Office Space Market Crash Feared

Dubai: Thousands of square metres of new office space due to come online in Riyadh over the next two years has raised fears of an office market crash after 2012.

Analysts say that an expected 830,000 square metres of office supply is expected over the next two years, with hundreds of other buildings under construction in the central business district of the Saudi capital as well as the under-construction King Abdullah Financial District (KAFD).

"With over one million square metres of high quality space being added to a market inventory of only three million square metres, there is some concern that the office market will crash after 2012," says a report issued this week by property consultancy Jones Lang LaSalle (JLL).

While the report concluded that Riyadh would witness a ‘flight to quality' with a mass of grade A office space coming online, Saud Masud, an analyst at Rasmala, said that much high-end space — such as the KAFD — was years away from handover.

"Mega projects are mostly concepts at this stage. They will take years, and perhaps decades, to fully roll out and they need to be able to generate sticky demand by incentivising companies and end-users in terms of best-in-class product offering as well as liaising with the appropriate financing platforms," he said.

In the meantime, he said, rents will continue to fall.

"There is a supply-demand imbalance in the commercial property sector in Riyadh, so further decline in rents is likely," he said.

Craig Plumb, head of research at JLL, said that an immediate benefit for tenants in Riyadh is that rents in the second class, or grade B, sector are likely to be hit hard.

As and when good property comes online, tenants will either upgrade or compare between rates in their existing premises.

"There are currently only two good buildings in the CBD, one of them being Kingdom Tower," he said.

"Those will keep tenants, but the older buildings won't be able to compete. So there will be a flight to quality of people relocating to new areas. It will leave a lot of older buildings vacant."

In the Riyadh office market, demand is strong from the government, multinational corporations and also from Saudi conglomerates and contractors.

"This quarter, there has been strong demand from government tenants and private sector companies. A global trend is a lot of the major multinational companies are being very tight in the amount of office space they are looking for. So, they are looking for smaller office spaces," said Plumb.

Meanwhile, in the residential market, analysts are more upbeat. John Harris, co-head of JLL Saudi Arabia, said that the government's economic stimulus package — which includes housing allowances for government employees and a public housing programme — is leading to rising sales prices and rents.

"These economic drivers are encouraging the development of large-scale real estate projects across all sectors. Factors such as higher GDP growth, greater oil production and increased bank lending have also contributed to the strong outlook across most real estate sectors," Harris said.

The current housing stock stands at 876,000 units. However, most of the supply completed over the last quarter has already been sold, the JLL report added.Source: Gulf News