The Saudi Arabian commercial office construction market is witnessing numerous new projects, particularly in Riyadh and Jeddah.

Alpen Capital, in its 'GCC Construction Industry', forecast a positive future for the commercial office real estate and construction markets in Saudi Arabia on the back of rising population, high liquidity, low interest rates and a booming economy.

However, the report noted that the prices and rentals in commercial offices declined amid oversupply. Average (grade A & grade B) building rentals were around SR900 per square meter per annum during Q3 2011, and 'we foresee commercial office prices and rentals to decline further in 2012 as supply is expected to outstrip demand.'

Yet, the report said the Jeddah commercial office construction and real estate market will be attractive in the long run due to an increase in demand from foreign investors and strong economic performance.

Jones Lang La Salle estimates an additional 190,000 square meters of commercial office space in 2012 and 2013 in Jeddah from around 357,000 square meter of office space stock at the end of 2010.

Zahran Business Center and Headquarters is expected to be completed in 2012. Upcoming supply of quality office space may also further hamper owners to create value propositions, Alpen said in the report.
The demand for commercial office space in Jeddah is likely to come primarily from the private sector and is expected to be concentrated around the CBD area.

Riyadh on the other hand, expects to add 818,000 square meters of commercial office space in 2012 and 2013, the report said. The first buildings of the much-anticipated KAFD are expected to be completed by the end of 2012. The ITCC Project, being developed by the Public Pension Agency (PPA), is also likely to be completed by the end of 2012.

'We expect prices and lease rentals to have a negative bias in the short to medium term due to oversupply of commercial office space. We also expect an increase in relocations in Riyadh after the completion of new business districts around the periphery of Riyadh. Rentals and re-sale prices of old commercial offices are expected to decline further, once the new business centers like the ITC Complex and King Abdullah Financial District come into the market. However, we maintain an optimistic outlook for Riyadh commercial office construction market mainly on the back of increasing economic activity in the city.' Alpen noted.

Riyadh had approximately 876,000 units of residential stock at the end of Q3 2011. Most of the units completed till Q3 2011 have been sold, signifying demand-supply imbalance in the market.

Increased prices of land coupled with a rise in prices of key inputs like steel and cement led to an increase in the average selling price of residential units across Riyadh. In Q3 2011, the average sales price of villas and apartments stood at SR3,050 per square meter and 2,343 per square meter respectively. Further, Colliers real estate research and services firm said in a separate report that rental yields of villas/duplexes across Riyadh increased from 7.9 percent in Q4 2010 to 8.6 percent in Q4 2011. Further, rental yields of apartments across Riyadh also increased from 7.4 percent in Q4 2010 to 7.8 percent in Q4 2011.

Average grade A office rentals increased by around 13 percent Q-o-Q to reach SR1,400 per square meter per annum mainly due to the addition of some quality projects in the region and an increase in rents announced by Riyadh Business Gate. However, grade B rentals remained almost unchanged Q-o-Q in Q3 2011 at around SR1,000 per square meter per annum. Average (grade A & grade B) building rentals were around SR1,150 per square meter per annum during Q3 2011.

Riyadh had commercial office property stock of 3,211,000 square meters at the end of Q3 201163.

The vacancy rates of office space in Riyadh were much lower as compared to the UAE and stood at 12 percent and 16 percent for city-wide and CBD area in Q3 2011 respectively.

In residential market sector, however, demand-supply imbalance in the market has resulted in increase in prices as well as rentals across Jeddah.
JLL projects an addition of around 78,000 residential units between 2012 and 2015. 'In longer term also we maintain an optimistic outlook of Jeddah residential properties market,' Alpen said.

Rental yields of villas/duplexes across Jeddah declined from 9.1 percent in Q4 2010 to 8.8 percent in Q4 2011. Also, rental yields of apartments in Jeddah also declined from 11.5 percent in Q4 2010 to 10.8 percent in Q4 2011. The decline in the rental yields across Jeddah was mainly due to an increase in prices of residential units on the back of a sharp rise in land prices across Saudi Arabia in the recent past, the report added.

Jeddah's residential market also witnessed a strong demand for a major part of 2011, which led to an increase in the average sale price of both villas as well as apartments. In Q3 2011, average selling prices of villas and apartments was SR4,000 and SR2,800 per square meter respectively. Jeddah also witnessed an increase in rents in 2011, due to an under-supply of residential compounds, particularly for expatriates. Developers have launched several projects to counter the problem of undersupply in Jeddah.
In Riyadh, JLL estimates that Riyadh will add around 126,000 residential units between 2012 and 2015. Further, by 2013 around 2,000 residential units will cater to the demands of expatriates across Riyadh. 'We expect that future supplies will focus on low and middle income groups of population,' Alpen said.

It forecast that residential rental yields across Riyadh will increase mainly due to rising rental rates on the back of a shortage of new residential units. The government’s effort to curb the speculation of land prices with the establishment of the Ministry of Housing is also seen to stabilize the residential prices in Riyadh, which will result in strengthening rental yields.