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Making Room for Your Business in the Kingdom

Rising demand for office spaces in Saudi Arabia is driving a build-out in new commercial projects, with strong growth in the supply of office spaces expected over the next two years, a property firm says

DUBAI — The Kingdom of Saudi Arabia will continue to be a lucrative market for all kind of businesses as the demand for quality office space is rising and all major centres likely to experience large growth in supply of office space in the next two years.

Office space development across the Kingdom has accelerated in the last two years, with a far greater proportion of new space falling into the higher quality bracket, according to commercial real estate adviser CB Richard Ellis.

This shift in quality has been the result of a number of factors, including improved economic circumstances and increasing numbers of international service providers with a greater appreciation of the benefits of prestige space.

Spatial dynamics vary amongst the main cities with only Riyadh having a clearly defined central business district, or CBD.

Prime office space in Jeddah, Khobar, Dammam, Makkah and Madinah is typically scattered along major road networks, which offer easy access and high visibility.

The issue of car-borne societies dominated by traffic access and parking which permeate all the major economies of the region, typically dominate office development throughout Saudi Arabia. This has been the main driver for scattered office space development which often appears in mixed-use developments in which the other main use is retail. Parking areas can be utilised by office workers and guests during the day and by shoppers in the evenings.

The CBD of Riyadh is suffering from access and congestion issues but this has been specifically addressed in the Metropolitan Development Strategy, or Medstar.

The plan is intended to guide the future development of Riyadh in order to provide a sustainable approach that moves away from current practice which can be characterised as a densely built central area surrounded by extended urban sprawl.

The plan for Riyadh suggests an LRT network enabling workers to get to the CBD using public transport and the creation of alternative development nodes to the north and north-east, linked by both public and private transport networks to the existing CBD.

Rental Rates

Despite the oil and gas boom that has been a driver for the office space sector in the last few years, rental rates in all sectors and locations of Saudi Arabia remain modest by Gulf standards.

This is due to a number of factors, including the relatively low cost of land in Saudi Arabia (despite recent speculator activity), the relatively poor quality of space and the availability of supply.

Central Province

Essentially, the only major office centre in Central Province is in Riyadh where the market has quickly moved from an undersupply situation to one of oversupply in a relatively short period. However, much of the new space has entered in a category below international standard Class A space with the result that the two buildings in Riyadh that comprise the total supply of this category, command significant premiums over office space in the next category down.

Although there has been a slight slowdown in office space starts this year, the current supply pipeline of Class A space in Riyadh is significant and is likely to drive down occupancy and rental levels in both the existing Class A space and the Class B market.

Quality office yields have dropped markedly over the last year from around 8 per cent or 9 per cent to more than 11 per cent, although it is difficult to be precise given the lack of transactions that have taken place during this time and the lack of transparency typical of the Saudi market.

Eastern Province

Office space supply in Eastern Province is dominated by Dammam and Khobar which together constitute around 85 per cent of the total supply. Both cities currently appear to be undersupplied given occupancy rates averaging over 90 per cent.

In locational terms, development is somewhat haphazard with no clearly defined CBD in either city and a gradual migration of office development onto the major highways that connect the two cities.

Office developments are often mixed with substantial retail developments creating a reasonably sustainable approach with parking shared by different user groups during the day and in the evening.

The top rental rates in Khobar lag those of Riyadh by around 30 per cent but similar to Riyadh, there appears to be a general drift towards higher quality space than was previously the norm. The development pipeline for office space in Khobar exceeds that of Dammam by approximately five times and is likely to overwhelm the growth in demand at least in the short term.

Western Province

The major office centre in Western Province is Jeddah, followed by Madinah and Makkah. Similar to office development trends in Eastern Province, the location of new supply is being guided by traffic and access issues, with office developments typically built along major arterial roads in high-visibility, mixed-use projects where parking can be shared between office workers and shoppers.

Jeddah has historically been undersupplied with quality space and many villas have been converted to accommodate excess demand. This practice has now been banned by the authorities with the result that although an estimated development pipeline of around 350,000 square metres of space (in all categories) is due to enter the market over the next two years, occupancy and rental rates are only likely to drop slightly.

The top rental rates in Jeddah are only around 5 per cent below those of Riyadh, but in Makkah and Madinah the top rates are almost 80 per cent below the top rates in Riyadh, indicating that quality office development is not a priority in either city.

· abdulbasit@khaleejtimes.com