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JLL releases its Q3 Jeddah report highlighting positive market sentiment across some real estate sectors
JLL's Real Estate Market Overview has shown that continued efforts of introducing measures to increase tourism, pilgrimage, investment and local entertainment options. These initiatives have boded well with Jeddah's real estate market and sentiment across some real estate sectors has been boosted, according to JLL's Q3 marketplace report released today. Jeddah's retail sector witnessed improved sentiment shown by an increase in construction activity following a subdued period.
"The Kingdom's commitment to increasing tourism, pilgrimage, investment and local entertainment options is reflected across the retail sector, which has seen an upward growth in sales transactions in Jeddah during July," said Eng. Ibrahim Albuloushi, National Director and Country Head, JLL, KSA.
"Increased spending can be attributed to the reinstatement of benefits to public sector wages earlier this year, bolstering spending power during the summer holidays. We also believe this move will prove to be encouraging for retailers to expand, and take over more retail space," he added.
The office sector will be another beneficiary of the government's recent reforms. With a number of financial and advisory firms announcing expansions or plans to enter the market, demand for office space is expected to increase.
The residential market saw a completion in the lifestyle segment in Q3 and similar developments are in the pipeline. Looking ahead, residential communities and lifestyle developments are likely to make up a larger share of upcoming supply.
The hotel sector continues to remain competitive with two completions coming into the market over the course of Q3, and further completions to be expected by the end of the year. Hotel ADRs and occupancies continued to decline YT August despite the school holidays and increased number of pilgrims during the Hajj season.
Sector summary highlights – Jeddah
The Saudi Arabian General Investment Authority permitted 100% foreign ownership of companies to a further three sectors: engineering, education and healthcare. The move is a further step towards diversifying the Kingdom's economic base and encouraging foreign direct investment. The government's privatisation efforts and easement of investment into the Kingdom should translate to an increase in demand for commercial space as investors, financers, consultants and new companies move into the market.
Evidence of this has been noted already as a number of financial providers and advisors recently announced plans to enter or expand in the Kingdom. Examples include Gulf International Bank who obtained approval for a local banking license earlier this year, and JP Morgan announced it will add a further 80 bankers in Saudi in 2017. While more recently Citigroup obtained a license to operate in Saudi.
There were no major, notable completions in the office sector over Q3 2017. The only completion was a 1,500 sq m building along Prince Sultan Street. Total quality office GLA remained at approximately 1 million sq m. Approximately 51,000 sq m of office space is expected to complete over Q4 2017. While there is a large amount of space to expect, most of the supply is in the final stages of construction. This includes the Ibraheim Centre (10,700 sq m) and Dream Centre (5,000 sq m) on King Abdulaziz Road, and Phase 1 of Lilian Towers (15,000 sq m) on Prince Sultan Street. However, some delay to early 2018 can be expected.
There is a growing amount of upcoming office supply along King Abdulaziz Road. The road is increasingly becoming better equipped to serve the commercial sector with a number of upcoming hotels and support retail centres.
Looking at the remainder of 2017 and 2018, many of the buildings expected to enter the market are mid-scale. In contrast to a market where small-scale offices traditionally dominated upcoming supply. However, small-scale office buildings are expected to continue to be present in the mix of upcoming supply particularly on Prince Sultan Street and Prince Saud Al Faisal Road.
As expected earlier this year, Y-o-Y office rents further declined in Q3 2017 by around 11%. Y-o-Y vacancies also increased in tandem, which reached 14% resultant of a number of mid-scale completions earlier this year that caused supply to outpace demand. Both Q-o-Q rents and vacancies showed a slower decline. Rents decreased by a more marginal 2% over the quarter, while vacancies marginally improved by 1%. Suggesting that office rents may have edged closer to stabilising. Despite the positive sentiment in the market, with a further 157,000 sq m pegged for completion over the next 15 months, further declines can be expected until the extent of economic reforms impact on the office sector becomes evident. Until then, office rents in Jeddah should remain competitive. Favouring tenants over landlords.
According to the Ministry of Housing, a total of 61,600 loans have been made to beneficiaries across the Kingdom so far this year. A further 23,100 loans are expected to be paid out by the end of the year. Combined with the provision of developed land and residential units through the Wafi program, the Ministry of Housing intends to deliver residential products and loans to a total of 280,000 beneficiaries in 2017. While there may still be a lengthy wait list, the loans paid and products delivered each month are positive move in providing access to home financing and housing, and encouraging activity in the residential market.
Approximately 3,000 units entered the market in Q3 2017 bringing total residential supply in Jeddah to approximately 812,000 units. Notable completions include 370 apartments part of the Gardenia Residence development by SEDCO. A further two lifestyle developments are in the pipeline including Diyar Al Salam Residences and J-One expected to be delivered in Q4 2017 and 2018 respectively. Fatima Residential Tower, located along Tahlia Street, also completed in Q3 delivering approximately 44 apartments.
In the mid and high-rise segment of the residential market, Golden Tower (85 apartments), and Abraj Al Hilal 2 (308 apartments) are both expected to complete by year-end. Further expected completions in this segment Bayat Plaza along Madinah Road (272 units) and Emaar Residences (283 units). Both are expected to be delivered in 2018.
Looking ahead to 2018 and beyond, community developments are likely to make up a larger share of upcoming supply. A sector which has long been dominated by stand-alone units. Most notably with the expected completion of the first phase of Al Ra'idah development (2,400 apartments) in North Obhur, and Mayasem, touted to be the next large-scale community development in North Obhur to begin construction of its first phase. The further delay of just over 800 apartments part of the first phase of Salman Bay Housing Project into 2018 means that residential completions in Q4 2017 are unlikely to exceed 2,000 units.
Rents continued to soften over the quarter but showed further signs of stabilising. Both average apartment and villa rents decreased marginally by 0.5% and 0.3% respectively Q-o-Q. Average Y-o-Y rents, however, decreased more notable, particularly for apartments which decreased by 9%, while Y-o-Y villa rents decreased by 4.2%. Overall, Y-o-Y rents are expected to continue to show a notable decline in Q4 2017, but remain relatively stable in 2018. However, further announcements restrictions on expatriate labour in the Kingdom may further reduce demand for apartments in Jeddah, which would likely stimulate downward pressure on rents.
Overall, sale prices showed marginal change across the board for both villas and apartments. Q-o-Q villa sale prices increased marginally by 1.3% due to a slight rebound in villa prices located in affluent areas in the West and North of the City. Apartment sale prices, similarly to the previous quarter, showed a sharper decline of 9% Y-o-Y.
The growth of the city and its retail sector towards the north of the city is further confirmed by the development of Obhur Mall. Still at the early stages of construction, the community center is expected to add just over 25,000 sq m in 2018. Once completed, it will be the second shopping center in the area, and one of a number of planned and under construction centers North of the city.
Q3 2017 saw the completion of Alireza Shopping Center located in Al Balad District, which added approximately 7,300 sq m of retail space to the market. Total supply in the market currently stands at around 1.2 million sq m of quality space. The next major completion, Jeddah Park, is now expected to complete in the first half of 2018. The remaining scheduled completions of 2017 are convenience and neighbourhood centers that include the first phase of Lilian Towers (approximately 6,700 sq m), and the retail component of Abraj Al Hilal 2 in Jeddah Gate (approximately 2,600 sq m).
There has been notable construction activity and announcements in the retail sector in Jeddah following a subdued period. Scheduled completions over the next two years amount to 176,000 sq m and 116,000 sq m in 2018 and 2019 respectively. Super regional shopping centers dominate the bulk of upcoming supply, however, in an ever maturing market, there are also a number of neighbourhood and community centers expected to complete as well. Following the successful completion of its expansion, Red Sea Mall announced the launch a further expansion of 2,500 sq m due to complete in late 2018. Future supply also includes the refurbishment of Al Basateen Center on Tahliya, which is expected to complete in 2018. While some delay can be expected, most projects in the supply pipeline are either in advanced stages of construction or progressing.
Rents edged closer to stabilising in Q3 2017 which saw Q-o-Q lease rates remain stable for both regional and super-regional shopping centres, but declined Y-o-Y by 2.3% and 7.6% respectively. Rents are expected to remain relatively stable over the last quarter of the year, but looking further ahead to 2018, rents may experience further softening as more centers enter the market. Y-o-Y vacancies remained stable at 10%, but marginally decreased by 1% Q-o-Q.
Latest data from SAMA shows that the number of point of sales transactions in the Jeddah increased by around 22.3% Y-o-Y in July, while the value of transactions increased by just over 8%. The increase in spending is resultant of the reinstatement of benefits to public sector wages earlier in the year boosted by spending during the summer holidays. This is positive news for the retail sector as increased spending may encourage retailers to further expand resulting in an increase in uptake of retail space, which would curb the potential negative impact of increased supply on retail performances. Particularly as the supply pipeline in general is moving towards the north of the city, where the retail sector is less saturated.
The announcement of the Red Sea tourism project in August has confirmed the government's commitment to increase the tourism sector's contribution to GDP. Initiated by the Public Investment Fund, the project aims to take advantage of Saudi's virtually untapped natural and historical assets located in the northwestern region of the Kingdom.
Tourism growth in Jeddah is expected to spring from the leisure segment to a large extend. Both public and private entities are developing projects to improve the quality of life in the city and diversify the leisure and entertainment offering for both residents and visitors. The renovation of the North Corniche along with the development of resorts and parks in the city are expected to create a more family-friendly environment and appeal to the leisure tourists.
Quality hotel room supply in Jeddah reached almost 10,400 keys in Q3 2017. The properties which added around 300 keys to the market were the Radisson Blu Hotel & Residence Jeddah Al Salam (142 keys) located on Quraysh Street, and the Frontel Jeddah (119 keys) located on Tahliya Street. The former is the fourth property of Carlson Rezidor in Jeddah under the Radisson Blu brand. Carlson Rezidor has a further two properties in advanced stages of construction in Jeddah: the Radisson Blu Hotel & Residence Corniche (160 keys), and the Park Inn by Radisson Madinah Road (84 keys). Both properties are expected to open by mid 2018.
A potential 900 keys could enter the market over the last quarter of the year. Several properties are near completion including the Hotel Galleria By Elaf (445 keys). Over the next two years, a number of midscale hotels are also expected to open, for instance under the Ibis and Premier Inn brands. The diversification of the hotel market will make Jeddah a more attractive place to visit to a broader range of visitors.
The hotel sector in Jeddah has remained under pressure over the Q3 2017, due to pressure on the corporate segment which represents bulk of visitors in the city. Despite the number of visitors picking up over the summer period and Hajj Season, occupancy levels declined by 10% to reach 62% YT August compared to 72% during the same period last year. ADRs also declined to USD 258 YT August, a decrease of 4.4% compared to the same period last.
Although RevPAR also decreased by almost 16% to reach USD 165 YT August, it is still considered healthy and is one of the highest in the region. Despite declining performances compared to historical numbers, the outlook for the hotel market in Jeddah remains positive. This is due to Jeddah's prime location between two the Holy cities of Makkah and Madinah, and its status as a leisure destination, which should see continued demand for hotels.
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Eng. Ibrahim Albuloushi
National Director and Country Head KSA
Head of Marketing & PR - MENA
+9714 426 6999