All real estate sectors continue to soften over Q3 2017, highlights JLL’s Q3 market overview report
Retail sector sees growth in sales and increased participation by women in the workforce
Riyadh, Kingdom of Saudi Arabia –30 October 2017: With retail sales continuing to increase, this could be the first sector to recover in Riyadh real estate market, highlights JLL’s Q3 market overview report. As the government launched the USD 2.6 billion entertainment company in September, Shoppertainment remains a key concept in the retail industry among entertainment, leisure and F&B tenants.
The growing participation by women in the workforce in Riyadh increased 1% quarter-on-quarter, to reach a total number of 397,000 women currently employed. Furthermore, recent laws introduced to allow women to drive from 2018, will likely increase the spending power of women in Saudi, resulting in increased demand for retail space.
“The government’s agenda very much focuses on expanding the tourism and entertainment sector. As a result, government spending has increased in these areas, as shown by the launch of the entertainment company in September,” said Eng. Ibrahim Albuloushi, National Director and Country Head, JLL.
“Furthermore, while the development market has been subdued, there remains increased growth in investment across all real estate sectors. Two new REIT’s have been listed on the Saudi Arabian stock market during Q3, bringing up the total REIT’s listed to six. A number of these REIT’s are currently seeking to acquire additional properties in Saudi Arabia, which will aid in boosting the real estate sector,” he added.
The hotel sector remains heavily dependent on business tourism and travel, but the Kingdom aims to diversify the economy from its dependency on oil and on the business tourism sector to include leisure and entertainment. These economic ambitions are expected to benefit the hospitality sector in the long-term.
The residential market has experienced further downward pressure in the rental sector as a result of continued expatriate departures. However, the affordable housing sector has witnessed positive activity as the result of the ongoing efforts by the Ministry of Housing to increase home ownership, in line with the National Transformation Program.
The office sector saw a modest decline in both occupancies and rentals. The market is most likely to witness further declines with the eventual introduction of the King Abdullah Financial District offering a significant amount of office space. Furthermore, private developers are reluctant to build additional office space given the current climate.
Sector summary highlights – Riyadh
Demand for office space from International corporate tenants has declined over the past year, as spending on major infrastructure and development projects has been scaled back or delayed. Future demand for office space will be heavily dependent on the upcoming 2018 budget (expected on December 2017) and the potential recommencement of some of the public projects in Riyadh.
Q3 2017 witnessed the completion of approximately 67,000 sq m of office space including Administrative Palaces by Ajlan (32,000 sq m), the office portion of Square 6 by Al Habdan (21,000 sq m), Oud Square by Al Hudaib (5,700 sq m) and the office portion of the Residence (4,600 sq m) and the Wahat At Tafaseel (4,000 sq m). There are no further major completions expected over Q4 2017, with the only scheduled delivery being the office portion of the Edhafah Tower (9,000 sq m).
The level of new supply is expected to increase significantly, with around 650,000 sq.m currently scheduled to complete in 2018, including Majdoul Tower (75,000 sq m), Ar Rajhi Tower (30,000 sq m), Cayan Mefic Center (12,000 sq m) and Malathek 1 (20,000 sq m). Some of these projects are however likely to be delayed until 2020 and even further. Moreover, there is several hundred thousand sq m of office space within the King Abdullah Financial District remaining on hold, with no set completion date. This space could be delivered to the market in a relatively short time of construction recommencing.
Vacancies have increased by 1% over the past year, to reach 16% in Q3 2017. Vacancies are expected to increase slightly further in the next 12-months, with soft demand and further supply in the pipeline.
Rents have decreased 4% over the past 12 months, to reach an average of SAR 1,244 per sq m. Demand for space has shifted from new, shell and core offices to fitted-out (previously occupied) offices, as occupiers seek to reduce capital expenses.
Rents are expected to continue to soften for the foreseeable future as supply continues to outpace demand.
The Ministry of Housing distributed almost 18,000 affordable residential products in Riyadh during Q3 2017, including off-plan residential units (9,500 units), cost-free developed residential land plots (1,100 plots) and subsidized housing loans (6,900 loans). The Ministry is targeting assistance to 280,000 families across the Kingdom in 2017 of which 185,000 have been allocated as at Q3 (leaving 95,000 pending for the rest of the year.
There were no major completions in the Riyadh market during Q3 2017, with the only deliveries being approximately 5,000 villa and apartments in small scale standalone projects scattered across the city. This brings the total residential stock to 1.17 million units.
The number of apartments sales transacted increased 39% and villas 7% Y-o-Y according to the Ministry of Justice. This growth in the volume of sales has however been accompanied by lower price levels. Apartment sale prices declined 4% and villas 5% Y-o-Y. Apartments have generally performed more strongly than villas, as declining purchasing power has seen a continued shift in demand from villas to apartments (bearing in mind that apartment supply was relatively low).
The market witnessed a decline in villa rents by 4% and apartments by 6% Y-o-Y due to rising vacancies resulting from the departure of some expatriate dependents. This has reduced demand for larger units and allowed more room for rental negotiations by existing tenants (including Saudi households) adding downward pressure on rents.
The growing participation by women in the workforce and plans to allow women to drive from next year (a previous barrier to employment) will likely increase the spending power of women in Saudi resulting in increased demand for retail space.
While total employment among Saudi females in Riyadh increased 1% Q-o-Q to reach almost 397,000 unemployment remains high among Saudi females in Riyadh (28.5%).
The employment among expatriate women working in Riyadh stayed unchanged Q-o-Q standing around 105,000 female workers. Unemployment increased 1.6% among expatriate women working in Riyadh to reach 5.5% in Q2 2017.
Approximately 44,000 sq m of additional retail space was completed during Q3 2017, including Square 6 (21,000 sq m), Welfare Center (14,700 sq m), the retail portion of Oud Square (6,000 sq m) and the retail portion of the Residence (2,000 sq m). The majority of this additional supply falls under the category of convenience, community and neighborhood centers, which marks a new trend in the market. The supply pipeline is moving towards northern Riyadh, reflecting the city’s expansion in this direction.
The market is expected to witness additional completions by the year-end including Elite (11,000 sq m), Dheyafah (9,100 sq m), Turki Square (2,400 sq m) and Adh Dhahiah Center (2,200 sq m). Looking ahead, notable completions in 2018 will likely include Qurtuba Boulevard (72,000 sq m) and Reef Commercial Center (11,000 sq m).
Rents remained largely stable during Q3 2017, with rents declining marginally in both the community (-3%) and regional (-1%) sectors of the market over the past year. Given the significant upcoming supply, vacancies are expected to increase across the market over the next 12 months, although the expanding Shoppertainment segment may occupy more space and help offset this trend.
Retail sales continue to increase. The latest data from SAMA shows a 32% YT August increase in the number of point of sales transactions compared to the same period from last year, and a 7% increase of the value of transactions during the same period. This increase is due to ta combination of the public allowances reinstatement, summer holiday spending and rising competition among the retailers in terms of price discounts. This comes as good news to the retail sector as it will likely result in more demand for space.
The Riyadh hotel market remains heavily dependent upon business travel. This is however changing, 2017 is marking a record year for mega-project announcement in the tourism sector in the Kingdom. Announced projects such as the SAR 10 billion (USD 2.6 billion) entertainment company, demonstrate the strong commitment of the Saudi government to place the tourism sector as a key driver for diversifying economy away from oil. The new company plans to invest in an entertainment complex that will open by 2019.
The capital city of the Kingdom hosts a large number of governmental institutions and is the heart and brain of this long-term diversification process. These economic ambitions are expected to benefit the hospitality sector in the city on the long-term. However, the recent increase in the supply combined with important seasonality in corporate travelers is keeping occupancy rates at a relatively low level which is typical for markets relying heavily on corporate demand.
The market witnessed two completions during Q3 2017 including Centro Waha (290 keys) and Swiss Spirit Hotel & Suites Metropolitan (80 units), confirming the commitment of private developers and international operators to the city. Both of these hotels are situated on the northern commercial strip (between King Fahad Road and Olaya Street). This brings the total quality hotel rooms stock to 12,200 keys. Compared to same period last year, Riyadh’s hospitality supply has grown by 8%, showing the recent supply growth in this sector.
Approximately 1,300 keys are expected to enter the market over the last quarter of the year including Crowne Plaza in Ar Raidah Digital City (386 keys), Fairmont Riyadh Business Gate (298 keys) and Hilton Riyadh Hotel & Residences in Ghirnatah business Park (645 keys), however some of these projects may delay opening to 2018. In the serviced apartment segment, Edafah Fraser Suites (95 serviced apartments) has pushed back its soft opening from Q3 2017 to Q4 2017 or even to 2018. Radisson Blu Hotel & Residence, situated in the Diplomatic quarter, will likely complete in Q1 2018, with 110 units.
Across the GCC countries and the MENA region, low oil prices have put the corporate segment under pressure for the last 2 years. Riyadh hospitality sector, which relies heavily on the business travellers, has been further impacted by this trend. The recent increase in the supply has also had a negative impact on YT date performance. The hotel sector in Riyadh continued to soften in Q3 2017. ADRs decreased 12% YT August to reach USD 185, down from USD 209 last year. Occupancies also declined 4% YT August to reach 52%, down from 56%.
RevPAR decreased 17% YT August to reach USD 97 down from USD 117 last year. Those declines were the result of the decline in business travel and the shift of seasonality by Ramadan season. The reduction in public spending, declines in oil prices and growth of virtual and hybrid meetings have all combined to reduce the demand for business travel. According to HotStats latest report (YT July 2017), corporate segment has generated 47% of the business of the hotels in Riyadh compared to 51% last year same period.