The ‘Local Class A' office market in Riyadh is increasingly being dominated by increasing levels of oversupply and moderate levels of demand, while there remains strong demand and a shortage of supply in the two ‘International Class A' properties - Kingdom Tower and Faisaliah, CBRE Bahrain Research Team said in its KSA MarketView. There is a marked separation in pricing and occupancy rates between these two groups, with Riyadh's two ‘iconic' office projects enjoying full occupancy with waiting lists and rental rates at over SR2,000/sqm/pa, while Local Class A rates typically hover at between SR1,200 and SR1,400/sqm/pa. Riyadh's office market improved slightly in 2011 in terms of rental rates and occupancy levels due largely to strong macroeconomic circumstances in the Kingdom, which were sufficient to override the continued weak global economic dynamics and new supply entering the market in 2009 and 2010. The largest single development of new Class A space is in King Abdullah Financial District where it was widely hoped that the GCC central Bank would be located. However, the sheer volume of space entering the market would seem to present a significant challenge for this sector. Numerous other centers in the Middle East have pursued the strategy of seeking to become the region's leading financial centre in recent years, including most notably Dubai and Doha. In both Dubai and Doha there is now a glut of ‘prime' space as Bahrain has maintained much of its grip on the financial services sector, certainly in terms of Islamic finance, due largely to its well-regarded regulatory environment and ratings. The growth in the supply of prime space in Riyadh is taking place in the context of a depressed global economy in which international firms including banks are seeking to cut overheads including staff and accommodation costs. Only the most bullish firms, with the deepest pockets, are seeking expensive expansion space in the short term. Without agreement on currency convergence in the GCC the presence of a GCC Central Bank in Riyadh also seems unlikely in the short term. Nevertheless, we may see a ‘flight to quality' in the office market over the next few years as prices become increasingly competitive. In this environment we may see lower quality, or Class B space become redundant or be redeveloped for other uses. There has also been a locational shift in Class A space in Riyadh, with the gradual northerly migration suiting most of the new commercial office projects in the city. In residential market sector, CBRE report said despite the shortage of housing, apartments continue to be unpopular with Saudi nationals for a variety of reasons including lack of privacy, issues concerning ownership of common areas, the inability to expand accommodation and the lack of secondary trading which would allow owners to move up and down the property ladder. The report said there has been a surge in demand, partly arising from general macroeconomic growth and expatriate executive employment opportunities. However, this is not the case looking forward, while macroeconomic indicators remain favorable, there is a significant volume of new compound units due to enter the market in the next few years, sufficient to ease demand/supply pressures and rental rates. However a review of ‘luxury' apartments for rent in Riyadh has revealed that there are virtually none available, certainly when compared with other major cities in the region, the report added. The highest quality apartments for rent are available at rents around 26 percent the level of top-end rents in Doha, for example. This is in the context of a tiny number of quality apartments for rent and indicates that the market for this particular product continues to be very weak at present. The demand for expatriate compounds in Riyadh is very strong at present, with very high occupancy and rapidly growing rents, partly due to a current mismatch between demand and supply, the report further said. Saudi Arabia continues to perform well in macroeconomic terms, largely as a result of high oil prices and the Kingdom's ability to step up production to cover for countries impacted by regional unrest. GDP growth in 2011 was estimated by the Finance Ministry to be around 6.8 percent, the fastest rate since 2003. The Government also increased public expenditure during the year, to a record $214 billion, 39 percent more than originally planned.
