Riyadh office rents jump 2.9% due to increased demand for Grade A offices
Momentum appears to be building around the Saudi government’s ‘Program HQ’ initiative, which has seen over 40 multinational businesses recently announcing plans to make Riyadh the base for their regional HQ’s by the end of 2024.
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The burgeoning demand for Grade A office space in the Saudi capital, Riyadh, has unsurprisingly placed upward pressure on Grade A office lease rates, which have risen 2.9% in the 12 months to the end of Q3 2021.
Faisal Durrani, head of middle east research, explained: “Inadvertently, businesses from elsewhere in the Kingdom are also opting to relocate to the capital, which is undermining office markets elsewhere in the country. Furthermore, the persistent flight to quality means Grade A and Grade B rents drifting further apart, highlighted by the fact Grade B office rents across Saudi Arabia have fallen by between 1% and 3% over the last 12 months.”
Looking ahead, Knight Frank predicts that demand for Grade A office space is expected to intensify as blue-chip multinationals are unlikely to settle for anything less, further driving the growing delta between the performance of Grade A and Grade B rents.
‘Program HQ’
Knight Frank notes that ‘Program HQ’ is likely to help redefine the future economic landscape across the Middle East for the better.
Durrani explained: “Clearly, the decision to position Riyadh as a regional rival to Dubai comes with its own considerations. These revolve around the quality and quantum of office space available, access to a global and diverse pool of talent, which Dubai has done extremely well over the past two or three decades, as well as taxation differences. The VAT rate in Saudi Arabia stands at 15%, compared to 5% in Dubai and the UAE, which adds to overall business expenses, as well as the cost of living”.
Despite this, Saudi Arabia is the region’s largest economy and has a population of around 35 million, strongly suggesting that there is room in the region for more than one business hub.
Durrani added: “As it stands, the only global hub city between Cairo and Mumbai is Dubai, so it would be in the region’s interest to see another complimentary hub, be it Riyadh or another city in Saudi Arabia. History shows us that regional hub cities often compliment and support one another’s growth, rather than ‘rival’ each other.
“The trifectas of Paris, London and Frankfurt, or indeed Hong Kong, Singapore and Kuala Lumpur give us a glimpse of what the region’s economic landscape may look like in the future.”
Retail still feeling the impact of structural changes due to Covid-19
Elsewhere, the retail sector continues to struggle to find its feet. The pandemic has driven a permanent shift to the digital world and many of the pandemic-induced shopping habits appear to be permanent, according to Knight Frank.
“Retailers who fail to transition or offer an enhanced digital experience will find it difficult to remain competitive. Retail landlords too cannot afford to be complacent and must stay aligned with evolving market expectations to stay relevant”, Durrani said.
Retail developments that do not cater to the swell in demand for public realm amenities will first see footfall decline, followed by the departure of retailers, as is the case in a few locations in the Dammam Metropolitan Area, for instance.
In contrast, the hospitality sector is experiencing a speedy recovery, with Riyadh benefiting from a resumption in corporate and business travel, while Jeddah continues to enjoy a surge in hotel room demand, fuelled by persistent domestic demand that is being met with a relatively limited number of quality hotel rooms, however this is set to change with a near 51% increase in rooms to almost 26,000 expected by the end of 2023.
For more information on the KSA Commercial market please contact Faisal Durrani