Saudi Arabia's retail sector will witness exponential growth in coming years, driven by increasing urbanisation trend, favourable demographics and westernised consumption patterns, according to new research by KPMG Al Fozan & Partners.
The report by the audit, tax and advisory services provider said the kingdom's focus on developing the entertainment and tourism sectors is transforming two of its major cities - Riyadh and Jeddah - into world-class retail destinations.
In Riyadh, the total gross leasable area (GLA) in 2018 reached over 2.1 million sq m with additional new retail space of 320,000 sq m expected to be delivered in 2019.
The total retail space in the capital city is expected to reach up to 2.7 million sq m by 2021, the report said.
It added that although the retail sector continues to be strong despite the effect it experienced from the introduction of the value-added tax (VAT) in January 2018, lower consumer purchasing power led to a decrease in rental rates by 5-10 percent across different areas of the city. Rents are expected to remain under pressure until the end of 2019.
The report noted that rental rates continue to be higher in regional and super-regional malls compared to community malls, driven by higher footfall. However, average vacancy rates rose to 15 percent across all mall categories by the end of 2018.
"Although a high amount of retail space is expected to enter the market, there is still demand for retail space in Riyadh. This demand stems from the increasing number of international brands willing to open stores since the opening up of the economy and growing awareness of international brands within the general public," said Firas Hassan, head of real estate at KPMG Al Fozan & Partners.
The report said that in Jeddah, demand for retail space is rising, supported by a high population base, elevated disposable income and changing lifestyle.
The current retail supply is dominated by super-regional malls and is estimated at 1.41 million sq m. This includes recent completions such as Al Marwa Plaza, the second expansion of Red Sea Mall, and Marina Avenue.
"The market is anticipated to witness the delivery of nearly 400,000 sq m in the coming two to three years given the delay in under construction projects, which were scheduled to be delivered in 2018, coupled with other forthcoming projects," said Hassan.
The Jeddah Park and King Avenue Mall are the most prominent forthcoming projects. Other under construction projects include Obhur Mall, Atelier Lavie and Sunset Avenue.
Rentals for regional malls registered a modest decline of 4-5 percent but new upcoming supply is likely to put further pressure on rental rates, the report said, adding that rental rates of community malls range between SR1,800-2,400 per sq m while lease rates for super-regional malls range between SR2,700-3,500 per sq m.
"With new residential communities being set up, we expect the new population in the area to feed into the demand for retail space. We still see an opportunity in developing super-regional malls that can serve as destination malls, equipped with advanced entertainment facilities, and vast range of F&B offerings," Hassan added.For all the latest retail news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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