Saudi Arabia's retail sector will witness exponential growth in coming years, driven by increasing urbanisation trend, favourable demographics and westernised consumption patterns, according to KPMG Al Fozan & Partners, a leading audit, tax and advisory services provider in the kingdom.

The kingdom's focus on developing the entertainment and tourism sectors and the aim of becoming a global economic powerhouse and an international business hub is transforming two of its major cities, Riyadh and Jeddah, into world-class retail destinations, stated the expert in its latest real estate report.

On the capital Riyadh, KPMG Al Fozan & Partners said the total gross leasable area (GLA) last year reached over 2.1 million sq m with additional new retail space of 320,000 sq m expected to be delivered in 2019. The total retail space in the capital city is expected to reach up to 2.7 million sq m by 2021.

Though the retail sector continues to be strong despite the effect it experienced from the introduction of the value-added tax (VAT) in January 2018, lower consumer purchasing power led to a decrease in rental rates by 5 per cent and 10 per cent across different areas of the city.

The report revealed that the rents were likely to remain under pressure until the end of 2019.

Rental rates continue to be higher in regional and super-regional malls compared to community malls, driven by higher footfall. However, average vacancy rates rose to 15 per cent across all mall categories by 2018-end, it stated.

Firas Hassan, head of real estate at KPMG AL Fozan and partners, said: “Although a high amount of retail space is expected to enter the market, there is still demand for retail space in Riyadh.”

“This demand stems from the increasing number of international brands willing to open stores since the opening up of the economy and growing awareness of international brands within the general public,” Hassan added.

Prince Turki Ibn Abdul Aziz Al Awwal Road, Northern Ring Road, King Abdul Aziz Road and Abi Bakr Al Siddique Road are the new destinations for the upcoming retail developments and shopping centres.

On Jeddah, KPMG Al Fozan & Partners said the demand for retail space was rising in the city, supported by a high population base, elevated disposable income and changing lifestyle.

The current retail supply is dominated by super-regional malls and is estimated at 1.41 million sq m. This includes recent completions such as Al Marwa Plaza, the second expansion of Red Sea Mall, and Marina Avenue, it stated in the report.

“The market is anticipated to witness the delivery of nearly 400,000 sq m in the coming two to three years given the delay in under construction projects, which were scheduled to be delivered in 2018, coupled with other forthcoming projects," remarked Hassan.

The Jeddah Park and King Avenue Mall are the most prominent forthcoming projects. Other under construction projects include Obhur Mall, Atelier Lavie and Sunset Avenue.

Rentals for regional malls registered a modest decline of four to five per cent owing to the decreasing demand for this asset class. However, new upcoming supply (if delivered as announced) is likely to put pressure on the rental rates.

The rental rates of community malls range between SR1,800 ($479.88) per sq m and SR2,400 ($639.84) per sq m, while the lease rates for super-regional malls range between SR2,700 ($719.82) per sq m and SR3,500 ($933.10) per sq m.

"With new residential communities being set up, we expect the new population in the area to feed into the demand for retail space," stated Hassan.

"We still see an opportunity in developing super-regional malls that can serve as destination malls, equipped with advanced entertainment facilities, and vast range of F&B offerings," he added.-TradeArabia News Service