Saudi Arabia in a Better Position for Real Estate GrowthEHSAN BAYAT

Saudi Arabia in a Better Position for Real Estate Growth Riyadh and Jeddah are two of the most prominent economic centers in Saudi Arabia.

As a result of low oil prices and a reduced supply of properties, both cities have been experiencing a steady downturn in the real estate sector. However, according to the kingdom’s latest ranking on the 2016 Global Real Estate Transparency Index (GRETI), compiled by JLL and LaSalle Investment Management, the real estate sector in Saudi Arabia is poised to make a comeback.

Saudi Arabia now stands at 63rd on the “Semi-Transparent” grouping of the GRETI, near Egypt, India, and Turkey. This move towards increased transparency is beneficial to the real estate sector because countries that have higher transparency levels statistically experience greater investor activity and increased corporate real estate transactions. In fact, nations considered “Highly Transparent” attract three-fourths of the investment in global commercial real estate.

The following overview of recent JLL reports details the office, retail, and residential market behavior in both Riyadh and Jeddah, including projections on how Saudi Vision 2030, the government’s plan to promote economic diversification in the face of falling oil prices, will affect the real estate market.

Riyadh Office Market

Rental values decreased marginally while vacancy rates stayed even at 16 percent. Analysts expect both metrics to change in the coming months with the addition of new properties to the market. The Information Technology and Communications Compound has roughly 160,000 square meters of gross leasable area (GLA) in the pipeline, and the King Abdullah Financial District will also soon complete several projects. As a result, rental values should decrease while vacancy rates will increase. Saudi Vision 2030 may eventually contribute to increased office space demand in Riyadh because of its provisions to admit more foreign real estate investment.

Jeddah Office Market

Project completions will not reduce rents in Jeddah the way they are expected to in Riyadh. In fact, office rental rates stabilized in the second quarter of 2016, even as supply increased. And where rental rates haven’t moved, vacancy rates have risen by about 1 percent. A developing trend in the city is tenants moving from lower-quality facilities to more updated and valuable properties. In addition, Saudi Vision 2030 is projected to have the same positive long-term effects on demand in Jeddah as it will in Riyadh.

Riyadh Hotel Market

The Rosh Rayhan Hotel and the Riyadh Copthorne Hotel opened in Q2 2016, bringing the total number of hotel rooms in the capital city to 11,000. Upcoming projects scheduled for completion this year may not open until 2017, but a total of more than 8,000 rooms should enter the market by Q4 2018. Among other factors affecting the hotel industry, falling oil prices have generated a decline in both government spending and corporate demand. Hotel operators and developers have consequently seen lower performance rates.

Jeddah Hotel Market

Lower oil prices have also negatively impacted the hotel market in Jeddah. However, the city has recently experienced a notable increase in new supply, and the majority of these hotels rank in the five-star category. Jeddah now offers nearly as many rooms as Riyadh. Occupancy rates have dropped to 69 percent, but this largely reflects the recent market entrants.

Riyadh Retail Market

Neighborhood centers have been in strong demand of late, and these properties accounted for the entirety of retail gross leasable area (GLA) added in Riyadh during the first half of 2016. Al Khaleej Mall and AL Hamra Mall should open by the end of the year, balancing out the retail growth for a combined total nearly 170,000 square meters of GLA. The city’s vacancy rates have stayed relatively low, and demand appears to be on a steady rise.

Jeddah Retail Market

In Q2, the expansion project on Alandalus Mall reached completion, creating 14,000 square meters of leasable real estate. The Red Sea Mall expansion should also be finished by the end of the year. Rental statistics showed a very small decline during Q2, and about 93 percent of retail properties have active tenants. Early projections from the Saudi Vision 2030 stimulus plan indicate favorable growth for retail the city of Jeddah in particular.

Riyadh Residential Market

Residential demand has begun to slow in the region, with noticeable decline in rental rates in Riyadh. The capital city gained roughly 11,000 new homes in the first two quarters of 2016, and this growth pushed the total number of residential units over 1 million. Quarterly measurements showed an increase in villa and apartment prices, but yearly counts indicate 5 percent and 1 percent decreases for villas and apartments, respectively.

Jeddah Residential Market

Total supply for residential units remained at approximately 796,000 as of Q2, and a shortage still exists for affordable housing. Efforts to increase the loan-to-value ratio have not yet achieved their purpose of attracting buyers, and the white land tax regulations will most likely not yield results until 2017 or 2018. Government measures to elevate transparency, however, should help to bolster the real estate market as a whole in Jeddah and Riyadh, and across the entire kingdom.