How Did Saudi Real Estate Perform in 2013?

Massive government spending is driving Saudi Arabian real estate growth, says Dr. Tobias Plate, senior partner at Roland Berger Strategy Consultants Middle East.

The Saudi real estate market experienced robust growth in 2013 led by the residential market with demand being supported by higher levels of credit, lower unemployment and better market confidence pushing house prices further. This housing market boom is expected to continue for the next years given the government’s massive investments in affordable housing projects, the establishment of the Ministry for Housing, and the passing of the new mortgage law.

Riyadh – Housing gap remains while office market prices drop due to oversupply

Residential stock in Riyadh increased by 2.5 per cent to approximately 940,000 units in 2013.The government’s initiative to deliver thr first parts of the SAR250 billion affordable housing programme is expected to grow this stock by an additional 10 per cent until 2015. In addition, activities by large players such as the Al-Habib Group or Dar Al-Arkan will add further capacity to the market. Nevertheless, the current undersupply is expected to remain and the average rental prices to increase accordingly (two per cent for villas and four per cent for apartments in 2013).

Riyadh’s office market has experienced a mixed performance with oversupply (vacancy rate of 18 per cent in 2013) expected to intensify with the delivery of several projects in 2014 such as the initial phases of King Abdullah Financial District (KAFD) and the Information Technology Communications Complex (ITCC). The average rental fee decreased by 7.5 per cent year-on-year in Q3 2013. The expected new units will add up to 500,000 sqm to the current stock of approximately two million sqm of qualified space putting further downward pressure on prices. Much like Dubai, the “flight for quality” trend with tenants upgrading to offices with better specifications in prime locations is expected to continue.

The retail market in Riyadh saw only minor additions to the existing mall retail space in 2013, like at Ethra Mall in Southern Riyadh, resulting in a total stock of approximately 1.3 million sqm of mall retail space. However, ambitious expansion plans of groups such as Al-Hokair are expected to grow the stock up to 1.8 million sqm within the next three years adding to the downward price pressure on rental fees in less performing malls.

Jeddah – Strong demand in a market with room for more retail space

In Jeddah, the supply of residential units rose by two per cent only (with the expected total stock of 750,000 units by end of 2013) worsening the existing shortage of housing. Accordingly, average sales and rental prices increased by three per cent to five per cent depending on the area. This trend is expected to continue led by high leasing demand for apartments by expats and increased buying demand for middle price units by Saudi citizen.

Supply of office space in Jeddah saw a significant increase of 12 per cent bringing the total stock to approximately 740,000 sqm.

Despite the increased supply, rents for both Grade A and Grade B office spaces have increased slightly (approximately two per cent year-on-year increase of average rent) due to a strong uptake of demand from both private and public sectors. As a result vacancy rates went down to a mere 14 per cent in Q3 2013 from 20 per cent in Q3 2012. This trend is expected to continue given an improved regulatory environment resulting in further enhanced demand for office space in Jeddah.

Retail space in Jeddah saw the opening of Flamingo Mall and the re-opening of Red Sea Mall after the recent fire. The stock of mall retail space grew by eight per cent to 840,000 sqm while there is still a strong demand for new spaces from retailers in Northern and Northeastern Jeddah to serve the upcoming local residential communities.