Increased transparency and a better environment for foreign investors are two of the big initiatives driving growth in the Saudi Arabian real estate sector.

1. Saudi Arabia in a
Better Position for
Real Estate Growth
EHSAN BAYAT

2. Saudi Arabia in a Better Position for
Real Estate Growth
 Riyadh and Jeddah are two of the most prominent economic centers in Saudi Arabia.
As a result of low oil prices and a reduced supply of properties, both cities have been
experiencing a steady downturn in the real estate sector. However, according to the
kingdom’s latest ranking on the 2016 Global Real Estate Transparency Index (GRETI),
compiled by JLL and LaSalle Investment Management, the real estate sector in Saudi
Arabia is poised to make a comeback.
 Saudi Arabia now stands at 63rd on the “Semi-Transparent” grouping of the GRETI,
near Egypt, India, and Turkey. This move towards increased transparency is beneficial
to the real estate sector because countries that have higher transparency levels
statistically experience greater investor activity and increased corporate real estate
transactions. In fact, nations considered “Highly Transparent” attract three-fourths of
the investment in global commercial real estate.
 The following overview of recent JLL reports details the office, retail, and residential
market behavior in both Riyadh and Jeddah, including projections on how Saudi
Vision 2030, the government’s plan to promote economic diversification in the face of
falling oil prices, will affect the real estate market.

3. Riyadh Office Market
 Rental values decreased marginally while vacancy rates stayed even at 16
percent. Analysts expect both metrics to change in the coming months
with the addition of new properties to the market. The Information
Technology and Communications Compound has roughly 160,000 square
meters of gross leasable area (GLA) in the pipeline, and the King
Abdullah Financial District will also soon complete several projects. As a
result, rental values should decrease while vacancy rates will increase.
Saudi Vision 2030 may eventually contribute to increased office space
demand in Riyadh because of its provisions to admit more foreign real
estate investment.

4. Jeddah Office Market
 Project completions will not reduce rents in Jeddah the way they are
expected to in Riyadh. In fact, office rental rates stabilized in the second
quarter of 2016, even as supply increased. And where rental rates haven’t
moved, vacancy rates have risen by about 1 percent. A developing trend
in the city is tenants moving from lower-quality facilities to more updated
and valuable properties. In addition, Saudi Vision 2030 is projected to
have the same positive long-term effects on demand in Jeddah as it will
in Riyadh.

5. Riyadh Hotel Market
 The Rosh Rayhan Hotel and the Riyadh Copthorne Hotel opened in Q2
2016, bringing the total number of hotel rooms in the capital city to
11,000. Upcoming projects scheduled for completion this year may not
open until 2017, but a total of more than 8,000 rooms should enter the
market by Q4 2018. Among other factors affecting the hotel industry,
falling oil prices have generated a decline in both government spending
and corporate demand. Hotel operators and developers have
consequently seen lower performance rates.

6. Jeddah Hotel Market
 Lower oil prices have also negatively impacted the hotel market in
Jeddah. However, the city has recently experienced a notable increase in
new supply, and the majority of these hotels rank in the five-star category.
Jeddah now offers nearly as many rooms as Riyadh. Occupancy rates
have dropped to 69 percent, but this largely reflects the recent market
entrants.

7. Riyadh Retail Market
 Neighborhood centers have been in strong demand of late, and these
properties accounted for the entirety of retail gross leasable area (GLA)
added in Riyadh during the first half of 2016. Al Khaleej Mall and AL
Hamra Mall should open by the end of the year, balancing out the retail
growth for a combined total nearly 170,000 square meters of GLA. The
city’s vacancy rates have stayed relatively low, and demand appears to be
on a steady rise.

8. Jeddah Retail Market
 In Q2, the expansion project on Alandalus Mall reached completion,
creating 14,000 square meters of leasable real estate. The Red Sea Mall
expansion should also be finished by the end of the year. Rental statistics
showed a very small decline during Q2, and about 93 percent of retail
properties have active tenants. Early projections from the Saudi Vision
2030 stimulus plan indicate favorable growth for retail the city of Jeddah
in particular.

9. Riyadh Residential Market
 Residential demand has begun to slow in the region, with noticeable
decline in rental rates in Riyadh. The capital city gained roughly 11,000
new homes in the first two quarters of 2016, and this growth pushed the
total number of residential units over 1 million. Quarterly measurements
showed an increase in villa and apartment prices, but yearly counts
indicate 5 percent and 1 percent decreases for villas and apartments,
respectively.

10. Jeddah Residential Market
 Total supply for residential units remained at approximately 796,000 as of
Q2, and a shortage still exists for affordable housing. Efforts to increase
the loan-to-value ratio have not yet achieved their purpose of attracting
buyers, and the white land tax regulations will most likely not yield results
until 2017 or 2018. Government measures to elevate transparency,
however, should help to bolster the real estate market as a whole in
Jeddah and Riyadh, and across the entire kingdom.