Continued economic and social stimulus initiatives drive growth in KSA real estate sector
| January 15, 2019
-Office: Greater demand for office space catering to SMEs and start-ups in the capital in line with initiatives to stimulate private sector growth
-Hospitality: Hotel occupancy up 3% year on year in Riyadh, with 5,760 keys to be delivered before 2022
-Residential: Existing supply in Riyadh stood at 1,252,000 residential units in 2018 with an expected delivery of a further 130,000 units before 2022.
-Retail: Oversupply is a challenge, but growing entertainment sector presents promising opportunities for diversification of retail portfolios in the capital
Despite large office supply deliveries expected in the city, Riyadh is continuing to witness demand for office space that caters specifically to SMEs and start-ups according to new data released by global real estate consultancy firm CBRE. Total office stock in Saudi Arabia’s capital stood at 4.2 million sqm of gross leasable area (GLA) by the end of 2018, with an additional 870,000 sqm of GLA expected to be delivered by 2022.
Increasing demand from SMEs follows a number of Government-led initiatives aimed at stimulating private sector growth and promoting a spirit of innovation and entrepreneurship in line with Vision 2030. CBRE’s Market Snapshot for 2018 also highlights a growing trend towards office supply as part of mixed-use projects. This trend is anticipated to shift the dynamics and performance of office space in Riyadh. Despite the positive long-term outlook, rental performances have continued to record pressures within both the primary and secondary office locations with rental rates down 4% and 7% year-on-year respectively. However, increased incentives by landlords, discounts for long-term leases, energy efficient units and unique design offerings are expected to help mitigate declines in the market.
The hospitality sector in Riyadh is broadening due to the country’s fledgling entertainment sector, according to CBRE. Traditionally the capital’s hospitality industry has been driven by the corporate market. However, the recent change in legislation to promote tourism in the country in addition to investments in leisure and entertainment, has enhanced opportunities for more diverse stock in the medium and long-term. In the short-term, CBRE states that it expects daily rates to remain under pressure given the volume of supply that is due to enter the market in the next few years. According to CBRE’s Market Snapshot, more than 5,000 keys are expected to be delivered to the market by 2022.
Simon Townsend, Head of Strategic Advisory at CBRE MENAT and General Manager, CBRE KSA, said: “The recent economic and social initiatives and legislation introduced by the Saudi Government have already had an extremely positive impact on the country’s real estate sector. Meanwhile, the increased Government spending on large-scale infrastructure and mega-projects is expected to further stimulate the overall market, with a positive trickling down effect on all key sectors. Oversupply remains a challenge, however the innovative spirit employed by the Government and private entities alike demonstrates the encouraging direction that the sector is moving in and the promising opportunities that exist across all asset classes.”
CBRE figures reveal a current supply of 1,252,000 residential units with an expected delivery of 130,000 additional units by 2022. Demand reflects an ongoing focus by the Government to provide citizens with increased affordable housing options. The Saudi Ministry of Housing has been particularly active in meeting such demand through a number of programs including the ‘Sakani’ initiative aimed at increasing the national rate of home ownership to 70% by 2030. The Government has also signed a number of PPPs to develop affordable housing units.
Rental rates within the retail sector have fallen - with super regional and regional mall rental rates down 7.5% year-on-year according to CBRE’s Market Snapshot report. However, the introduction of cinemas and other entertainment offerings into the city’s malls is likely to increase footfall in the long-term. The growing prevalence of omnichannel retail and the entry of new APAC brands into the market will further stimulate the capital’s retail sector. The report suggests that diversification will prove key in the coming years with an expected 320,000 sqm of GLA expected to enter the retail market by 2022.