Knight Frank says Saudi firms are struggling to find quality accommodation for their expansion plans
A lack of prime office stock in Saudi Arabia is holding the market back as firms struggle to find accommodation for their expansion plans, according to a new report.
Knight Frank's Saudi Arabia Office Market Review 2018 said that there have been a number of notable commercial office transactions throughout this year, as key occupiers both from the public and private sector look to expand or move to upgraded premises.
But it added that the market continues to be dominated by a lack of Grade A stock and a large supply pipeline.
In terms of performance, market wide rents and occupancy levels have been under pressure since 2016, with the trend continuing into 2018 amid increasing levels of supply and subdued occupier demand, Knight Frank said.
It noted that key prime areas continued to perform better than the market average as a result of a lack of high quality stock.
"However a major headwind is that a large portion of upcoming supply falls within this category, which could put pressure on performance in this segment. Against the backdrop of a highly elastic supply dynamic, we see rents for Grade B assets softening further in the short term where buildings that suffer from poor accessibility and parking arrangements will struggle for occupancy," the real estate consultancy said in the report.
"Although we have seen an improvement in business sentiment in 2018, we believe that any increase in demand will remain subdued in the short term, with rents and occupancy likely to remain under pressure as increased demand will be met with new supply. Vacancy rates can therefore be expected to rise placing downward pressure on rents," it added.
Knight Frank said it expects landlords to continue offering incentives in order to maintain occupancy levels amid an increasingly competitive market.
Longer term, Knight Franks said it sees demand for office space picking up from current levels as economic reforms under the National Transformation Plan (NTP) and Vision 2030 start feeding through the wider economy, translating into an acceleration of growth in the non-oil private sector.
Saud Sulaymani, partner at Knight Frank Saudi Arabia, said: “Going forward, the implementation of various urban regeneration programs, mixed use communities, and large scale infrastructure projects is expected to act as a catalyst for the real estate market in the kingdom.”