Office building boom hits rents in Saudi cities

New projects mean short-term pain for Jeddah and Riyadh office markets

New office space set to hit rents in Riyadh
New office space set to hit rents in Riyadh

The wave of new projects being undertaken in Saudi Arabia is weakening rents and sale prices at its commercial centres in Riyadh and Jeddah, according to CBRE.

The firm said that rental prices of office space in each city had declined during the first half of 2012 - in Jeddah by as much as 20%.

In Riyadh, around 1.2m m2 of space is currently being built in the new King Abdullah Financial City (KAFD) in the north of the city, which currently only has around 3m m2 of office space.

Just 600,000m2 of this is considered to be prime, Grade A space, although 800,000m2 is expected to come on stream within the next two years. CBRE said this means the short-term future for a market that already has vacancy rates of 15% "is likely to be challenging".

"The sheer volume of new quality space due to enter the market at KAFD alone seems likely to overwhelm this category in supply terms," it said.

Similarly, the amount of prime office space in Jeddah is set to double over the next two years, again placing pressure on rents. However, CBRE said that landlords are generally more resistant to the concept of reducing rents or offering increased incentives.

"This continues to be the case even in markets where excess supply imbalances are imminent."

In contrast, demand for housing is booming, fuelled by the country's rapidly-growing population. The government has set aside $67bn for 500,000 housing units - alongside the $45bn marked for education, $23bn for healthcare and $9.4bn for transport improvements.

Despite this, housing remains a "pressing issue", the firm said.

New mortgage laws aimed at protecting people from unscrupulous lenders are actually preventing people from accessing finance, it argued, and it is likely to take some time before the laws are tested in the market.

"At present, mortgages comprise around 2% of GDP compared to around 70% in the US or UK and this is likely to change little in the short term," CBRE said.

"Consequently, housing needs remain a pressing issue."

Demand for lower-cost housing is most acute, and contribtued to a 15% rise in apartment rents in Riyadh, compared with 10% for Villas. Shortages in Jeddah also meant that sale prices for villas increased by 10% despite around 5-10,000 new units being added during the first half of the year.

"Intense demand pressure for low-cost housing as yet unmet by the private sector has forced the government to step in, with the Saudi Pension Fund announcing plans to develop a giant housing project of 10,000 units in northern Jeddah," CBRE said.

"The project will comprise a mix of apartments and villas on a site measuring 2.6 square kilometres, although it is unclear as to when the project will be completed and contractors have yet to be appointed."

 

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