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DENVER-ProLogis, the international distribution REIT has formed a joint venture with Arcapita, a Bahrain-based investment company, which will develop and acquire advanced logistics warehouse space in the Middle East. Known as ProLogis Middle East, the equal partnership expects to create a US$1 billion portfolio in the six Arab states of the Persian Gulf, known as the Gulf Cooperation Council region.

The GCC is a trade bloc involving the six states—Saudi Arabia, Kuwait, Bahrain, Oman, Kuwait and Qatar. The venture will initially focus on Saudi Arabia, with further developments to follow in the rest of the GCC region. The JV expects to commence construction of its first sites during the second half of 2008.

ProLogis chief executive Jeff Schwartz says Saudi Arabia will be the initial focus due to its strategic location, land availability and large population base. “Our experience in Dubai has given us a better understanding of the logistics property dynamics in the GCC region, where we believe local and multinational companies will increasingly demand modern distribution centers to serve the region’s growing needs,” he says. “As we have done in other nascent logistics markets, we plan to leverage our first-mover advantage and existing customer relationships to create a logistics warehouse platform and fill a previously underserved market… .”

Arcapita is not a new strategic partner for ProLogis. Arcapita chief executive Atif Abdulmalik says his company has invested in a series of ProLogis’ real estate property funds in the US that were “successful” for its investors. “The Middle East currently has a shortfall in the supply of modern, institutional-quality warehouses,” he says. “Given steadily rising gross domestic product regionally, leading to increased demand amongst consumers, we believe the demand for high-quality distribution facilities will continue to grow rapidly.”

The JV expects that two-thirds of its development will be build-to-suit projects, with the remainder comprising inventory, sale-leaseback and fee development transactions. Saudi Arabia will ultimately account for up to 70% of the total portfolio size, with the balance in the remaining GCC countries, excluding the United Arab Emirates.

“Our strategy will be to target land positions near major population centers and seaports,” says ProLogis’ Joseph Ghazal, head of the JV. “Saudi Arabia’s membership into the World Trade Organization in 2005 helped spur economic growth and consequently, demand for regional distribution space.”

ProLogis began developing its first distribution center in the Middle East in November, a 798,000-square-foot facility in Dubai for Aramex, a transportation services provider. Slated for completion later this year, the facility is being developed in Dubai Logistics City, an emerging new distribution hub less than 20 minutes from the Port of Jebel Ali, the world’s seventh largest container port.

Due to open at the end of 2008, Dubai Logistics City is part of Dubai World Central, a $33-billion government-backed master-planned urban community covering 54 square miles. The centerpiece is a new international airport that will have capacity to handle 120 million passengers and 12 million tons of cargo a year. More than 120 companies have reportedly reserved some 38 million sf out of an available 118 million sf at Dubai Logistics City, which is expected to be one of the world’s largest, integrated multi-modal logistics platforms.

In January, ProLogis SVP Melissa Marsden told GlobeSt.com the region is attracting significant foreign direct investment, which has led to increased personal income. This in turn is driving growth in domestic consumption and creating a need for efficient logistics operations.

As a result, Marsden said many of ProLogis’ major third-party logistics customers want to establish a presence in the market and that there is growing demand for modern distribution space from local companies as well. However, she continues, at present there is a market only for build-to-suit and fee projects rather than speculative development.

“Given the global nature of our customer relationships, we believe further expansion into this region would be consistent with our core business strategy,” she said. “Over time, we think the Middle East could represent up to $300 million to $400 million of annual development.”

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