Analysis

JLL Report: Affordable housing boosts Riyadh market

JLL looks at how Riyadh’s office, residential, hotel and retail markets fared in Q1 2018

The focus on providing more affordable housing continues in the Saudi capital, with the Ministry of Housing announcing it distributed 15,272 affordable residential products in Riyadh during Q1 2018. This total comprises completed units (787), off-plan residential units (7,235), developed residential land plots (25) and subsidised housing loans (7,225). Moreover, a new US-Saudi consortium was announced in March 2018 to build 25,000 housing units in northern Riyadh. This project will further increase the supply of affordable housing and promote higher home ownership in coming years.

Supply

Almost 7,500 units completed in Q1 2018, bringing total residential stock to 1.26m units. Notable completions in Q1 2018 included the Malaga Project by Gulf Real Estate (148 apartments and 18 villas), the Darraq DQ phase 4 by Our Hospitality (45 apartments and 41 villas), the Nuzul Fatin by Horses Architecture (33 apartments), the Jomanah Plaza (56 apartments) and the Khouzama villas by AI Bani (14 villas).These new completions are in northern Riyadh districts (AI Malaga, Diplomatic Quarter, A IKhouzama and As Sahafah).

While some developers are expanding their upper quality offering, most remain focused on the affordable sector of the market. Future supply in 2018 and 2019 is expected to be 22,000 and 29,000 units respectively. Likely completions this year include DAMAC Tower by Paramount (252 apartments), AI Bayt 53 block 83 (235 apartments), DAMAC Esclusiva (189 apartments), Malathek l.a (160 apartments), Aali Ar Riyadh (85 apartments), Malathek l.a (85 apartments), Canary AI Khozama (54 villas), M Residence (48 apartments) and AI Bani Sulaimaniah mixed-use project (24 apartments).

A number of housing projects announced by the Ministry of Housing received good reservation rates, including Dawaween Aljazira (Southern Riyadh, 4,500 units), East Gate (Eastern Riyadh, 7,000 units) and Diyar AI Saad (Northern Riyadh, 577 units). These projects are expected to increase affordability in Riyadh once completed.

Performance

According to data from the Ministry of Justice, the number of apartments sold in Riyadh increased 15% in Q1 2018, relative to last year. Despite this increased activity, sale prices continued to decline by 1.5% q-o-q and 3.2% y-o-y. The number of villas sold increased slightly by 3% in Q1 2018 compared to last year, as sale prices declined 2.2% q-o-q and 6% y-o-y.

The rental market also softened further, with continued declines reported in all sectors. Apartment rents declined 0.9% q-o-q and 5.1% y-o-y, while villas rents decreased 1.7% q-o-q and 5.1% y-o-y. The introduction of VAT and the new expatriate dependent fees pushed some expatriates to repatriate their families and relocate to smaller one-bedroom or studio units.

The dependent fee, launched in July 2017 at $27 per dependent per month, is expected to increase to $53, $80 and $107 in July 2018, 2019 and 2020 respectively. Saudi families may also seek smaller villas, as women’s ability to drive will reduce the need for family driver rooms over time.

The introduction of the new Ejar unified contract facilitates the ability to collect rent and should strengthen demand from investors as the residential sector becomes a more investable grade asset across Saudi.

Office Space

The Municipality of Riyadh is expected to launch 1,100 smart parking spaces in the area between Olaya Street, King Fahad Road, Urouba Street and Khurais Road in the coming months. This initiative is aimed to increase parking provision in the central area, which currently has limited options. This should have a positive impact on demand for properties located along the major commercial roads covered by the initiative.

The northward expansion of the office market continues to accelerate. The Ministry of Health is expected to relocate from central to northern Riyadh by leasing two towers in the Ra’idah Digital City (RDC) in the Al Nakheel District, with an annual rent of more than $26.3m under discussion.

Supply

There were no major completions in Q1 2018. Three small completions of the Maather Project (3,500 sqm), the Bani Sulaimaniah mixed-use project (2,000 sqm) and the Ammar Tower (4,000 sqm) brought total office space in Riyadh to 3.9m sqm.

The Riyadh market is expected to exceed four million sqm of GLA by the end of this year. Likely notable completions this year include the Majdoul Tower (75,500 sqm), Rajhi Tower (30,000 sqm), Malathek 1 (20,000 sqm) and Cayan Mefic Centre CMC (12,000 sqm). This represents a significant level of new supply, with supply generally exceeding demand at present.

The most significant new office project in Riyadh is the King Abdullah Financial District (KAFD), which has the potential to totally transform the current office market. While the first stage of this project is physically complete, no decision on the release date has yet been made.

Performance

Office rents in Riyadh have remained largely unchanged over the past year, with the weighted average currently standing at $346, which marks no change to rent on either a y-o-y or q-o-q basis.

JLL has improved its performance basket to include a number of new buildings and removed certain older and poorer quality buildings. As a result of this revision and the decision of the Ministry of Health to take two towers in the ROC project, vacancies declined to 9% in Q1 2018, a 6% improvement. While the market is likely to remain relatively stable in the short term, the delivery of the KAFD has the potential to result in an oversupply situation that could place downward pressure on rents.

Retail and Hotel

The retail sector experienced little effect from the introduction of VAT in Q1 2018. However, rents and occupancies both softened because of lower consumer purchasing power and the departure of some expatriates. The value of transactions in Riyadh increased by 5% YT Feb 2018 compared to the same period in 2017, indicating continued strength in this sector.

‘Shoppertainment’ continues to be a hot topic in the retail industry, with the opening of the first cinema in Riyadh (within the KAFD) scheduled for late April. The hotel sector is expanding its current stock of almost 12,300 keys (as of Q1 2018), with 1,900 keys scheduled to complete by the end of the year.

The main indicators recorded a small improvement over the first two months of the year, with occupancies increasing by 6% and ADRs by 3%, compared to the same period in 2017. However, the hotel market could experience further downward pressure over the remainder of 2018. With the increased use of virtual meetings affecting the currently dominant corporate sector, growing the demand for leisure tourism is critical to the sector’s long-term success.

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