Market View: CBRE H2 2011 Saudi Arabia
This report was prepared by the CBRE Bahrain Research Team, which forms part of CBRE Global Research and Consulting – a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. HOT TOPICS Despite a huge uplift […]
HOT TOPICS
- Despite a huge uplift in public sector spending through 2011, the Government of Saudi Arabia still announced a budget surplus of over $80 billion.
- Office rental rates in Riyadh stayed reasonably stable in 2011 but both rate and occupancy are expected to come under severe downward pressure through 2012 and 2013 due to new supply.
- Despite pressure for the private sector to address the needs of the affordable housing sector, little progress has been made due to the lack of available mortgage finance and rampant land speculation.
- Residential compounds have also come under demand pressure with the result that there is little available supply and rental rates have spiked. Again, there is significant new supply in the development pipeline with the result that pressures should moderate over the next two years.
OVERVIEW
Saudi Arabia continues to perform well in macroeconomic terms, largely as a result of high oil prices and the Kingdom’s ability to step up production to cover for countries impacted by regional unrest.
GDP growth in 2011 was estimated by the Finance Ministry to be around 6.8%, the fastest rate since 2003 and well above the 5.1% forecast made in November.
However, the Government also increased public expenditure during the year, to a record US$214 billion, 39% more than originally planned, but made possible by the oil income windfall and made expedient by the pressures of the ‘Arab Spring’ which has brought issues of social inequality sharply into focus across the region.
Despite the high levels of public spending and substantial Government employee wage rises, the Kingdom posted a budget surplus of US$81.6 billion, and inflation actually fell during the year to 4.7% – down from 5.3% in 2010.
Plans for the massive redevelopment programme for central Makkah have been announced and include the compulsory acquisition and destruction of 7,000 properties during 2012.
Ultimately, the project will offer a fully integrated transport system to include trams and ring roads and to incorporate expansion of the Grand Mosque.
As part of the surge in infrastructure spending, the Government has also committed to spending US$2.9 billion on 284 road projects in 2012, including laying over 4,000 kilometres of new roads and studies on a further 2,000 kilometres.
Despite the willingness to spend significant amounts on infrastructure, the Contractors Committee at the Jeddah Chamber of Commerce and Industry estimated in December 2011 that there were around US$150 billion worth of delayed public projects.
The main problems were cited as lack of funds, manpower, contractual disputes, building material prices, Government bureaucracy and consultancy mechanisms.
GDP and GDP Growth, Saudi Arabia – 2000 to 2012. Source: IMF
During H2 the Government announced the implementation of an unemployment benefit scheme known as ‘Hafiz’ for which 700,000 young Saudi men and women qualified.
Unfortunately, the payment levels are significantly in excess of the amounts that employers are paying expatriates at present, thus having the impact of disincentivising young Saudis from working and employers from employing them.
OFFICE MARKET
Riyadh
The ‘Local Class A’ office market is increasingly being dominated by increasing levels of oversupply and moderate levels of demand, while there remains strong demand and a shortage of supply in the two ‘International Class A’ properties – Kingdom Tower and Faisaliah.
There is a marked separation in pricing and occupancy rates between these two groups, with Riyadh’s two ‘iconic’ office projects enjoying full occupancy with waiting lists and rental rates at over SR2,000/sqm/pa, while Local Class A rates typically hover at between SR1,200 and SR1,400/sqm/pa.
Riyadh’s office market improved slightly in 2011 in terms of rental rates and occupancy levels due largely to strong macroeconomic circumstances in the Kingdom, which were sufficient to override the continued weak global economic dynamics and new supply entering the market in 2009 and 2010.
The largest single development of new Class A space is in King Abdullah Financial District where it was widely hoped that the GCC central Bank would be located. However, the sheer volume of space entering the market would seem to present a significant challenge for this sector.
Numerous other centres in the Middle East have pursued the strategy of seeking to become the region’s leading financial centre in recent years, including most notably Dubai and Doha.
Class A Office Space Lease Rates, Riyadh – 2007 - 2011
In both Dubai and Doha there is now a glut of ‘prime’ space as Bahrain has maintained much of its grip on the financial services sector, certainly in terms of Islamic Finance, due largely to its well-regarded regulatory environment and ratings.
The growth in the supply of prime space in Riyadh is taking place in the context of a depressed global economy in which international firms including banks are seeking to cut overheads including staff and accommodation costs. Only the most bullish firms, with the deepest pockets, are seeking expensive expansion space in the short term. Without agreement on currency convergence in the GCC the presence of a GCC Central Bank in Riyadh also seems unlikely in the short term.
Supply of Class A Space, Riyadh – 2005 to 2013
Nevertheless, we may see a ‘flight to quality’ in the office market over the next few years as prices become increasingly competitive. In this environment we may see lower quality, or Class B space become redundant or be redeveloped for other uses. There has also been a locational shift in Class A space in Riyadh, with the gradual northerly migration suiting most of the new commercial office projects in the city.
Retail Sector
Similar to much of the Middle East, spending time in shopping malls in Saudi Arabia has become a key pastime over the last decade, largely because they offer easy access and plentiful parking, a temperature controlled environment and family-oriented entertainment at relatively low cost.
Malls are becoming larger and offering more sophisticated entertainment options – to the extent that Dar Al Arkan has recently announced the creation of a ‘snow village’ in a south Riyadh mall located in a relatively low-income area.
New malls actually need to achieve one of two main objectives to succeed – either capture the family or female markets who view the mall as a leisure/ entertainment option or successfully achieve the one-stop shop approach of the ‘community mall’.
In the coming years it is very likely that we will see developers approach the market in one of these two ways. They will either build the ‘Super Regional’ malls that act as entertainment destinations and cannibalise the tenant market, or they will build the ‘community’ or ‘neighbourhood’ malls that are convenient to each sub-community, serving immediate needs through the presence of a hypermarket and other convenience outlets/service providers.
RESIDENTIAL MARKET
As the supply and demand gap continues to widen in the Saudi housing sector, affordability, access to mortgage finance and the lack of suitable products remain the key barriers to home ownership amongst Saudi nationals.
Saudi Arabia has the largest real estate market in the GCC, but the least developed mortgage market, and this has resulted in a shortage of owner-occupied residential housing, particularly at the lower end of the income scale.
Saudi Arabia’s mortgage penetration rate is estimated at around 2%, while markets such as the UAE have rates at around 14%.
Even this figure is well below mature western markets such as (for example) the United Kingdom where the penetration rate is currently around 70%.
Riyadh
Despite the shortage of housing, apartments continue to be unpopular with Saudi nationals for a variety of reasons including lack of privacy, legal structures for ownership of common areas, the inability to expand accommodation and the lack of secondary trading which would allow owners to move up and down the property ladder.
However, the high cost of land, the urban sprawl that is taking place in Riyadh, and a softening of conservative attitudes may have the impact of altering this historic position.
In other less conservative centres in the region such as Dubai, Abu Dhabi, and Doha, the high cost of land, the large expatriate communities, transportation problems and the availability of services and transparent legal structures have encouraged a move to apartment living, particularly amongst the expatriate populations.
However a review of ‘luxury’ apartments for rent in Riyadh has revealed that there are virtually none available, certainly when compared with other major cities in the region.
The highest quality apartments for rent are available at rents around 26% the level of top-end rents in Doha, for example.
This is in the context of a tiny number of quality apartments for rent and indicates that the market for this particular product continues to be very weak at present.
The demand for expatriate compounds in Riyadh is very strong at present, with very high occupancy and rapidly growing rents, partly due to a current mismatch between demand and supply.
RESIDENTIAL MARKET
There has been virtually no compound development in the last decade whilst there has been a surge in demand during the same period, partly arising from general macroeconomic growth and expatriate executive employment opportunities.
However, this is not the case looking forward, while macroeconomic indicators remain favourable, there is a significant volume of new compound units due to enter the market in the next few years, sufficient to ease demand/supply pressures and rental rates.
Jeddah
Similar to Riyadh, most housing developments in Jeddah take place on a relatively small scale, with developers typically building projects comprising no more than 30 units. This is partly the result of the lack of available development finance and restrictions which mean that developers are not able to apply downpayments to cover construction costs.
Apartment development has long been relatively popular on the corniche, but these units have historically been favoured by buyers from Riyadh who use the properties for second home summer residences.
Apartments have been built for primary home users in central Jeddah but take-up to date has been weak and there have been widely publicised problems between owners unable to agree to common area charges and management. In many cases, owners have publicly stated that they ‘regret’ such purchases and unless legislative changes are made this particular market opportunity is likely to remain somewhat stunted by negative publicity.
With land prices in Jeddah being largely over-speculated similar to other major centres in the Kingdom, developers have found it hard to address the needs of the affordable housing sector and therefore developments for sale in Jeddah continue to be focused on the middle income sector with reasonable levels of success.
The level of pent-up demand for housing from any sector capable of servicing a mortgage is substantial given the extremely low levels of mortgage penetration in the market at present.
The strong economic performance of Saudi Arabia which is likely to carry on through 2012 as a result of ever increasing oil prices is likely to continue to stimulate expatriate employment particularly at senior executive level.
Consequently, and similar to Riyadh, the demand for expatriate compound housing in Jeddah currently far exceeds demand especially for the better quality, well maintained properties.
