The Ministry of Housing distributed almost 18,000 affordable residential products in Riyadh during Q3 2017, including off-plan residential units (9,500 units), cost-free developed residential land plots (1,100 plots) and subsidised housing loans (6,900 loans). The Ministry is targeting assistance to 280,000 families across the Kingdom in 2017, of which 185,000 had been allocated as of Q3 (leaving 95,000 pending for the rest of the year). The Ministry has announced its intention to publish details of this allocation monthly on a city-by-city basis.

There were no major completions in the Riyadh market during Q3 2017, with the only deliveries being approximately 5,000 villas and apartments in small-scale stand-alone projects scattered across the city. This brings the total residential stock to 1.17 million units. Nearly 6,000 units are expected to enter the market by year-end, but experience suggests that at least 1,000 will be delayed until 2018.

A further 46,000 units are currently scheduled for delivery in 2018/2019, with most being built and sold on an off-plan sale basis in partnership with the Ministry of Housing. In addition, the construction of several medium and high-rise residential projects remains ongoing, including Rafal Living (350 units), DAMAC Esclusiva and Paramount (around 440 units), Meem Tower (48 units) and Raidah Digital City (around 2,100 units).

The number of apartment sales increased 39% and villas 7% y-o-y, according to the Ministry of Justice. This growth in the volume of sales has however been accompanied by lower price levels. Apartment sale prices declined 4% and villas 5% y-o-y. Apartments have generally performed more strongly than villas, as declining purchasing power has seen a continued shift in demand from villas to apartments (bearing in mind that apartment supply was relatively low).

The expansion of the various Ministry of Housing affordable public-private partnerships (PPP), difficulties in raising financing, expected taxation and subsidy cuts on energy prices have together resulted in more private developers working with the Ministry. The market witnessed a decline in villa rents by 4% and apartments by 6% y-o-y, due to rising vacancies resulting from the departure of some expatriate dependants. This has reduced demand for larger units and allowed more room for rental negotiations by existing tenants (including Saudi households), adding downward pressure on rents.

Office Sector

Demand for office space from international corporate tenants has declined over the past year, as spending on major infrastructure and development projects has been scaled back or delayed. Actual government spending Kingdom-wide during H1 2017 decreased 2% compared to H1 2016, to around $102bn, down from $104bn, according to the Ministry of Finance.

Future demand for office space will heavily depend on the 2018 budget and the potential recommencement of some public projects in Riyadh. The Ministry of Finance has indicated that the upcoming budget will be expansionary, which will likely have a positive impact on demand for office space.

Q3 2017 witnessed the completion of approximately 67,000sqm of office space, including Administrative Palaces by Ajlan (32,000sqm), the office portion of Square 6 by Al Habdan (21,000sqm), Oud Square by Al Hudaib (5,700sqm) and the office portion of the Residence (4,600sqm) and the Wahat At Tafaseel (4,000sqm). There are no further major completions expected over Q4 2017, with the only scheduled delivery being the office portion of the Edhafah Tower (9,000 sq m).

The level of new supply is expected to increase significantly, with around 650,000sqm currently scheduled to complete in 2018, including Majdoul Tower (75,000sqm), Ar Rajhi Tower (30,000sqm), Cayan Mefic Centre (12,000sqm) and Malathek 1 (20,000sqm). Some of these projects are however likely to be delayed until 2020 and even further. Moreover, several hundred thousand sqm of office space within the King Abdullah Financial District remains on hold with no set completion date. This space could be delivered to the market within a relatively short time of construction recommencing.

Vacancies have increased by 1% over the past year, to 16% in Q3 2017, and are expected to increase slightly further in the next 12 months, with soft demand and further supply in the pipeline. Rents have decreased 4% over the past 12 months, to an average of $331 per sqm. Demand for space has shifted from new, shell and core offices to fitted-out (previously occupied) offices, as occupiers seek to reduce capital expenses.

Prior to the toughening economic conditions, most tenants preferred new office space that could be fitted out according to their own branding. While they still have to pay key money to cover the fit-out, the cost of buying the existing furniture and fittings is generally below that of purchasing new items. Rents are expected to continue to soften for the foreseeable future, as supply continues to outpace demand.

Retail Focus

Growing participation by women in the workforce and plans to allow them to drive in 2018 (a previous barrier to employment) will likely increase the spending power of women in Saudi, resulting in increased demand for retail space. While total employment among Saudi females in Riyadh increased 1% q-o-q to reach almost 397,000, unemployment remains high among Saudi females in Riyadh (28.5%).

The employment of expatriate women working in Riyadh stayed unchanged q-o-q at around 105,000. Nearly 30,000 women participated in the recent Glowork event dedicated to job creation for women in Riyadh. Landmark Arabia (which currently employs around 15,000 employees in retail stores around KSA) has announced plans to hire a further 6,000, which would increase their ratio of female employees from 25% to 40%.

Approximately 44,000sqm of additional retail space was completed during Q3 2017, including Square 6 (21,000sqm), Welfare Centre (14,700sqm), the retail portion of Oud Square (6,000sqm) and the retail portion of the Residence (2,000sqm). The majority of this additional supply falls under the category of convenience, community and neighbourhood centres, a new trend in the market. The supply pipeline is moving towards northern Riyadh, reflecting the city’s expansion in this direction. The market is expected to witness additional completions by year-end, including Elite (11,000sqm), Dheyafah (9,100sqm), Turki Square (2,400sqm) and Adh Dhahiah Centre (2,200sqm). Looking ahead, notable completions in 2018 will likely include Qurtuba Boulevard (72,000sqm) and Reef Commercial Centre (11,000sqm).

Rents remained largely stable during Q3, declining marginally in both the community (-3%) and regional (-1%) sectors of the market over the past year. Shopping centre vacancies remained unchanged at 9% on both a y-o-y and q-o-q basis, while strip retail vacancies continued to increase. Given the significant upcoming supply, vacancies are expected to increase across the market over the next 12 months, although the expanding shopper-tainment segment may occupy more space and help offset this trend.

Retail sales continue to increase. The latest data from SAMA shows a 32% August increase in the number of point of sales transactions compared to the same period last year, and a 7% increase in the value of transactions. This is due to a combination of the public allowances reinstatement, summer holiday spending and rising competition among retailers in terms of price discounts. This is good news for the retail sector, as it will likely result in more demand for space.