Saudi Arabia’s economic growth in overdrive

JEDDAH – As a significant volume of new prime office space starts to enter the Riyadh market, particularly at King Abdullah Financial District (KAFD), and the overall occupancy rate starts to rise, rental rates in general have started to edge downwards and incentives have started to become more widespread, according to the latest Saudi Arabia MarketView by CBRE, the global real estate consultancy firm.

“Headline rents offered at KAFD are high in comparison to existing market norms, but terms are flexible and there is room for negotiation on incentives. In the existing prime office areas in the southern central areas, office rental rates are starting to come under downward pressure and new supply in these areas is forcing both lower headline rents and more generous incentive packages,” said Mike Williams, Head of Research & Consultancy, CBRE Middle East.

In contrast to both these areas a number of business park projects that have recently emerged in northern Riyadh such as Granada Business Park, ITCC and Riyadh Business Gate have proved extremely popular, notes the CBRE report.

“All three of these projects are either fully occupied or nearing full occupancy at strong rates and without significant support from incentive packages. These projects have successfully met market requirements by providing good access, parking and quality as well as being located in the northern parts of Riyadh that are attracting increasing interest,” added Williams.
The CBRE report said the supply of prime office space in Jeddah looks set to jump with the completion of The Headquarters Business Park in the second half of 2013, but growth in demand largely driven by government expenditure on infrastructure will likely moderate the threat of oversupply. Rental rates in Jeddah remained static in the first half of 2013 despite a slight drop in vacancy rates during the same period
“International firms engaged in implementing government infrastructure projects will likely absorb much of the new and existing space, and there is likely to be a relatively balanced environment where neither supply or demand move significantly out of line,” commented Williams.

Moreover, the report said overall levels of economic activity in Al-Khobar have historically been driven largely by Saudi Aramco, augmented by family firms and small branches of international or regional consultancies. Saudi Aramco has embarked on a transformation program to become the world’s leading integrated energy and chemical company by 2020.
In addition, the growth of the industrial city of Jubail has also driven the office market in Al-Khobar as engineering firms enter the market in order to serve the three main drivers for economic growth in Eastern Province which are Saudi Aramco, Jubail Industrial City and Saudi government infrastructure initiatives.

“As it relates to office space, supply, demand, quality and rental rates have all risen consistently since 2000 and there have been no reverses in any of these categories for over a decade. Rental rates in existing properties have remained virtually static since 2008, however, rental rates for local Class A space have risen, due largely to improvement in the quality of local Class A space entering the market,” added Williams.
“Rental rates for space that would be considered local Class A space now lie in quite a broad range from around SR800/m²/pa to SR1,300/m²/pa with the most recently completed buildings commanding the highest rents,” Williams noted.