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Mon 5 Jul 2010 01:47 PM

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Oversupply set to squeeze Riyadh office rents

Flood of new office stock likely to pressure landlords to favour occupancy - analyst.

Oversupply set to squeeze Riyadh office rents
OFFICE SPACE: Analysts said a flood of new office stock is likely to put pressure on landlords. (Getty Images)

Office rental prices in Riyadh will be squeezed over the next five years as a supply pipeline of 1.3 million sq m takes a toll on rates, real estate agency Cluttons has said.

In its latest Saudi Arabia property market update, analysts said a flood of new office stock is likely to pressure landlords to favour occupancy over high headline rents.

“A number of private developers who have not been subject to pressing financing obligations have often attempted to maintain price levels at the expense of occupancy,” the report said. “We believe that the large amounts of planned supply will exert downward pressure on rents in the short to medium term.”

State-backed projects King Abdullah Financial District and the King Saud University Endowment Project alone will deliver up to one million sq m by 2013, with a further three million sq m planned in later phases.

“Located in the north and northwest of the city, they represent a geographical shift in focus for new development in the office sector in Riyadh,” analysts said.

Landlords are also facing added competition from Saudi’s largest conglomerates; firms that are likely to build rather than rent to minimise long-term costs.

“Rental demand from the largest Saudi companies remains weak, as the majority of these are owner occupiers. This availability of land and dilapidated properties in prime locations means that development opportunities are available… to develop their own buildings rather than take space,” analysts said.

On the retail front, the sector is seeing a similar shift in power as an increase in available retail space allows tenants to haggle for better deals.

“In general, this has taken the form of longer rent-free periods rather than a reduction in headline rents,” the report said. “[Landlords are becoming] increasingly flexible in order to keep tenants and maintain high occupancy levels.”

According to the report, typical mall rents range from SR560 per sq m annually for an anchor site, to SR2,520 per sq m for a prime food court position.

While retail occupancy levels remain high at almost 90 percent, Cluttons warns that without a centralized retail planning system, “this sector, in common with the rest of the GCC, runs the risk of oversupply.”

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