I find it laughable when investment bankers come to my office and try to assure me that warehouse and logistics space in Dubai is a “defensive” investment. Mathematical reality does not support this argument. Rents in Jebel Ali Free Zone (JAFZ), the most prime industrial enclave in the Arabian Gulf, have fallen from AED 44 a square foot in 2014, when crude oil prices peaked at $115 a barrel, to AED 35 now. In the financial markets, a peak to trough fall of 20% constitutes a bear market and the JAFZ rent declines now demonstrate that prime industrial, logistics and warehouse space is not immune to the slump in the business cycle and is hugely correlated to the economic/credit cycle in Dubai. The glut of planned real estate investment trusts in UAE will only increase the supply of industrial property and further reduce rents and capital values in this sector.
The protracted banking credit crunch, thousands of job losses in sectors as diverse as oil and gas, aviation, finance, construction and hotels will lead to a sharp shrinkage in retail volumes and thus demand for warehouse space in 2017. This is reflected in the 20% fall in warehouse rentals and capital values. Bankers and developers dazzled by the sharp 30% rise in the values of JAFZ warehouses in 2013 – 2014 did not anticipate that the oil price crash, fiscal austerity, contractor debt/banking credit crunch in the UAE would also gut demand for industrial assets at the precise moment when supply of warehouse space was set to soar. The result? A painful bear market that will not bottom out in 2017. Warehouses, like luxury homes, are a kiss of death when demand slumps as their market is so illiquid. As J.P. Morgan rightly observed “Liquidity is like a cab on a rainy night. It disappears when you need it the most”.
The real pain in the industrial property sector is felt by many local traders who had acquired warehouses and logistics on credit in 2014, near the peak of the market cycle. As the business cycle deteriorated since international and local banks slashed credit facilities to these accounts. When import/export volumes and retail sales plummeted in 2015, these traders were forced to sell their properties in a falling market. Increases in tenant fees/levies, insurance/storage security cost and the cost of upgrading decades old warehouses for the needs of high tech corporate supply chains have only exacerbated the pain, as has new supply from Dubai Investment Park and Dubai South. As usual, older, Class B warehouses in Al Quoz saw the steepest rental falls, down 25%.
I was shocked to read that the prices of Burj Khalifa apartments had fallen by 25% in the past year. Usually, prime property in global cities is viewed as a store of value, exhibits less price volatility as it has a relatively price inelastic demand curve. This is clearly not the case in the Dubai luxury home market. Prices for Palm Jumeirah apartments, Emirates Hills and Hattan on the Lakes villas have all fallen by 20 – 25% in the past two years. International property broker CBRE believes the steep price falls are due to the fact that major property developers ramped up construction of thousands of new villas and townhouses before Expo 2020. CBRE expects the number of new homes scheduled for delivery in 2017 and 2018 to “be well above” the last five year annual average of 15000. The tsunami of offplan product launches does not bode well for secondary market capital values. There is a major glut of luxury villas in Dubai at the same time as high priced expat executives in the AED 80,000 – 150,000 a month salary range are culled en masse in banking, oil and gas, aviation, construction etc. Expect the bear market in luxury homes to accelerate in 2017 and 2018 as the metrics for a market bottom are simply not evident.