Saudi Arabia’s office market needs more high-quality space

Demand in Riyadh is flat, with only a handful of properties such as Al-Faisaliah tower, right, retaining high occupancy levels. (Shutterstock)
Updated 05 December 2018
0

Saudi Arabia’s office market needs more high-quality space

  • Saudi Arabia’s major cities and business hubs continue to suffer from a lack of the high-quality grade A stock
  • Rents for the lower-end and increasingly dated grade B space have softened, with potential renters put off by issues such as poor accessibility or lack of parking

LONDON: Office space rents remain under pressure in Saudi Arabia this year due to subdued occupier demand and a sluggish economy, according to a new report.
While the Kingdom recorded a pick-up in economic growth in 2018 due to improved oil prices, declines recorded in late 2017 still drag on the office-space rental market, the research published on Tuesday by real estate consultancy Knight Frank found.
Saudi Arabia’s major cities and business hubs continue to suffer from a lack of the high-quality grade A stock most sought-after by private and public companies.
Rents for the lower-end and increasingly dated grade B space have softened, with potential renters put off by issues such as poor accessibility or lack of parking. “The slowdown in the office market continued in 2018, as subdued occupier demand weighs on market-wide rents and occupancy levels; while key prime schemes continue to perform better than the average market as a result of limited stock of high quality assets,” said Raya Majdalani, research manager at Knight Frank.
Demand could recover in the longer term as reforms under the government’s National Transformation Plan and Vision 2030 begin to feed into the economy, the report said.
Economic growth is projected to reach 2.2 percent this year and 2.3 percent in 2019, according to the International Monetary Fund (IMF) estimates.
Urban regeneration initiatives such as mixed-use communities will act as a “catalyst” for the sector, Knight Frank said.
Demand in the capital city of Riyadh remains flat, with only a handful of grade A properties such as Kingdom Tower, Al-Faisaliah tower and Business Gate retaining high occupancy levels, the report found.
The King Abudullah Financial District is set to hand over phase 2 stock after 2021, which is expected to boost supply of quality space.
Average third-quarter Riyadh rents for grade A property stood at SR1,550 per square meter per year, while grade B rents stood at SR775 per square meter.
Renters in Jeddah are also waiting for a fresh supply of high-end office space, with the planned Jeddah Gate project, from the Dubai-based developer company Emaar, set to deliver about 230,000 square meters of high-quality office space in a mixed-use environment.
Knight Frank said that it remained “cautious” about the “timely delivery” of scheduled projects, adding it expects further delays given market conditions.
Grade A rents in the Red Sea city declined by 4 percent year-on-year and Grade B rents fell by 13 percent.


Liquidity squeeze hits sukuk sector

Updated 12 December 2018
0

Liquidity squeeze hits sukuk sector

  • US interest rate rises and the end of the Federal Reserve’s quantitative easing program have lessened dollar availability
  • Investors from developed markets are more reluctant to park their money in assets from further afield because the returns they can achieve nearer to home are increasing

BARCELONA: Shrinking liquidity as central banks rein in years of ultra-loose monetary policy is crimping both demand for sukuk as well as supply.
Last year, issuance of Islamic bonds, or sukuk, reached a record high of $95.7 billion, up from $68 billion in 2016, according to S&P Global Ratings, which forecasts 2018 issuance will total up to $80 billion.
US interest rate rises and the end of the Federal Reserve’s quantitative easing program have lessened dollar availability, while the European Central Bank’s decision to lower and then stop its own bond-buying program in December is exacerbating liquidity constraints.
“Liquidity that used to be channelled to the global sukuk market is becoming scarcer and more expensive,” said Dr. Mohamed Damak, senior director and global head of Islamic Finance (Financial Services Research) at S&P Global Ratings, who estimates Europe and the US provide 20-40 percent of sukuk investment.
“That will impact the capacity of sukuk issuers to the tap the sukuk market over the next 12 months.”
Investors from developed markets are more reluctant to park their money in assets from further afield because the returns they can achieve nearer to home are increasing in line with higher rates and a strong dollar.
“Whereas before when there was so much liquidity, investors were almost desperate in the hunt for yield and sukuk. Now, they’re a bit more discerning and spreads on emerging markets, including sukuk instruments, have started to widen,” said Khalid Howladar, managing director and founder of Dubai’s Acreditus, a boutique risk, ratings, regulatory and Islamic finance advisory practice. “You’ll see more discrimination coming into sukuk pricing.”
In the first nine months of 2018, sukuk issuance in Gulf Cooperation Council (GCC) countries totalled $26.9 billion, down from $39.8 billion in the prior-year period, according to S&P. GCC sovereign issuance fell by nearly half over the same period to $14.8 billion from $27.9 billion, although issuance by regional corporations rose 2 percent to $12.1 billion.
The decline in government sukuk issuance is partly due to the rebound in oil prices, analysts said, with crude now trading at more than $70; Gulf governments had historically funded their spending through energy receipts and conventional bank lending, with little need to issue debt, but the slump in oil prices from mid-2014 forced a rethink.
Saudi Arabia began issuing debt for the first time since the 1990s after falling into deficit and has now sold $11 billion of sukuk — $9 billion in April 2017 and $2 billion in September 2018, plus $41 billion of conventional bonds since 2016, according to Reuters. These have helped Saudi Arabia fund its budget shortfall, while the Kingdom has also spent some of its foreign reserves, which fell from 2.75 trillion riyals at 2014-end to 1.90 trillion riyals in September 2018.
Although now less of a necessity, Saudi Arabia and other Gulf governments may issue more sukuk do so in order to support their fledgling Islamic capital markets.
“Bahrain, Oman and to a lesser extent Saudi (Arabia) are still facing deficit pressures,” said Howaladar. “But nonetheless, the pressure is less and so that borrowing urgency has diminished.”
Bank lending has always dominated the market, but the private sector is increasingly keen on diversifying its funding sources so as to not be as dependent on banks, he said. “Globally, Islamic banks are growing faster than their conventional counterparts, so whether you want to do a sukuk or Sharia-compliant financing the bank market is still open,” added Howaladar. “Bond and sukuk markets get more attention, but banks are still able to offer Sharia-compliant financing for their customers.”
UAE sukuk issuance has grown in 2018, rising to $6.4 billion as of Sept. 23, versus $3.3 billion in the prior-year period, according to S&P. The country’s markets regulator this year issued new sukuk regulations that have helped bolster supply, said Raffaele Bertoni, head of fixed income investment at Kuwait-based Gulf Investment Corporation, a supranational financial institution co-owned by the six nations of the GCC.
A large part of the UAE’s 2018 issuance is from real estate companies seeking to optimize their financing structure with a better mix of sukuk and bank debt ahead of Dubai hosting the multibillion-dollar Expo 2020, he said.
“Several new real estate projects are in the last phase of completion, and sukuk represents an efficient and more convenient financing structure compared to conventional bonds or even bank loans,” Bertoni added.
Corporations that prefer sukuk funding due to religious considerations will continue to issue Sharia-compliant debt despite the growing expense, said Sharjil Ahmed, a Dubai-based Islamic finance specialist and fintech strategist.
“But other issuers who opted for sukuk because of attractive pricing may shift to wherever they can obtain cheaper funding,” he said.
As well as tightening liquidity, a lack of standardised Sharia regulations and geopolitical concerns have slowed sukuk issuance in 2018.