Riyadh property market set to develop strongly

Cluttons, the real estate specialist, which has enjoyed a dedicated Middle Eastern presence since 1976, yesterday announced its most recent market report for Saudi Arabia. This report is released in conjunction with the firm's participation at Cityscape Riyadh 2012 and covers the office, retail and hospitality sectors in some detail. In summary, the report finds that the real estate market in the Kingdom, in particular Riyadh, is currently being driven by a number of master-developed projects which will increase the volume of stock in the marketplace significantly.
Saudi Arabia's economy remains robust as a result of sustained high oil revenues and continued government spending on infrastructure, health care and education projects in a bid to diversify the economy away from the petrochemical sector. A key milestone in the development of the real estate market has been the approval of the mortgage law, which will open up the possibility of home ownership to a larger proportion of the market. This, coupled with increased regulation, will help move the market forward in a positive manner.
Historically, office stock in Riyadh was located along King Fahd Road, which is the location of two of Riyadh's prime office developments, Kingdom Tower and the Faisaliah Tower. However, due to increasing congestion, poor car parking and impractical floor plans, a number of 'out of town' office developments have been completed in 2012, such as the Riyadh Business Gate.
This migration northward will become even more evident in 2013 as the initial phases of the King Abdullah Financial District (KAFD) and the Information Technology Communications Complex (ITTC) release 800,000 sq m onto the market.
A total of 180,000 sq m of accommodation was added to the Riyadh stock in 2012 with a further 1,000,000 sq m in the pipeline for the end of 2014. The impact of the release of this additional development remains to be seen, but many commentators predict that this will place increasing negative pressure onto a market where vacancies currently are running between 15-20 percent and downward movement is being seen in rents in all but the prime buildings. Many are considering taking drastic action and converting office buildings to the hospitality sector, where the supply demand balance is not as great.
The retail environment continues to be an important part of life for the Saudi family, as malls remain the main entertainment focus and leisure destinations, leading to a number of different retailing formats being developed across the Kingdom. These include mega destination malls, which tend to be anchored by a food hypermarket and offering a mix of international brands. Examples of such malls within Riyadh include Riyadh Gallery, Saharah Plaza and Khurais Mall, all of which offer an excess of 10,000 sq m of retail accommodation.
Other retail forms include specialist and inline retail offerings located along arterial routes, such as the new Prestige Centre on Takhassasusi Street that launched in 2012 and neighborhood retail outlets, such as those in the north of the capital that service the needs of the local community.
A key retail type outlined in the report is the mixed-use retail scheme, such as the Kingdom Centre and the Faisaliah which have dominated the 'high end' market and have been operating at close to 100 percent occupancy in 2012. Over the short- to medium-term, this segment will see an increase in stock through the commissioning of the retail elements of the King Abdullah Financial District (KAFD) and a number of other large mixed-use schemes such as the Information Technology Communications Complex (ITTC) that will bring 200,000 sq m of space to the market to dominate future supply in 2013. By 2015, organized retail stock is expected to top 1.5 million sq m should all of the pipeline schemes come to market.
Unlike in the western and eastern regions of the Kingdom, the business tourist generally drives the hospitality sector in Riyadh. This has meant that the city traditionally has lagged behind other areas of the Kingdom, which in turn lead to a flood of new developments entering the market in 2011, increasing stock to in excess of 7,000 bedrooms, across all star categories. Unfortunately, this supply came on stream as demand slowed, leading to considerable downward pressure on Average Daily Rates (ADR) and occupancy levels which are currently hovering at around SR 1,000 with occupancy levels at their lowest ever level of 60 percent.
It is unlikely that this downward trend will be reversed in 2013, given the short- to medium-term supply pipeline in this sector, which is set to see 5,000 bedrooms come to the market in the next five years. This increase in stock is focused in the 4 to 5 star market. Future hotspots for new projects include a number of the major master developed mixed-use schemes such as the King Abdullah Financial District (KAFD), Riyadh Business Gate, the Information Technology and Communications Complex (ITTC) and the Granda Business Park.