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29 March 2024

Supply-demand gap pushes up Riyadh realty

Annual residential completions in Riyadh are about 30,000 units across all sectors but the Saudi capital's supply pipeline has shrunk this year due to the tight construction credit and consumer caution. (AFP)

Published
By Anjana Kumar

Residential prices in Riyadh are expected to increase by five to 10 per cent per annum in the next two years owing to restrained supply and a growing economy, said a recent report.

"With supply restrained due to recent credit conditions, a large pool of untapped demand and an economy that has started to grow, we expect a cyclical recovery in the housing market in Riyadh with prices capable of growing by five per cent to 10 per cent per annum over the next two years," said the latest 'The Riyadh City Profile for June 2010' by Jones Lang LaSalle (JLL).

"Recent increases in construction costs may also add pressure to residential prices over the next 12 to 18 months," the report said.

According to JLL, the consumer confidence has prompted moderate increase in prices and land values in Riyadh with the residential market experiencing moderate increases in prices and land values on the strength of recovering confidence and a return to economic growth. "Further, rental values are looking more robust than sales prices in Riyadh," said the report.

JLL said the total inventory across Riyadh is roughly 900,000 housing units. While there are no reliable or comprehensive statistics for housing starts in Riyadh, data from the Ministry of Economy and Planning and also from the Ministry of Municipal and Rural Affairs suggests annual residential completions in Riyadh are about 30,000 units across all sectors (villa, apartment, social, compound etc). This year's census should provide some fresh data on household patterns.

Rising demand

Riyadh's supply pipeline has shrunk in 2010 due to tight construction credit and consumer caution during the recent slowdown. "There were no major new residential projects announced in the past 12 months, compared with six in 2008. Many of the projects announced in 2008 such as Al Wasl, Ajmakan and Shams ArRiyadh have still not delivered any units and many are now being restructured.

Riyadh's population growth, its changing demographics and formation of new households are triggering a fresh demand. However, JLL said the real challenge in converting this potential demand into actual demand for housing units is actual employment growth and affordability. While most professional developers have been providing houses priced at more than SR1 million (Dh979,375), the greatest demand in the city remains in the SR500,000-SR750,000 range.

Expatriate residents now make up a substantial portion of the buying population in Riyadh, representing up to 30 per cent of purchasers at some new developments. Foreign residents are typically allowed to buy for their own occupation in locations approved by the Ministry of Interior. There are some restrictions on reselling.

Home finance is an important tool for enabling affordability. For new community developments, mortgages have been used to finance up to 40 per cent of sales. According to the notary public office in Riyadh, between 3,000 and 4,000 mortgage instruments are registered annually. "If the new mortgage law is passed, clarifying rights and recourses for borrowers and lenders, then we can expect home finance to have a bigger impact, sustaining both volumes and prices," said the JLL report.

Meanwhile, the Riyadh residential market has experienced a soft pricing environment for new houses during 2009 and 2010. "Average purchase prices fell in 2009 but have started a modest recovery in 2010. In contrast, the rental sector has witnessed persistent double-digit increases in the rental inflation index. This number is finally starting to fall in line with the rest of the inflation measures but it does show that demand and supply conditions have been tighter for rental accommodation than for ownership, reflecting the affordability challenge," said the report.

"Small 'micro-builders' are continuing to drive the residential sector. There are a handful of professional developers, but these do not account for more than 10 per cent of Riyadh's annual housing requirement. Sales of serviced land plots to these micro builders or directly to families' accounts form a substantial proportion of housing market activity."

According to JLL, the government is taking action to increase the supply of housing for low-income Saudis. "In 2006, the Ministry of Social affairs started a housing scheme to build 66,000 units in different regions of the kingdom. Three charity organisations [King Abdullah Housing Development Foundation for His Parents, Prince Sultan Foundation for Philanthropic Projects and Prince Salman Foundation for Philanthropic Housing] have delivered more than 600 units in Riyadh during the past three years," said the report.

After almost 10 years without large amounts of new supply, developers and investors are starting to focus on the expatriate compound sector. A handful of smaller projects in the 50 to 100 unit range have been delivered over the past year. There are a number of large compound schemes with 300-plus units in the planning stages but not yet under construction. Conditions will, therefore, remain tight in this sector until at least 2013 and rents should continue to increase. In the first half of 2010, this growth has, however, been uneven, with prices strengthening in the up-market areas to the east and north of Riyadh, while they declined in the south and west areas of the city.

Meanwhile, demand for office space in Riyadh is coming from the public and private sectors which increased over the first half of 2010, with rents being more robust than sale prices over the last year.

The Jones Lang LaSalle report said that tenants are enjoying more competitive market conditions in the light of increasing vacancies and falling average rentals. Demand from the private sector is being driven by regional and international groups looking to expand or establish their presence in the kingdom.

There remains a strong appetite for income-producing assets from the financial sector and cap rates for investment grade property are currently below 10 per cent.

Despite increased demand from both the private and public sectors, the market continues to move in favour of tenants with vacancies increasing and average rentals declining over the first half of 2010.

Office space

Demand for office space by both the public and private sectors is improving. According to JLL, the company has received new instructions to assist clients to secure additional space to expand their business. Nonetheless, new supply is outstripping demand so tenants are enjoying increasing power vis-á-vis landlords. Large tenants in particular should be able to test landlords' limits on rental rates.

Supply

There has been around 50,000 sq mt of new office space completed so far during 2010. Occupiers are benefiting from the introduction of this new office supply of diverse quality and scale across the city.

JLL said there were 12 new buildings completed during 2009, adding more than 140,000 sq mt of office gross leaseable area. The report said it has seen over the past few months the pension agencies' large projects move from the drawing board to the construction stage. "Several towers are now emerging in the King Abdullah Financial District being developed by the Public Pension Agency," said the JLL report.

Additional towers are being constructed by Sama, CMA and the Tadawul stock exchange. The General Organisation for Social Insurance also has office buildings emerging above grade at its Olaya Towers and Granada Business Park developments. "These three projects should be ready for occupiers in 2012-2013 making up the majority of new supply expected over the next five years over which we expect up to one million square meter of new space, a majority of which will be available for rent. This will be equivalent to approximately one third of Riyadh's existing inventory of office space," said the report.

JLL said the Ministry of Justice leased two new buildings that were built on spec and has started to create a cluster around its Notary Public office located in north Olaya across the interchange from the KAFD. The Ministry of Virtue and Prevention of Vice located its national headquarters in the 8,000 sq mt Forus Building on Khurais Road. These and other leasing deals augment the new office buildings that have been self-developed by other ministries such as defence, interior and education.

With project funding and staffing levels on the increase, government agencies will remain the largest source of demand in Riyadh. The challenge for developers is that these agencies rarely make pre-lease commitments and will often limit their lease commitments to three years. Demand from multinational companies has started recovering in the first half of 2010, with banks, IT, consulting and engineering companies driving demand for new premises.

Saudi business groups have also been active in the market on an opportunistic basis to acquire space or buildings on favourable terms.

Performance

While there has been substantial demand, it has not kept pace with the number of new buildings entering the market. The vacancy rate is increasing, resulting in quoted rents dropping by up to 10 per cent.

There are buildings under construction on which work has been stopped or delayed and in some of these cases developers are assessing alternative uses such as healthcare or hotels as exit strategies. At least one developer is also considering selling office space on a strata title basis.