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JLL releases its Jeddah Q2 marketplace report showing further declines in performance
JLL's Real Estate Market Overview has shown Jeddah's retail sector is experiencing some improvements, but overall the city's real estate sector has remained "relatively subdued" in Q2 with further declines in performance recorded.
Sentiment in the retail sector has been boosted by the reinstatement of benefits to public sector staff, according to JLL's report released today.
"The pace of decline has generally declined suggesting that some sectors are approaching the bottom of their current cycle," said Mr Jamil Ghaznawi, national director and country head, JLL, KSA.
"Market sentiment is expected to improve somewhat later this year."
The report said the removal of the 20% quota restriction on Hajj pilgrims should see increased demand for both retail and hospitality in Jeddah. Further reforms to energy costs and the general higher cost of living may, however, curb domestic spending compared to historical trends.
There was a minor completion in the office sector over Q2 2017 that saw the Gross leasable area (GLA) of quality office space in Jeddah increase to over one million sq m. Office rents showed little change Q-o-Q, but both rents and occupancies showed significant decreases Y-o-Y.
There were no notable completions in the residential sector over the second quarter of the year either. However, the reinstatement of public sector employee benefits came as positive news for the retail sector, which had been struggling following the removal of the benefits. Although point of sale transactions showed slight improvement, retail rents decreased.
The hotel sector witnessed the opening of the Ritz Carlton in Q2 2017 in addition to a completion in the serviced apartment segment with the Staybridge Suites Al Andalus Mall.
Sector summary highlights – Jeddah
The market remains soft, with landlords becoming more responsive to the challenging economic environment and reduced demand from the oil and construction sectors by showing greater flexibility when leasing. More owners are now targeting the healthcare sector for potential tenants in light of the growing demand for healthcare services.
The mid to long term prospects for the Jeddah office market have been boosted by the USD 400 billion in trade deals signed during US President Donald Trump's visit to Riyadh in May. The agreements cover a number of sectors including healthcare, education and technology, and are in line with the Saudi Vision 2030 to develop new sectors locally.
"This should have a positive impact on the office sector in Jeddah, which currently relies on demand from a limited number of sectors," said Mr Ghaznawi.
There was only one minor completion during Q2 2017, which was Alameya Business Park, adding approximately 4,000 sq m to the market. This completion pushed the supply of quality office space in Jeddah to just over one million sq m.
A further mixed-use development encompassing a commercial tower has been announced in Q2 2017. Al Rawdah Commercial Centre by SEDCO Development will be located on Prince Saud Al Faisal and will include a shopping centre and three towers including office, residential and hotel components.
Market wide office rents decreased by 9% Y-o-Y while Q-o-Q rents decreased marginally by just 0.2%, which may suggest that rents are now stabilising.
The entry of a number of mid-scale properties to the market over the coming year combined with limited new demand may see vacancies further increase, adding additional downward pressure on rents as competition increases.
Vacancies increased from 7% in Q1 to 15% in Q2 2017. This is largely due to the addition of recent completions to the performance basket that have not been absorbed yet.
The expansion of the city towards the north has slowed over the last two years, as increased interest has turned to more centrally located sites due to the introduction of the White Land Tax. However, as the number of large scale, quality developments in North and South Obhur progress, the draw of the northern corridor is expected to resume over the next two – three years.
The total supply of residential units in Jeddah in Q2 2017 stood at approximately 809,000 units - there were no notable completions. Expected completions later this year include Gardenia Residence (370 apartments), the latest in a growing number of lifestyle developments.
The first phase of Al Ra'idah, owned by the Public Pension Agency and located in South Obhur, is currently under construction. This project will deliver approximately 2,500 apartments in the first phase, making it the largest, recent residential completion in Jeddah. The development is predominantly residential, with later phases including close to 4,000 apartments and 1,100 villas.
Another prominent development in the area, the 170 storey Jeddah Tower (pegged as the world's next tallest tower), has been officially delayed according to Kingdom Holding. This will see the delay of approximately 500 apartments until 2019. The tower is the first phase of a more ambitious plan to eventually develop a mixed-use city spanning an area of 5.3 million sq m.
Prices and rents remained relatively stable over Q2. Apartment rents rebounded marginally (1.4%), after recording a sharp drop in Q1 2017 as a result of departing expatriates over 2016. Villa rents also remained relatively stable.
Sale prices also showed stability in Q2 2017 with both apartment and villa sale prices decreasing marginally by 1.2%.
The reinstatement of benefits to public sector workers in Q2 is positive news for the retail market, which suffered weaker performances in light of the introduction of these cuts in 2016. Whether or not household spending will return to the same levels as the pre-wage cuts period is yet unclear. Although wage levels have been restored, the cost of living remains higher than before, due to the removal of subsidies on utilities and energy costs. The cost of living is also set to increase further with the government considering further revisions to energy costs in 2017, in addition to the recent Sin Tax on tobacco and energy drinks, and the introduction of VAT in January 2018.
Q2 2017 witnessed the completion of the expansion of Red Sea Mall, adding 18,000 sq m of retail GLA to the market. The total stock of quality retail space now stands at approximately 1.2 million sq m. Avenue Mall in North Obhur (116,000 sq m) is expected to be the next major completion following Jeddah Park, with this project likely to draw demand from other malls in the northern districts once completed.
Notable scheduled completions in 2017/2018 include Jeddah Park, which is in advanced stages of construction and Al Basateen Centre, which is currently under renovation.
The number of community and neighborhood shopping centers in Jeddah is expected to increase as well.
Overall market rents for the retail sector decreased by 2.4% Q-o-Q and 4.3% Y-o-Y. Rents for super regional shopping centres continued to soften both Q-o-Q and Y-o-Y decreasing by 3.2% and 7.5% respectively. Regional shopping centre rents also decreased by 2.3% Q-o-Q and 3.2% Y-o-Y.
Rents may soften further over the year due to upcoming supply entering the market. However, stronger household spending following the reinstatement of public sector wages should curb the impact on rents, meaning rents are likely close to bottoming out.
The opening of the Ritz-Carlton Jeddah has not only boosted the supply of luxury hotel keys in Jeddah, but also added 83,000 sq ft (approximately 7,700 sq m) of meeting, conference and convention centre facilities into the market that sorely lacks quality facilities. Major conventions in Jeddah have to date mostly been held at a limited number of properties including the Hilton, Leylaty Hall and the Jeddah International Exhibition and Convention Center (Al Harthy Convention Centre).
The addition of further quality convention space can be expected to spur the number of major events held in the city, which has recently grown under the backing of the Saudi General Authority for Entertainment. This is in line with the Saudi Vision 2030 goal of boosting the number of cultural activities in the Kingdom.
The total supply of hotel rooms in Jeddah crossed the threshold of 10,000 keys following the opening of the Ritz-Carlton in Q2 2017.
The hotel marks the Ritz-Carlton's first property in the city, and second in the Kingdom, and sets a new standard of luxury for hotels in Jeddah. A major boost to the supply of hotel keys is expected once the Elaf Galleria in Tahlia opens later this year adding 445 keys to the market.
Hotel performance continued to weaken during Q2 2017. This is most likely a result of growing competition in the market. This is a trend that is likely to continue for the next several years in Jeddah as more hotels and brands enter the market.
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