Saudi landlords forced to get creative in supply glut

Saudi Arabia may be suffering from a shortfall in residential property, but its biggest cities are seeing an oversupply of commercial space forcing landlords to come up with new plans to entice tenants, according to new research.

A report by real estate consultancy CB Richard Ellis (CBRE) showed that high-end office vacancy rates in Riyadh sit at around 20 percent.

New space added onto the market during the first half amounted to just over 100,000 square meetings, outweighing demand of about 50,000 sq m.

“As a consequence, landlords are, for the first time, venturing into ‘incentives’ territory, including such offers as rent-free periods, assistance with fit-outs, professional property management and reduced or zero service charges,” the report stated.

“Although increasingly employed, the concept of landlord incentivisation remains somewhat embryonic but is likely to be enforced upon landlords as the significant supply pipeline reaches fruition.”

In Jeddah, CBRE predicted that around 250,000 sq m of top-end office space would come onto the market, which the agency said would be a significant volume for the market to absorb.

“Nevertheless, office space take-up has been healthy in 2011, with many tenants also taking the opportunity to upgrade accommodation in a climate of slightly weakening rental rates,” the report said.

“Similar to other major markets in Saudi, tenants are typically price-sensitive and focused on the rental rate and number of parking spaces rather than the quality and ‘prestige’ of new properties.”

CBRE also reported a similar situation in Khobar and Dammam, with the growth in demand for office space more than matched by growth in supply, leading to lower rents.

Social spending packages announced by King Abdullah are pumping an estimated $130bn into the Saudi economy. Much of that money will be spent on lowering the unemployment rate, which, in theory, will help boost commercial real estate demand in the medium term.