Saudi property market heats up

30 November 2007
High returns in the kingdom's real estate sector are set to continue into the next decade as supply struggles to keep up with demand.

Investors seeking high yields in the region's real estate markets need look no further than Saudi Arabia. Returns are in excess of 300 basis points higher than in the UAE or Bahrain. Growth is fuelled by demographics indicating a continuing supply-and-demand shortfall, legal changes, and a growing commercial and retail market.

Even with many projects coming on line in the next year, the demand for high-quality office, hospitality, retail and residential property looks set to continue into the next decade. “The situation would be even brighter if it was not so difficult to convince people to move to Saudi Arabia,” says Nick MacLean, managing director, Middle East, at real estate consultant CB Richard Ellis (CBRE).

“That is not just true for Westerners, but also for Gulf Arabs. Another factor preventing greater growth in Saudi Arabia is the difficulty of getting access to the country. But there are positive signs from the government on that count, and enthusiasm to invest there from all over the world.''

Other industry experts agree. “The drivers for investment in Saudi Arabia are oil price driving liquidity, the reform in investment law and the planned introduction of mortgage regulation,” says Mohammed Dahmash, head of real estate practice in Saudi Arabia at consultant Ernst & Young. “All the signs point to a continued high demand.”

“In the best buildings in Riyadh, rents are about $600 a square metre on an annualised basis,” says CBRE's MacLean. “But right now, there is not enough high-quality space. Rents fall off pretty quickly when you get out of the central business district. The Jeddah market is not as costly, but Riyadh is still the business heart of the country.

“Foreign companies are basing people in both locations and splitting the business to capture both sectors of the market. But they are keeping their back-office operations in the UAE or Bahrain, because of the difficulty of getting people to relocate to Saudi Arabia.”

Rising rents

Commercial rents in Riyadh have risen by 15 per cent a year on average since 2005, according to global real estate consultant Colliers International. Despite the $600 a sq m commanded for the best buildings in Riyadh, Colliers says primary office property in strong locations is available at $400 a sq m, while offices in secondary locations are going for $275 a sq m.

The King Fahd/Al-Olaya project in Riyadh will increase supply by 400,000 sq m this year, although only a further 160,000 sq m is set for completion next year. Older and secondary-grade office buildings will suffer a gradual decline in occupancy and rental rates, as tenants seek to lease better-quality accommodation, according to the consultant. However, the delivery of higher-grade space has stratified the existing market.

“The commercial property sector has experienced a notable shift in its demand-supply dynamic over the past few years,” says John Davis, managing director of Colliers International. “Historically, it is a stagnant market characterised by weak demand and a diminishing tenant base, but increased economic activity and investor confidence has brought about a shortage of supply. This has been due both to the increase in the number of companies - local and foreign - setting up offices in the kingdom and to the expansion of existing companies' operations.”

Davis says demand is most pronounced for primary-grade office space and the majority of buildings in the central business district enjoy occupancy levels close to 100 per cent, at least in the short term, because of a lack of alternatives in the city.

Retail mall development continues in Riyadh and Jeddah, with several major centres under construction. Despite rapid expansion of supply, take-up rates remain strong as retailers show confidence in consumer spending. In common with regional trends, retail space in Riyadh attracts higher rental returns than other sectors. This has driven the development of several large malls and ground-floor retail outlets in new office and residential buildings. This trend is likely to be even more marked in future as shopping becomes a primary leisure activity in the kingdom.

There were few shopping malls in Riyadh until 2005, when there was a sudden increase in the amount of land available to them. This continued through 2006 and a further large increase in gross leasable area (GLA) is expected by the end of this year. Colliers expects a total GLA of 2.5 million sq m in Riyadh by the end of 2007 - exceeding regional counterparts Jeddah (2.1 million sq m), Dubai (1.7 million sq m) and Abu Dhabi (833,500 sq m).

Growth is then expected to slow until 2010, when there will again be a substantial increase in overall GLA. Rents in primary-grade retail malls have increased by 15-20 per cent since 2005, where existing leases have allowed. Given the typical length of lease terms, generally five years, these increases are relatively moderate. However, this modest growth in rents hides the impact of a substantial increase in GLA across Riyadh.

As the retail market in the city has matured, more sophisticated malls have begun to command higher rents. In the most prestigious malls, rents are up to $800 a square metre. At the same time, malls in a poor state of repair and those in weaker locations have reportedly started to experience occupancy shortfalls and falling rental returns.

There are three major malls coming on line this year, offering a total of 250,000 sq m of space. By regional standards, the overall provision of GLA per capita in Riyadh provides more scope for development, even with lower incomes than other locations in the region.

Driving growth

In the hospitality sector, hotels are reporting high occupancy rates and steadily growing average room rates. Demand is overwhelmingly driven by the growth in tourism. Growth in foreign investment, along with industrial and real estate development, has resulted in increasing demand.

“In terms of hospitality, Saudi [Arabia] will continue to demand high-quality accommodation because we are a religious destination,” says Damash. “Normally, investors can enjoy the same 70:30 debt-to-equity ratio, and even 80:20 in some cases.”

There are several hotel properties under construction in Riyadh and the government is pushing for developments in Jeddah. International hotel companies are targeting the kingdom (see feature, page 67). These hotels will expand the capital's stock of internationally operated rooms considerably. About 220 rooms will be added by the end of 2007, according to Colliers, a further 795 in 2008, 262 in 2009 and 350 in 2010. This supply will be added unevenly, with the bulk of additional four-star supply completed by the end of 2008. Considerable additional five-star hotel room supply will be completed in 2009. It is expected that both segments will experience short-term declines in performance as new supply is delivered, but the market will perform robustly in the longer term.

However, many investors are excited about the residential market. If there is one issue upon which Saudi investors agree, it is that residential demand will continue to soar, espe-cially as finance for housing becomes more accessible. “In the residential market, Islamic institutions with development arms had been filling the void resulting from the absence of a mortgage system,” says Dahmash. “When there are changes in the mortgage laws, the sector will open up greatly. There is a demand for Islamic finance on these deals and for mega-projects, the Islamic financing certificate (sukuk) is a popular vehicle.”

A housing shortage, especially within low-to-middle-income sectors of the population, is adding to the growth potential. Annual residential unit occupancy is estimated at 92 per cent. At present, most large residential developments in Riyadh involve the sale of sub-divided development plots in schemes targeting private individuals. However, some developers are beginning to shift their focus towards developing ready-to-occupy properties. This is in tandem with a growth in demand for finished units - local developers and brokers indicate occupier preference for completed units rather than buyers organising the construction of their own homes.

High-income housing in Riyadh is concentrated in the north and east of the city. The bulk of developments are under way at the periphery of these areas. Low-income housing schemes are planned in the south and southwest of the city, targeted at industrial employees. Figures for 2006, provided by the Riyadh Chamber of Commerce and the Riyadh Development Authority, estimate the total number of individual housing units in the greater metropolitan area at 732,154.

Samba estimates, correlated with the Chamber of Commerce's own figures, indicate approximately 59 per cent of all units are villas, duplexes or traditional Arabic bungalows. There are about 432,000 of these in total. They further estimate that apartments account for nearly 33 per cent of the total - about 242,000 units. Initial yields on investment are 6-8 per cent. Rental income at the top end of the market is as high as $80 a square metre on an annualised basis.

Overall, the prospects for the real estate sector are good as profitability and demand remain high. Strong growth is expected across all the key development areas, particularly in retail and commercial space in Riyadh and Jeddah. And the increase in financial availability for housing purchases will act as a further catalyst for growth.

TABLE: Saudi Arabia and UAE real estate markets

Saudi Arabia




Abu Dhabi


Class A Central business district rent ($/sq m/ month)





Class A suburban rent ($/ sq m/ month)





Vacancy rate (%)





Prime yields (%)





Gross available retail space (sq m)





Source: Colliers International

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