Riyadh - MENA Herald: JLL, the world's leading real estate investment and advisory firm, today released its annual review of the KSA Real Estate Market for 2015, assessing the latest trends in the office, residential, retail and hotel sectors. In the macro background of lower oil prices and reduced government spending, the report highlighted the Riyadh market maintaining steady performance, while Jeddah showed continued growth momentum.
Mr Jamil Ghaznawi, National Director and Country Head of JLL KSA, said: “We have witnessed a shifting demand in the residential market in both Riyadh and Jeddah, as the trend moves towards property rentals from sales. Residential transactions declined by 5% in the Year-to-November 2015 compared to the same period in the previous year. We expect rental demand to continue in 2016 but at a slower rate in comparison to 2015, while little or no change is likely in the sales market in 2016. However, this situation may change once the regulations surrounding the ‘white land tax’ are released”
“Lower oil prices have put pressure on economic growth, liquidity, government budgets, the stock market and asset prices. This scenario has led to cuts in subsidies and reduced government spending and has also impacted the financing of real estate projects. A more selective approach can be seen, with an increased focus on critical infrastructure and affordable housing projects. On the other hand, there is reduced spending on less urgent projects, resulting in delays or scaling back of many projects”.
With new hotels opening in Riyadh this year, there may be downward pressure on ADRs and occupancy rates due to increasing competition. However, we expect the Jeddah hotel market to remain relatively stable in the near to medium term. Even though there is new supply of Jeddah hotels, there is strong demand to absorb any new supply, as result of religious tourism and higher occupancies during school and public holidays.”
“In regards to the office market, Jeddah has witnessed a steady and healthy growth along with new supply of quality space. On the other hand, Riyadh rentals have remained relatively stable as occupiers exercised relative caution in terms of expansion as the economy slows down.”
Looking into 2016 and beyond, Mr. Ghaznawi remarked: “We are entering a very challenging period as oil touches new lows and the government cuts spending and subsidies. It is encouraging to see that the government is taking steps to diversify the Saudi economy. Such structural initiatives will have long term benefits and will contribute towards the positive development of the Saudi real estate market. Moreover, new laws allowing full foreign ownership of wholesale and retail business will attract foreign investment, which will ultimately benefit the real estate market. And finally, religious tourism will remain a growth sector in Jeddah and the Western region, and could support new hospitality supply.”
SECTOR SUMMARY HIGHLIGHTS –RIYADH:
Office: The materialization rate of commercial projects in Riyadh has been low in 2015, with only 121,000 sq m of the 500,000 sq m proposed actually being delivered (24%). This is mainly due to labour shortages and delays in obtaining permits and services to some projects. The majority of stock delivered came from ITCC, which delivered almost 66,000 sq m of office space in 2015. While a substantial amount of supply is scheduled for delivery over the next couple of years, given the historical delays in projects, materialization rates are expected to remain low.
Residential: In Riyadh, approximately 17,000 units entered the market over 2015, the majority of which were standalone villas or small apartment buildings (with no projects exceeding 150 units). Looking ahead at the upcoming supply, there are a number of large-scale projects including Green Oasis and the second phase of Manazil Qurdoba, which will deliver 930 and 700 residential units respectively. While 28,000 units could potentially be completed in Riyadh during 2016, actual deliveries are likely to be significantly less. Around 2,250 land plots were handed over to end users within the Eskan Airport Project in Riyadh in 2015. Apart from this development, there are no other major planned or under construction affordable housing projects in Riyadh.
Retail: A significant amount of retail space is expected to enter the market in Riyadh over the next two years. This is expected to increase vacancy rates and decrease rents as competition in the market increases. If all the projected supply materialises, Riyadh’s stock of quality retail space will increase by almost 60% over the next five years. Annual rental rates increased steadily in 2015 at an average of 2% for super regional malls and 4% for regional malls.
Hotels: Just two new hotel projects have opened in Riyadh this year (the Movenpick and Doubletree by Hilton) adding a total of 635 additional rooms. The materialization rate of hotel developments is generally low and a number of projects have been delayed to 2016, due largely to the shortage of laborers and overambitious expansion plans by hoteliers. An additional 8,900 room keys could complete in the years from 2016-2018 (representing an 84% increase from current supply levels) but in reality not all these projects are likely to materialize. ADRs increased by an average of 2% in each quarter of 2015 (apart from Q4 where ADRs decreased marginally by 1%). Y-o-Y occupancy rates remained almost identical (within 1%) to their respective periods in 2014 with Q4 2015 occupancy rates currently standing at 58% in Riyadh.
SECTOR SUMMARY HIGHLIGHTS – JEDDAH:
Office: In Jeddah, only 38,000 sq m of GLA entered the market in 2015, comprising mostly of small space up to 5,000 sq m, with the exception of M Sas and Al Esayi Tower, which added 10,000 sq m and 7,800 sq m respectively. The development of small-scale projects reflects Jeddah’s role as a secondary business centre after Riyadh. While a significant amount of office space is scheduled to be delivered over 2016, (with a number of projects on Prince Sultan Street and King Abdulaziz Road, and the Emaar Square part of the Jeddah Gate development) further delays are expected and not all this space is likely to materialize.
Residential: the majority of the 20,000 new units delivered in Jeddah over the past year have been in the form of standalone villas and small apartment buildings. These projects bring total residential supply to around 789,000 units as of Q4 2015. Looking ahead at 2016 and 2017, major project completions such as Salman Bay Housing and several of Eskan projects are expected to add a significant number of units to the market in addition to stand-alone units. There have been no competitions of any major affordable housing projects in Jeddah over the last year. However, there are currently 15,000 affordable units now under construction within the Eskan and Salman Bay Housing developments, with a further 15,000 under planning.
Retail: Much of the retail space under construction in Jeddah lies to the North and East of the city, which both currently suffer from a shortage of quality retail space. Once complete, those centers will draw demand from their catchment areas, which may affect footfall, and consequently performance rates, in shopping centers in other areas. According to SAMA, the value of retail sales transactions across Saudi increased by almost 14% in the first 9 months of 2015 compared to the same period last year. The growth in sales turnover is representative of the strong demand for retail space, especially in Jeddah. Average retail rents have increased by 11.8% over the past year, with the strongest growth (8.3%) recorded in Q4 2015. Vacancy rates in Jeddah remained stable at 7% for the first half of the year, but increased to 11% by year-end as some older centers under renovation or lost tenants to better quality retail space.
Hotels: Many of the proposed hotels planned in Jeddah have also failed to materialize in 2015, with the only opening in the year being the Radisson Blu Plaza with just 112 keys. The service apartment sector has been more active. In addition to the Ascott Tahlia property opening in Q3 2015, two further properties by Ascott have opened in Q4 2015 including the Ascott Sari Street and the Citadines Al Salamah. The opening of three quality-serviced apartments in a short period reflects the positive outlook for quality serviced apartments and highlights a likely transformation of this market over the next few years. In Jeddah, almost 8,000 additional hotel rooms are expected to be delivered over the next three years, almost double the current stock.
