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Riyadh real estate market momentum ‘increasing'
Published in The Saudi Gazette on 08 - 06 - 2011

RIYADH: Riyadh real estate market is expected to experience strong demand on the back of improving economic indicators like oil prices and real GDP growth now projected at 5.7 percent, Jones Lang LaSalle, the world's leading real estate investment and advisory firm, said Tuesday in its "Riyadh Real Estate Market Overview - Q1 201."
The positive outlook is further strengthened by the government's recently announced stimulus package that aims to invest significant public capital into a broad range of public sector developments and infrastructure projects, it added.
The report noted that land trading remains the most active sector of the real estate investment market in Saudi Arabia. Trading volumes have increased in the Riyadh market, driving up land prices during Q1 2011.
Riyadh's hotel market has moved into the recovery stage of the property cycle in Q1 2011, with increasing ADR's and Rev PAR compared to the same period in 2010, the report added.
Considering all real estate asset classes in Riyadh, the residential sector appears most promising because of strong national population growth combined with increasing number of expatriates workers, the report said.
Consequently, rental growth is rising faster than inflation.
In terms of development, more than half of the stimulus package is allocated to housing in order to build 500,000 additional housing units for Saudi families. Market sentiment has been encouraged by the Shoura Council's mortgage law reforms, which will stimulate demand and ultimately result in prices appreciation.
John Harris, Co-Head of Jones Lang LaSalle Saudi Arabia, said "Saudi Arabia stands out in the region for its stable environment and large, growing economy. The government stimulus package has helped push the real GDP forecast up to 5.7 percent. The wealth is changing the face of Riyadh, with new road systems, business parks, universities, public parks, and communities appearing to the north and east of the city. We are concerned that a lot of investment capital is pushing up peripheral land prices, which will complicate the process of delivering affordable housing. Fortunately, recent announcements indicate the government is taking proactive steps to encourage affordable development, including free land grants."
The report further said that though public and private sector employment is experiencing healthy growth and absorbing new office space, the market continues to move in favor of tenants. The steady stream of new office buildings along King Fahd Road and Olaya Street is now outpacing Riyadh's growing demand for new office space, it noted.
Residential rents and sale prices are increasing and this trend should continue through 2011, the report said, adding that mortgage and off plan sales reforms should start to boost demand in 2012.
Developers have recognized robust demand for affordable housing, but high land prices and reliance on traditional construction techniques remain significant barriers to private sector delivery of affordable housing in Riyadh.
Since investors and lenders are now aware of vacancy risks, the pipeline of new projects should be turned off, but supply expansion will continue due to a handful of very large previously launched projects with long construction timelines will hit the market in 2013-14. "At this time, the options available to tenants will multiply and we expect a 'flight to quality' in the office sector, leaving 10+ year old office buildings with an uncertain future."
In 2011, conditions in Riyadh's retail sector stabilized after a period of market saturation in 2009-10. There is very little new supply coming on-stream while increased spending is being driven by employment growth, salary hikes and stimulus-linked bonuses in the public sector. With urban expansion, new opportunities are emerging for good quality, family-oriented retail environments and community focused retail centers. Since rents having bottomed out and new retail development is limited, management teams are reviewing strategies to enhance existing supply through improving key factors like accessibility, parking and tenant mix of retailers and restaurants.
In the first quarter of 2011, the Riyadh hotel market has moved into an upward cycle, evidenced by increasing occupancy levels and average daily room rates. In 2009-2010, new supply was limited and our analysis indicates latent demand that will be stimulated by attractive offerings through new hotels anticipated by delivery in 2012-13. Saudi authorities are also trying to stimulate demand for hotels with various initiatives to support expansion of the local tourism industry.
Moreover, the report noted:
q Public companies and agencies are leading investment and development. Plans to construct a further 500,000 residential units and major investment in infrastructure, transport, healthcare and education sectors will further reinforce this position.
q The office market continues to see new supply entering the market pushing CBD vacancies up to 18 percent. While demand is strong, it is unlikely to offset additional supply levels, resulting in a further decline in average rentals during - Owners have begun to recognize the importance of property/facility management and are preparing new strategies.
q The office market will remain tenant favorable during the next three years. There will be opportunities to 'trade up' from existing facilities and improve workplaces, enhance security and increase parking.
q While retail sales have increased on the back of the government stimulus package, rents are generally stable and vacancies have increased in secondary centers during Q1 2011.
q Development opportunities remain for new community retail centers as city limits are expanding and new residential areas are being developed.


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