_Saudi Arabia - Riyadh commercial market review

Government entities remain the largest occupiers of office space in Riyadh. Given the current market conditions, we are likely to see them restructure and downsize their operations as the kingdom cuts public spending. This comes after the government announced its plans to reduce its spending on public wages to 40% of the budget by 2020 from 45%. In addition, the government aims to cut one-fifth of its civil service.

شعبان 04, 1438

In the long term however, and as the kingdom looks to diversify it’s economy and accommodate its large young population moving into the labour force, demand for office space is likely to pick up in the capital. Future demand is expected to stem from the financial sector as Riyadh looks to position itself as a global financial centre.

Supply

The total stock of office space in Riyadh is currently at 2.4 million sq m GLA. This is expected to increase to reach 3 million sq m GLA by the end of 2018. However, given current market conditions we are cautious about the delivery of projects within the specified timeframe and expect further delays. Key to the development of the Riyadh commercial market is King Abdullah Financial District which, when complete, will dramatically change the dynamics of the market by offering a best in class mixed use product. Due to delays in handover any major effect on Grade A rental rates will be smoothed as the supply is phased into the market from 2018 onwards.

Performance

Average rental rates remained fairly stable throughout 2016 with marginal declines witnessed across Grade B stock. Due to the historic lack of good quality commercial premises, Grade A rents have remained flat over the last 12 months, underpinned by high occupancy rates.

Looking ahead, Riyadh’s office market is expected to become increasingly tenant favorable as new projects are delivered, the majority of which are Grade A. Faced with a softening in demand, landlords are likely to be become flexible in their approach to leasing in order to retain and or attract good quality tenants.

As a result Grade B rents will continue to fall throughout 2017 while Grade A rents will come under downward pressure in line project completions. That said due to the lack of Grade A stock in the market and the delay to King Abdullah Financial District, any reduction in rents could be offset for approximately 12 to 24 months.

Currently Grade A rents stand at SAR 1,300 per square metre per annum while Grade B rents stand at SAR 800 per square metre.

Overall vacancy rates were relatively stable at 15% throughout 2016 however this is expected to increase over the next 12 to 24 months as more space is delivered to the market. As supply increases we expect a two tiered market to develop where buildings situated in better locations with flexible floor plates and generous parking ratios will command premium rents while secondary assets will see larger falls in rental values and increases in vacancy rates.

Click here for the full Saudi Arabia Offices Market Update - H2 2016