the need for, and increased demand of, the development and implementation of supply chain risk management with concurrent business continuity strategies.
New solutions to the existing supply chain models are underway. As they are characteristically dependent on a chain of variables, this makes them all the more vulnerable to external risk factors.
Increasing focus on realizing points of failure and reducing the margin of error along with asset-optimization and cost- minimization will be priorities in the medium term.
Technological integration to the supply chain network will work towards mitigating these risks and streamlining processes in the future.
The local warehousing market could benefit in the mid-long term as many businesses look to concentrate on local entities to fulfil their supply chain requirements.
Market sentiment indicates that an increasing level of demand has been unmet due to supply chain interruptions, resulting in order cancellations and delays.
22 % Orders cancelled or put ion hold 26 % Supply chain interrupted
35 % Receivables being delayed 4 % We are experiencing significant decrease in demand for goods
13 % We are experiencing significant decrease in revenue
Source: Colliers, 2020 7
(Data as on 2019) Market Landscape Riyadh
Riyadh’s logistics and industrial areas are scattered Workshops, Warehouse COVID-19 impact, industry evolution, city overview Q1 2020 | KSA: Warehousing Sector throughout 5 zones, with the largest supply of warehouses & Logistics Districts, and logistics & distribution centers (L&D) mainly Industrial Cities concentrated in the southern zone, near Riyadh’s Dry Port High Growth Potential and Modon industrial cities. Recently, the expansion in Mid Growth Potential terms of warehousing and L&D development activity has Low Growth Potential been predominantly towards the southern zones in the form of private industrial masterplans in the immediate vicinity of Kharj Road. The northern zone has seen a moderate North Industrial Complex development of industrial and logistics supply over the Tharawat Logistic City past few years on the back of the demographic expansion Periodic Car Check towards the north. King Salman Road
Northern Ring Road
Key Challenges Sinayit Al Khaleej King Abdullah Road > Subdued performance of key feeder sectors (FMCG’s, Automotive, Furniture, Construction).
> Large areas of warehousing lands are occupied by an Al Oruba Industrial Area aging supply of conventional warehouses. Ali Bin Ali Industrial Area > Concentration of industrial lands in the southern zones, away from demographic expansion and population First Industrial City centers. As Sulay An > Automation of warehouses that tend to be more capital Noor Al Masheal intensive than prior versions of warehouses. Al Faisaliah Tuwaiq Workshops Al Manakh > The accelerated pace of change in the retail Al Masani Ad Dif’a industry and changing demand preferences are Sinaeiat Aleasima Second Industrial City Obeikan causing increased uncertainty on future fulfillment Zamil Industrial City Industrial City Al Shifa Bader requirements. Al Fanar Al Shifa Mawrah Industrial City Development Industrial City Industrial Gate City Logistics Park Market Directions and Potential Al-Ojaimi Taya Industrial City Industrial City 23.8 Jabel Ali Movements 21.5 Industrial City 19.4 > Arising opportunities will cater to changes in the retail Al Fauzan industry through high-specs storage and fulfillment Industrial City centers. 2020 2025 2030 > Built-to-Suite warehouses that maximize efficiency Demand Projections (M sqm) and minimize overall costs. > Due to technology advancements and allowance for Warehouses & Riyadh GDP more storage height, demand for consolidated high- Logistics Supply spec storage facilities is increasing. Fluffing this 623 bn SAR demand would require experienced developers and 24.5 M Sqm suitable blocks sizes in well designed masterplans to allow for advanced infrastructure and heavy traffic of Population Employed long, medium and small vehicles. Population 6.8 M > Last-mile delivery is creating demand for facilities in 3.1 M certain geographical pockets located less than 1-hour from main consumers hubs in the north, north east Supply Per Capita and north west of Riyadh. 3.6 Sqm Retail Spending > There is high potential for Self and Micro Storage. bn SAR Ideal location for this product would be in close Market Wide 85 proximity (15 to 30 minutes driving time) to major Occupancy residential hubs and main business districts. 79%
Source: Colliers 8
Jeddah Market Landscape
Jeddah’s current warehousing districts are concentrated Modon Oasis Al Kawthar south and east of the metropolitan zones, with Al Khomra district – south Jeddah – being the major hub for warehouses and logistic and distribution centres (L&D) due to its proximity to Jeddah Islamic Port as well as Modon 1st Industrial City.
Key Challenges > The slowdown in occupiers demand has exerted Q1 2020 | KSA: Warehousing Sector Warehousing Q1 2020 | KSA: downward pressure on the performance of Al Kawthar warehouses in Jeddah, with market rents dropping between 10% to 15% over the past 2 years, with average market-wide lease rates for conventional
Covid-19 Impact, industry evolution, KSA Market Overview Market KSA evolution, Impact, industry Covid-19 warehouse dropping from SAR 150/sqm to SAR 131/sqm. > Rent is expected to slightly decrease in the future before stabilizing, reflecting weaker market sentiment Al Nakheel in the coming years. The drop in performance has been pronounced in newly-developed as well as Quwaizah obsolete projects located within Al Khomrah District.
Al Jawhara Opportunities and Potential
1st Industrial City Movements > In light of the current uncertainty in the market and slow economic growth, the performance of the warehouse and logistics sector is likely to remain subdued in the short-term. However, the market Al Khumra is expected to pick-up in the future, as the positive economic impact of the Saudi Vision 2030 and the National Transformation Program (NTP) begin to Workshops, Warehouse materialize, raising spending and, consequently, & Logistics Districts, demand for warehousing and logistics space. Industrial Cities 3rd Industrial City High Growth Potential > Furthermore, structural changes in the warehouse 2nd Industrial City Mid Growth Potential and logistics sector based on the adoption of new Low Growth Potential supply chain management practices and the potential growth of e-commerce is expected to drive up demand for logistics & distribution centers and Warehouses & modern warehouses with high-specifications. Logistics Supply Jeddah GDP 26.1 M Sqm 362 bn SAR
Population 24.1 Employed 4.5 M Population 21.7 19.5
Supply Per Capita 1.1 M 5.7 Sqm Retail Spending Market Wide bn SAR Occupancy 56 75 % 2020 2025 2030 Demand Projections (M sqm)
Source: Colliers 9
Market Landscape Dammam Existing warehousing and logistics supply in DAK (Dammam and Al Khobar) are primarily located across four major zones: & Al Khobar COVID-19 impact, industry evolution, city overview Q1 2020 | KSA: Warehousing Sector Eastern, Northern, Western and Southern. The Eastern Zone comprises factories in the 1st Industrial City and warehousing and logistics facilities in the rest of the sub-districts. The Northern Zone comprises primarily light industrial
(workshops), with warehouses and logistics in Ar Rabiyah and King Abdullaziz Seaport Al Khail districts. The Southern Zone comprises primarily light industrial (workshops) with warehouses and logistics within Ibn Sina District, the Western Zone comprises factories in the Ar Rabiyah District 2nd Industrial City, while warehouses & logistics are situated Al Khair District Al Muhammadiyah throughout the remaining districts. District Al Khodaryah District Al Khalidiyyah Ash Shamaliyah Key Challenges Al Khalidiyyah Al Janubiyyah 1st Industrial City > Rental rates in 2019 dropped by c. 5% – 10% in the warehouse and logistics sector on the back of economic slowdown, lower retail Al Nahdah District spending, alongside a drop in the employed population (16%). We Al Manar District expect rates to soften in the short-term. > Warehouse supply has reached nearly c. 20.9 million sqm, with a potential development of c. 3.9 million sqm. The recent slowdown in economic growth, along with decreasing rents will likely slow down the development of warehouses in the short-run. > Future supply is expected to be limited as developers delay 2nd Industrial Sinayiat Al Thuqba development of new projects until market conditions progress. City Ibn Sina Scoop Indus-Comm Sinayiat Alfawaziya Masterplan Al Taawun District
Warehouses Masterplan Opportunities & Potential Scrapyard Movements > Rental rate is expected to improve in the medium to long-term, driven by structural changes in the retail sector as well as government initiatives such as Vision 2030.
> The National Industrial Development and Logistics Program Workshops, Warehouse is focused on transforming Saudi Arabia into an industrial & Logistics Districts, Industrial Cities powerhouse, which is expected to drive up demand for logistics High Growth Potential and warehouses over the medium to long-term. Mid Growth Potential > In the medium to long-term, structural changes in the industrial Low Growth Potential and retail sectors are expected to drive up demand for well- located and high-specs warehouses and logistics & distribution centers that will cater to online retail (E-commerce) companies Warehouses & as well as major logistics operators and retailers. Logistics Supply DAK GDP 20.9 M Sqm 237 bn SAR
23.0 Population Employed 20,7 1.9 M Population 18.7 M Supply Per Capita 0.7 11.0 Sqm Retail Spending Market Wide bn SAR Occupancy 34.7 2020 2025 2030 ~90% Demand Projections (M sqm)
Source: Colliers 10
SURVEY RESULTS Q1 2020 | KSA: Warehousing Sector Warehousing Q1 2020 | KSA: SURVEY RESULTS
Covid-19 Impact, industry evolution, KSA Market Overview Market KSA evolution, Impact, industry Covid-19 Warehouse Automation
Survey Participants-Industry Breakdown Facility Type Breakdown
15% 18% 31% Food & Beverage Conventional Dry Storage Real Estate 36% Cold Storage Logistics Services Distribution Centers High-Spec Warehouses Source: Colliers, 2020 25% Source: Colliers, 2020 54% 21%
Participants view on automation take-up in warehousing facilities in 2020 (rough percentage estimate).
0 76% - 100% 21 % 51% - 75% 29 % 26% - 50%
50 % total respondents % of 0% - 25%
Source: Colliers, 2020
50% of the survey participants The remaining 50% believe that believe that there will be less than there will be a 26%-75% take up 25% of automation take up in in the automation of warehousing warehousing facilities in 2020. facilities. 11
SURVEY RESULTS Current C19 Impact COVID-19 impact, industry evolution, city overview Q1 2020 | KSA: Warehousing Sector
How COVID-19 Pandemic has impacted general business operations at present.
2 % We are considering expanding our operations due to sudden increase in demand 16 % We are starting to restrict spending because of uncertainty 7 % The market is causing us to seek financing (overdraft, others)
11 % total respondents % of Orders are being cancelled or put on hold 18 % Receivables are being delayed 7 % We are experiencing significant decreases in revenue 14 % We are experiencing significant increase in demand for our goods and/or services Warehouse Automation 14 % Supply Chain is interrupted 11 % We have completely or partially closed our physical place of business Source: Colliers, 2020
COVID-19’s short-term impact on businesses in 2020.
7 % Positive (Increase in demand may cause us to consider expanding our operations) 21 % Flat (no impact) 21 % Negative low (this may impact us financially, but we are confident
we can overcome the challenges) total respondents % of 43 % Negative medium (this may significantly impact our financials) 7 % Negative high (this may halt our business activities) Source: Colliers, 2020
Revenue impact on business operations for Q1 2020.
14 % Increase 14 % Decrease of more than 81% 0 Decrease of 61% - 80%
14 % total respondents % of Decrease of 41% - 60% 29 % Decrease of 21% - 40% 29 % Decrease of less than 20% Source: Colliers, 2020
The pandemic has led to major supply- Short term revenue impact has been demand discrepancies, supply chain recorded at a decrease of c.a. 20% interruptions and order fulfillment to 60%. However, a small percentage issues. of respondents noted an increase in performance, which may indicate superior Majority of our survey participants operational efficiency and/or increase in indicated that COVID-19 had a significant demand. impact on business over the short term. 12
SURVEY RESULTS C19 Impact Outlook
Identify current and future business strategies to address customer concerns and difficulties:
17 % Extend contract expiry date for customers
7 % Q1 2020 | KSA: Warehousing Sector Warehousing Q1 2020 | KSA: Big discounts on immediate payments
13 % total respondents % of Extend credit facilities
3 % Covid-19 Impact, industry evolution, KSA Market Overview Market KSA evolution, Impact, industry Covid-19 Lift restrictions (if any) on minimum order amounts
23 % Provide online solutions
17 % Routinely share updates with customers and/or the public
20 % Nothing - operate business as usual
Source: Colliers, 2020
Identify current business support that is required and the time-frame businesses expect to take to recover from the COVID-19 impact:
Business Support Required Recovery Timeframe 24% 15% 15% 24% Prediction
Advanced IT solutions Less than 3 months Credit/Facilities from suppliers/ 23% 3 - 6 months financial institutions 7-12 months 24% Financial government support 1 year and above 28% Non-Financial government support 46% Source: Colliers, 2020 Source: Colliers, 2020
We see businesses highlighting the importance of online solutions as part of their overall strategy moving forward.
Warehousing companies are seeking business support such as IT solutions and financing from both government & non-government sources.
The majority of respondents remain optimistic and aim to recover in less than a year. 13
SURVEY C19 Impact Outlook RESULTS Opportunities COVID-19 impact, industry evolution, city overview Q1 2020 | KSA: Warehousing Sector
Identify factors that will increase the attractiveness of warehousing facilities over the next two years:
25 %
17 % % of total respondents % of 13 % 13 % 10 % 10 % 11 %
Proximity Accessibility/ Likeability to Storage Advanced Build to Suit Controlled areas to main Suitable “Last Mile capacity internet/data adaptability and physical warehousing accessibility Delivery” (greater height, infrastructure security hubs/main (industry (proximity to enforced floors) suppliers specific) main residential Source: Colliers, 2020 hubs, etc.)
Identify market player sentiments on which industries/sectors will benefit the most from the pandemic’s impact on the KSA:
30 % Logistics Services 22 % Food and Beverage 41 % Trading (including online retail) % of total respondents % of 7 % Manufacturing
Source: Colliers, 2020
We see the proximity to warehousing hubs and main suppliers as well as industry specific accessibility as areas of focus moving forward.
We see the trading sectors (including online retail), logistics services and F&B expanding their current market share as a result of the pandemic. 14
Outlook
Fuelled by a rapidly changing economy, we are witnessing substantial movements across the warehousing industry to cope with evolving demand drivers. Q1 2020 | KSA: Warehousing Sector Warehousing Q1 2020 | KSA:
Significant financial impact is expected while business operators continue to Covid-19 Impact, industry evolution, KSA Market Overview Market KSA evolution, Impact, industry Covid-19 evaluate strategies to cope with the current realities of the COVID-19 impact and understand the potential of a “new normal” as the situation stabilizes.
We foresee an industry shift towards leveraging technology to increase efficiency within the warehousing sector, engaging with suppliers, managing inventory, and assessing the impact to production.
Managing demand scenarios and tracking impact on logistics and storage capacities will be key areas to monitor in the mid-term. FOR MORE INFORMATION
Ian Albert Colliers International | Kingdom of Saudi Arabia. Chief Executive Officer Middle East & North Africa Al Faisalah Tower Main: +971 54 453 7400 Riyadh | Kingdom of Saudi Arabia Email: [email protected] Main: +966 11 273 7775
Imad Damrah The Headquarters Business Park Managing Director Jeddah | Kingdom of Saudi Arabia Saudi Arabia Main: +966 12 610 5900 Main: +966 12 610 5900 Mobile: +966 50 417 2178 Email: [email protected]
Fouad Abou Rafeh Director Saudi Arabia Main: +966 12 610 5900 Mobile: +966 55 035 9970 Email: [email protected]
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