Robust economic growth drives prime office rents in Saudi Arabia

4230While real GDP growth in Saudi Arabia slowed from 5.8% in 2012 to 3.8% last year, the effect was overstated by the 0.7% contraction in the Kingdom’s hydrocarbon sector. On a more positive note, however, the finance, insurance, real estate & business services, as well as the public administration sector, grew by 4.9% and 3%, respectively. These were revealed in a new report released by Knight Frank, a leading independent global property consultancy.

Growth in these two sectors helped to underpin the 6% year-on-year increase in office rents in Saudi Arabia in the first quarter of 2014. The best performing market within the Kingdom was Jeddah, where rental values were up 9% on the same part of the preceding year. Like Riyadh and the Eastern Province, Jeddah does not have a central business district (CBD), with the better quality office stock located along a number of main roads, including Tahlia Street, Prince Sultan Street, Madinah Road and King Abdul Aziz Road. However, even Jameel Square – considered one of the best office buildings in the city – continues to suffer from parking and access issues. Looking ahead, while Jeddah should see the completion of around 100,000m2 of new space this year, the majority of it will come from a single office development – the Head Quarter Building on the Corniche.

Meanwhile, Riyadh continues to develop as the commercial centre of Saudi Arabia, with the majority of the large financial and banking institutions currently located in the city. Demand for office space in the capital has been rising – Granada Business Park and Riyadh Business Gate, for example, are nearing 100% occupancy, which helps to explain the 4% annual increase in rents in the first quarter of 2014. Going forward, a number of master-planned schemes are expected to reach completion such as the King Abdullah Financial District (KAFD) and Information Technology Communications Complex (ITCC). If these projects are delivered as planned, the capital’s office stock could rise sharply over the next few years, which in turn may exert downwards pressure on rents.

Demand for office space in Saudi Arabia’s Eastern Province has historically been driven by the oil sector, although this is starting to change as the service sector has started to expand in recent years. However, Grade B stock remains popular among occupiers, with parking and ease of access taking precedence over quality. That said, in the first quarter of 2014, prime office rents rose by 5% year-on-year, although it is likely that rents will stabilise in the short to medium term as a number of new projects are due to be delivered over the next few years.

Stefan Burch, General Manager Bahrain and Saudi Arabia commented: “Year-on-year, Grade A rents across the Kingdom have performed well in comparison to regional markets. While large amounts of supply are due to be released to the market over the coming year, growth in the non-oil private sector looks set to underpin demand for commercial office space in the short to medium term. Going forward we expect Grade A rents to stabilise over the coming twelve months while Grade B rents will soften as poorly designed space becomes increasingly hard to lease.”

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