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According to JLL’s Q1-2016 Jeddah Real Estate Outlook
JLL, the world's leading real estate investment and advisory firm, today has released its Q1 2016 Jeddah Real Estate Market Overview report that assess the latest trends in the office, residential, retail and hotel sectors. In Q1 2016, it was noted that Jeddah witnessed a general slowdown across its real estate sectors due to demand-supply mismatch and the country's overall macroeconomic scenario.
Mr Jamil Ghaznawi, National Director and Country Head of JLL KSA, commented saying: "The existing demand-supply mismatch is expected to widen as more retail and office supply is expected to enter the market with the easing of backlog projects. In the residential segment, sales prices continued to decrease marginally while rents started slowing down in Q1 2016 after continuous growth in 2015. It is also interesting to see that higher quality residential developments are being launched in response to buyer demand for additional amenities. On the other hand, the office market witnessed a further slowdown in the growth of lease rates, which is expected to continue due to demand constraints throughout 2016. Historically, the government and public sector have led demand for office space in Jeddah, but going forward we expect a shift in demand towards private firms as there is hardly any new project announcements,
Meanwhile, in the retail market lease rates have showed signs of stabilisation in Q1 as vacancies are absorbed. With more projects materialising over 2016/2017, lease rates are expected to remain stable or decrease marginally. But with a Y-o-Y reduction of 9% in the value of retail sales , it could affect retail footfall which in turn will impact demand for retail space.
In regards to the hotel market, the sector is impacted by the general economic slowdown as a result of lower oil revenues affecting various demand drivers. With declining visitors, the hotel sector has begun to show signs of weakening across Jeddah. Interestingly, new supply is expected to be added as a number of hotels are expected to be completed later in 2016, and it remains to be seen how they will perform in this economic scenario."
Sector summary highlights – Jeddah:
Office: 33,000 square meters of Gross Leasable Area (GLA) was added during Q1 2016. This included the completion of Al Andalus Crown Tower on Madinah road, which added 12,000 square meters of GLA, as well as a smaller office building called Strek located on Prince Sultan Street. Total supply reached 925,000 square meters of GLA. Further completions are expected throughout 2016, including the Al Khair Tower which will add approximately 43,000 square meters of GLA to the market. On an annual basis, average lease rates increased by 2%. However, Q-o-Q lease rates decreased marginally by 1%. Vacancy rates have remained relatively stable at 5% as of Q1 2016; down from 6% in the previous quarter.
Looking ahead into 2016, demand for office space from the public sector is expected to decrease after the Ministry of Finance restricted new hires. In addition to the Ministry's announcement that no new projects will be introduced, demand for office space from the construction sector is expected to decrease as well. This will shift the demand from the public sector to the private sector. Office spaces located North of Madinah Road and Sultan Street have increased lease rates ahead of the completion of the new airport. This should increase demand for office space within close proximity.
Residential: The villa market saw a decline in both sale prices (-5.4%) and rentals (-2.5%) over the quarter. The decline in prices reflects the continued loss of buyer sentiment as a result of the previous 70% loan-to-value ratio, while rents also decreased as they are generally considered less attractive than apartments due to their higher cost.
The apartment sector fared somewhat better than villa sector, with both prices and rents remaining basically stable over the quarter.
According to the latest survey by the Eskan Committee of the Jeddah Chamber of Commerce and Industry, current supply stands at 793,000 units. A total of 4,000 units (consisting of standalone villas and apartment buildings) entered the market in Q1 2016. The most notable project completed was Da'em Residences, which added 120 apartments to the market.
Saudi's Central Bank announced that it will allow specialised mortgage companies to increase their maximum contribution to home financing to 85%. This is a positive step towards increasing access to home loans and is expected to stimulate demand and will also likely change the current performance rates for villas and apartments. However, it is still too early to anticipate what impact this will have on the market. The developers of Jeddah Tower (previously known as Kingdom Tower) have announced that the tower is currently 20% complete and scheduled for completion in 2018.
Retail: The first quarter of 2016 saw two completions: Al Khayyat 3 and Yasmin Mall. These added just over 70,000 square meters of GLA to the market. The total supply of retail space currently stands at approximately 1.2 million square meters of GLA. While Y-o-Y lease rates have increased for both regional and super regional centres, changes in Q-o-Q lease rates suggest that they have peaked as super regional rates remain stable and regional centres decreased marginally by 1% as of Q1 2016. Y-o-Y vacancies have increased from 7% to 10% as vacancies increased in dated shopping centres while they reorganise tenants and upgrade their facilities. Q-o-Q vacancies have decreased marginally from 11% to 10% in as some refurbishments, such as in Mall of Arabia, are completed.
Higher materialisation is expected over the next two years after 2015 saw a slowdown in the number of projects entering the market. A further 56,000 square meters of GLA is expected to be delivered in 2016, while 2017-2018 is expected to add over 900,000 square meters of retail space to the market in Jeddah. However, some delays and cancellations are expected.
Following the opening of Yasmin Mall, as part of Arabian Centres' expansion plans across KSA, a further 3 centres are expected to be delivered in Jeddah by 2018. These include Al Qalam Mall in King Abdulaziz University, Jawharat Jeddah in Al Basateen District and Prince Sultan Oasis which is a part of Prince Sultan Cultural Centre. For the first time in 10 years, point of sale transactions reduced 9% Y-o-Y. This is due to the recent cut in energy subsidies which softened purchasing power in Saudi.
Hotel: There have been no new additions to the market over the last quarter and supply remains at approximately 8,600 keys. 2016 should see a faster pace of hotel delivery with around half of the 3,200 keys forecasted for 2016 expected to materialise. Current projects in the pipeline include: Radisson Blu Al Salamah, the Ritz Carlton, Movenpick City Star, Assila Hotel and Elaf Galleria. YT February occupancy rates have decreased to 68%; 5% lower compared to the same period in 2015. Consequently, YT February Available Daily Rates (ADR) and Revenue per Available Room (RevPAR) have decreased by 5% to USD 229 and 11% to USD 156 respectively. The likely reason for this is declining business visitors amid an economic slowdown.
The economic slowdown has already impacted performance rates for Jeddah's hospitality sector. Should the planned projects for 2016 materialise, it is expected to cause further declines in hospitality performance rates over the next two years. With the development of the new airport, Prince Majed Road will become the new gateway to Jeddah and a number of hotels are already under construction or planned in close proximity. The area surrounding the Jeddah Haramain Railway station, which will be used to transport pilgrims to Makkah and Madinah, should also see increased demand, and consequently supply, for hotel rooms in the future as the station nears completion.
Jeddah prime rental clock
This diagram illustrates where JLL estimates each prime market is within its individual rental cycle as at the end of the relevant quarter.
*Hotel clock reflects the movement of RevPAR.
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