Riyadh’s office real estate market gains on private sector growth

State initiatives prompt creation of new SMEs and fresh demand, but rents to fall, says CBRE

 King Abdullah financial district in Riyadh. Demand for office space is growing in the Saudi capital. Bloomberg

Demand for office property in Riyadh is expected to rise on the back of government initiatives to expand the private sector and small- and medium-sized enterprises under the kingdom’s Vision 2030 road map, a report said.

The capital city of Saudi Arabia “is continuing to witness demand for office space that caters specifically to SMEs and start-ups”, the report by global real estate consultancy CBRE said on Monday.

Total office stock in Riyadh stood at 4.2 million square metres of gross leasable area at the end of 2018, with an additional 870,000 square metre expected to be delivered by 2022.

Increasing demand from SMEs is due to government-led initiatives and regulations to improve ease of doing business in Saudi Arabia, as the country works to boost investment and stimulate domestic job creation.

The Vision 2030 strategy aims to diversify revenue streams for the world’s biggest oil-exporting economy and ensure sustainable employment for its young population.

CBRE's latest Riyadh Market Snapshot report highlights a growing trend towards office supply as part of new mixed-use projects. "This is anticipated to shift the dynamics and performance of office space in Riyadh," it said.

Despite the positive long-term outlook, rental performances have continued to come under pressure within both primary and secondary office locations, with rental rates down 4 per cent and 7 per cent year-on-year respectively as of the end of 2018, according to the report. Similar to other GCC economies, Saudi Arabia suffered sluggish economic growth during the three-year oil price slump from 2014, with a knock-on effect on corporate growth.

However, increased incentives by landlords, discounts for long-term leases, energy-efficient units and unique design offerings are helping to mitigate declines.

Riyadh’s hospitality sector – which was previously driven by the corporate market – is growing as a result of the country’s fledgling entertainment sector, the report added. Hotel occupancy was up 3 per cent year-on-year at the end of 2018, with a further 5,760 keys expected to be delivered before 2022.

Meanwhile, existing residential real estate supply in Riyadh stood at 1,252,000 units in 2018, with a further 130,000 units set to be delivered before 2022.

“Oversupply remains a challenge, however the innovative spirit employed by the government and private entities demonstrates the encouraging direction the sector is moving in and the promising opportunities that exist across all asset classes,” said Simon Townsend, head of strategic advisory at CBRE Mena and Turkey, and general manager for Saudi Arabia.