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JLL releases its Riyadh 2017 Q1 report evaluating the office, residential, hotels and retail sector.
JLL, the world's leading real estate investment and advisory firm, today released its Q1 2017 Riyadh Real Estate Market Overview report which assesses the latest trends in the office, residential, retail and hotel sectors.
The latest Q1 market summary report discusses the office sector aligning with the National Transformation Program and the office market softening as a result. Traditionally, most government tenants occupy their own buildings and have taken less space in private sector buildings in Riyadh. However, there is now a change in the market as government agencies are now considering leasing space in private sector buildings, which could be a positive trend for the market in the future.
In the housing sector, public private partnerships (PPP) are being widely used to tackle the shortage of affordable housing in Riyadh with the recent signing of MoUs between the Ministry of Housing and the private sector.
"This signing indicates that both the public and the private sector in Riyadh are expected to streamline the development processes of housing schemes and in turn reduce both timeframe and construction costs," said Mr Jamil Ghaznawi, national director and country head, JLL, KSA.
"The launch of East Gate – a large-scale residential project consisting of 7,000 units in Eastern Riyadh marks the first public private partnership (PPP) executed by the Ministry of Housing. With this momentous signing, additional similar partnerships are expected to enter over the course of the next year," he added.
Saudi Vision 2030 introduced the concept of the feminization of the retail sector by increasing the workforce of women by 22% to 30%.
"The increased participation of women will prove to be positive for the sector's growth overall and this initiative should attract additional female entrepreneurs resulting in higher spending power," said Ghaznawi.
In March 2017 King Khalid International Airport received a surge of 38,000 passengers per day on domestic flights. Domestic tourism in the Kingdom is expected to grow significantly over the next decade as a result of increased government spending in the tourism industry under the Vision 2030. A number of initiatives have been launched to promote the cultural heritage of the Kingdom with the Saudi Commission for Tourism and National Heritage (SCTH) allocating around SAR 400 million to a tourism related lending program that was launched at the Saudi Travel & Tourism Investment Market (STTIM) in Riyadh in Q1.
Sector summary highlights – Riyadh:
There were no major completions in Q1, although a number of small scale mixed-use buildings added around 15,000 square meter in aggregate to the total stock. Almost 122,000 square meter of Gross Leasable Area (GLA) is expected to complete by the end of the year, with potential completions including Al Rajhi Tower (30,000 square meter), CMC Tower (12,000 square meter), Elegance Tower (24,000 square meter), and the Administrative Palaces Project by Ajlan (30,000 square meter.) If construction were to recommence at King Abdullah Financial District (KAFD) within the next quarter, the phase of this project could be completed within an estimated period of 12 months.
With some private companies expected to downsize further, and the public sector shrinking its headcount (in line with the 20% reduction required in the 2030 vision), vacancies are expected to increase and rents to decline further over the remainder of 2017.
As of Q1 2017, the total stock of residential units in Riyadh stands at around 1.17 million units. Notable completions in Q1 include Marvella apartments, a project by Rafal situated in eastern Riyadh with almost 600 units. Approximately 24,000 additional units could potentially materialize by the end of the year. This total is likely to include more affordable projects developed under PPP agreements between the Ministry of Housing and private developers. These agreements are considered a positive in terms of increasing future supply in line with customer preferences and pricing.
The performance of the residential sector softened marginally over the quarter. Sale prices of apartments decreased by 2% Quarter-on-Quarter, and sale prices of villas decreased by 1%. Rentals have followed a similar trend, falling by 1% Q-o-Q for both villas and apartments. In terms of sale volume, the first quarter of 2017 witnessed a 1% decrease Y-o-Y and a 25% decrease Q-o-Q. Moreover, the number of transacted villas in Q1 2017 fell by almost 40% compared to the same period last year and a 2% increase relative to last quarter.
The total supply of retail space in Riyadh stands at around 1.52 million square meter as of Q1 2017. While there were no major completions, one small project Al Ghadeer Square (around 7,000 square meter of GLA) was completed in Q1 2017. In addition, some small-scale retailers, like Al Jazeera Markets are expanding their business and leasing new space. Al Jazeera Markets opened its fourth branch in Riyadh this quarter, adding almost 3,000 square meter of GLA and are expected to open three more small branches over the year, adding a further 3,000 square meter of GLA in aggregate. Additional small-scale completions expected during 2017 include Elite (11,000 square meter on Dhabbab Road) and Levels (7,500 sq m on the Northern Ring Road). The most notable completion expected this year is Riyadh Park, a super-regional mall situated on the Northern Ring Road, which is expected to add around 92,000 square meter of GLA to the total retail supply in Q4.
Rents for super-regional centers have fallen by more than other malls, declining by 10% over the past year. Rents for regional malls have decreased by 5% and rents for community malls have fallen 3% Year-on-Year. Market wide vacancies have increased marginally to reach 8% and occupancies are expected to soften further over the remainder of 2017 due to increased stock and more selective consumer behaviour.
The first quarter of 2017 saw the opening of the Hyatt Regency hotel and the Best Western Plus Fursan. The Hyatt Regency, a 5 star hotel situated in Al Olaya district, marks the first property of the Hyatt Hotels Corporation in Riyadh. It added 261 rooms to the total stock, currently standing at around 11,900 keys. The Best Western Plus added 66 keys of 4 star quality on the Eastern Ring Road.
A further 2,500 keys are currently scheduled for delivery in 2017, which should add downward pressure on ADRs. The pipeline for 2017 includes but is not limited to Crowne Plaza ITCC (386 keys), Fairmont Riyadh Business Gate (287 keys), Hilton Riyadh King Saud University (241 keys), Hilton Riyadh Hotel & Residences GOSI (645 keys and 221 serviced apartments), Nobu Hotel (134 keys), and Swiss-Belhotel Riyadh (126 keys). However, some of the scheduled supply may be delayed to 2018 and beyond, given the historical trend of delays and the softening performance of this sector.
Low oil prices have reduced the travel and entertainment budgets of both the public and private sectors. As the Riyadh hospitality market relies heavily upon corporate and government related travel, it has witnessed a continued softening in performance. Occupancy rates have decreased from 60% to 57% YT Feb, while ADR compressed to USD 193 (a 15% decrease compared to YT Feb 2016) and RevPAR fell by 18% to USD 109.
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