Saudi’s commercial real estate market witnessed slowdown in demand for commercial space in Q1 2017

Knight Frank, the leading independent global property consultancy, published today its Saudi Arabia Commercial Review for Q1 2017, examining the demand, supply and performance of office spaces across Riyadh, Jeddah and the Eastern province.

According to the report, the slowdown in demand for commercial space has been met with a corresponding reduction in construction completions which has in turn moderated any major decline in rental rates for Grade A buildings. Grade A buildings have maintained both achievable rental rates and occupancy levels over the past 12 months because of the historic lack of good quality space. On the other hand, Grade B rents are expected to continue falling this year while downward pressure to Grade A rents will be offset in the short term by completion delays.

Stefan Burch, Head of Country, KSA said: “The volatility in oil prices has been a stimulus for the government to adapt its economic strategy which has resulted in a series of wide-ranging reforms aimed at diversifying the country’s economy and encouraging a more productivity-led economic model. Saudi Arabia’s Vision 2030, and the ambitious targets set out in the National Transformation Plan (NTP), call for a shift from a state-led economic system to one driven by the private sector.”

Riyadh

Office space in Riyadh is dominated by government entities who remain the largest occupiers but this is likely to change in light of the government’s plan to cut public spending. Demand for office space is however expected to pick up in the long term in Riyadh as the kingdom looks to diversify its economy and accommodate its large young population entering the labour market.

King Abdullah Financial District will be key to the development of the Riyadh commercial market. When complete, it will dramatically change the dynamics of the market by offering a best in class mixed use product. In terms of performance, average rental rates remained stable throughout Q1 with marginal declines witnessed across Grade B stock. Due to the historic lack of good quality commercial premises, Grade A rents have remained flat over the last 12 months, underpinned by high occupancy rates.

Jeddah

Demand for office space in Jeddah remained subdued in Q1 2017 following the slowdown in commercial activity in 2016. Demand has been strongest for fitted units below 300 square metres as tenants became more cost sensitive. This year is expected to follow the same trend until the non-oil economy picks up and the reforms set out in Vision 2030 and the National Transformation Plan (NTP) feed through into the wider economic system.

The total stock office space in 2016 was broadly flat year to year as no major projects were delivered. This trend is due to reverse the coming years as approximately 200,000 square metres of good quality Grade A space is expected to come on line.

In terms of performance, there remains a lack of good quality stock, underpinned by the performance of Grade A rents over the past 12 months. To this end Grade A rents have remained flat while Grade B rents have seen marginal declines year-on-year. Commercial rents in Jeddah are likely to face downward pressure over the next 12 months as tenants rationalise operations and focus on cost cutting.

Eastern Province

Family business conglomerates along with the oil & gas and industrial & manufacturing sectors are the main drivers for office space demand. Demand has recently stemmed from the professional services segment catering to the hydrocarbon sector such as consulting and law firms. Nevertheless, the public sector continues to be a major occupier of space and given recent market conditions, demand from this segment is expected to weaken in the short term.

Supply remains dominated by fragmented development with no well-defined Central Business District. Knight Frank’s data shows that over the next couple of years an additional 150,000 square metres of leasable space is expected to be delivered to the market. Whilst available stock is still predominately Grade B, future supply will mainly consist of Grade A quality stock.

Performance continues to be affected by the limited supply of completions throughout 2016 with market wide vacancy rates remaining stable at circa 25% year-on-year. This is expected to increase to 30% over the coming 18 months as demand softens and additional space is delivered to the market.

The full report can be downloaded here