As a significant volume of new prime office space starts to enter the Riyadh market and the occupancy rate starts to rise, rental rates have started to edge downwards and incentives have started to become more widespread, a report said.

Headline rents offered at King Abdullah Financial District (KAFD) are high in comparison to existing market norms, but terms are flexible and there is room for negotiation on incentives, according to the latest Saudi Arabia MarketView by CBRE, a global real estate consultancy firm.

“In the existing prime office areas in the southern central areas, office rental rates are starting to come under downward pressure and new supply in these areas is forcing both lower headline rents and more generous incentive packages,” said Mike Williams, head of Research & Consultancy, CBRE Middle East.

In contrast to both these areas a number of business park projects that have recently emerged in northern Riyadh such as Granada Business Park, ITCC and Riyadh Business Gate have proved extremely popular, the report said.

“All three of these projects are either fully occupied or nearing full occupancy at strong rates and without significant support from incentive packages. These projects have successfully met market requirements by providing good access, parking and quality as well as being located in the northern parts of Riyadh that are attracting increasing interest,” added Williams.

According to the CBRE report, the supply of prime office space in Jeddah looks set to jump with the completion of The Headquarters Business Park in the second half of 2013, but growth in demand largely driven by government expenditure on infrastructure will likely moderate the threat of oversupply. Rental rates in Jeddah remained static in the first half of 2013 despite a slight drop in vacancy rates during the same period.

“International firms engaged in implementing government infrastructure projects will likely absorb much of the new and existing space, and there is likely to be a relatively balanced environment where neither supply or demand move significantly out of line,” commented Williams.

According to the MarketView, overall levels of economic activity in Al Khobar have historically been driven largely by Saudi Aramco, augmented by family firms and small branches of international or regional consultancies. Saudi Aramco has embarked on a transformation programme to become the world's leading integrated energy and chemical company by 2020.

In addition, the growth of the industrial city of Jubail has also driven the office market in Al Khobar as engineering firms enter the market in order to serve the three main drivers for economic growth in Eastern Province which are Saudi Aramco, Jubail Industrial City and Saudi Government infrastructure initiatives.

“As it relates to office space, supply, demand, quality and rental rates have all risen consistently since 2000 and there have been no reverses in any of these categories for over a decade. Rental rates in existing properties have remained virtually static since 2008, however, rental rates for local Class A space have risen, due largely to improvement in the quality of local Class A space entering the market,” added Williams.

“Rental rates for space that would be considered local Class A space now lie in quite a broad range from around SR800 per sq m per annum to SR1,300 per sq m per annum with the most recently completed buildings commanding the highest rents,” said Williams.

Residential market

The issue of available, serviced land is particularly pressing in existing urban areas, where land speculation has driven up prices of land zoned for residential use, the CBRE report said.

Given that the Ministry of Municipal Affairs has forecast that 88 per cent of Saudi Arabia’s inhabitants will live in urban areas by 2025, this issue is key to the newly launched National Urban Strategy and has led to calls for unused urban land to be utilised to meet housing needs.

“The rate of growth in residential rental rates does appear to have slowed in both Riyadh and Jeddah although there are naturally variations by property size, quality and location,” said William.

“In broad terms, the western and central areas of Riyadh have exhibited the strongest growth in the villa rental market, while growth in the apartment sector has been most rapid in central areas such as Olaya.”

The northern areas of Jeddah have grown the fastest in the villa sector while apartment growth has been most marked in the western areas close to the cornice, according to the CBRE report.

“The low-income and often industrial areas to the south of the city have actually experienced a fall in rental rates during the first half of 2013,” William observed.

The prolonged shortage of compound accommodation largely occupied by high-income expatriate workers in Saudi Arabia has caused many to examine the potential for this sector both in terms of purchasing existing cash generating assets or constructing new compounds.

Research undertaken by CBRE in this sector has revealed that operational costs are extraordinarily high as a share of gross income, and as a result of excessive land speculation, low density compounds with the necessary range of leisure and recreational facilities are extremely difficult to build at a price that would make them competitive with the long-standing compounds already operating in this sector.

“Hence, we are left with a situation whereby existing compounds are operating at full occupancy but there are virtually no new entrants to the market, either planned or under construction,” Williams concluded. – TradeArabia News Service