Landing rights

House prices in Riyadh are rising because of a shortage of new developments and a lack of land, but the supply of office space is easily outpacing demand. Published in MEED, February 2014

From the highest vantage point in Riyadh, at the top of the Kingdom Centre, most of the Saudi capital looks to be distinctly low-rise. Other than the Al Faisaliyah Center and some other office blocks between Olaya Street and King Fahad Road there is not much to catch the eye in the centre.

To the north, however, an island of skyscrapers that will form the King Abdullah Financial District (KAFD) is taking shape. In general though, few buildings rise over two or three stories and looking down it is easy to spot large plots of unused land. Some of them are pressed into service for parking space, but many are simply fenced off.

As the city expands these empty plots are becoming a bigger issue, particularly in terms of housing. Riyadh’s current housing stock is around 963,000 units, according to Land Sterling, a Dubai-based property consultancy, but it estimates that 50,000 more units are needed every year for the next decade.

Few people think that the city will be able to overcome this shortfall in the coming years, not least because of the issue of land.

“Unused land is very much a live issue and it is one of the root-causes of the lack of affordable housing,” says Craig Plumb, head of research at Jones Lang LaSalle (JLL), a real estate agency.

“It’s an economic problem because it pushes up land values. But it’s also a planning and urban design problem because it means you have cities with big holes in them and developments further out, so it doesn’t make for the most attractive cities.

“Housing shortages are driven by cost as much as anything. None of the developers have yet come up with a model that allows them to mass produce housing that is both affordable and attractive enough for people to want to live there.”

The lack of affordable housing has been exercising minds in government for several years. In 2011, the General Housing Authority was replaced by the more powerful housing ministry and the government announced plans to build 500,000 new homes around the country. The house-building programme has been slow to get going however, not least in Riyadh. Some large contracts have been signed. In 2011, for example, the ministry signed a deal with US firm Parsons to design 11 housing schemes, including at least one in Riyadh. And in April last year, the ministry signed an SR1 billion ($267 million) deal with Rashed Contracting Company to build 7,000 units on a five square kilometre site northwest of the airport.

Some think that land prices could start to ease off soon. “There is unused land in all the large Saudi cities,” says one local economist. “But I think we’ve reached the peak of land prices and they will start to correct in 2014, if the ministry of housing delivers on its promises.”

For now, however, the gap between supply and demand is still increasing, as are prices. The sale and rental prices of villas is rising by around four per cent per year, according to Century21, another real estate agency, while apartment prices are up by between three and seven per cent.

The pent-up demand may be most critical in the lower and middle parts of the market, but there is also a shortage of homes in compounds aimed at expatriates, leading to long waiting lists. At the luxury end of the market, however, buyers are relatively well served.

In contrast the cost of commercial property is falling because of large new developments that are due to come to the market in the near future. These include not only KAFD but also the Information Technology Communication Complex (ITCC) scheme, which is nearing completion.

“The office market is quite soft, largely because of a few very large projects that are being built which will deliver lots of supply from 2014,” says Plumb. “They include the KAFD and ITCC. They’re massive schemes so the market is a little bit hesitant at the moment while tenants wait to see what’s going to happen.”

The arrival of so much new office space is likely to drive down prices in other districts, where there is often plenty of space capacity already. The vacancy rate of commercial premises was running at 18 per cent at the end of June 2013, according to Century21.

“Clearly the scale of the KAFD is very large. It will add significantly to the office capacity in Riyadh and will clearly put some downward pressure on office pricing,” adds one banker in the city.

The situation for the retail sector is less problematic. Average rents have increased slightly in the largest shopping malls, but have remained broadly flat in other segments of the market. JLL says new malls coming to the market in the next few years should keep prices steady.

The locations of the KAFD and the ITCC is part of a longer-term trend which has seen the city’s centre of gravity move northwards in recent years. Hotels are being developed to meet the demand at these new sites. A new Fairmont hotel is currently being built at the Business Gate development, for example, which is just off the northern ring road.

Overall the hotels sector is expanding quite quickly - perhaps too quickly. There are around 9,000 hotel rooms in the city with recent openings including a Marriott Courtyard, but many more are on the way. Hotel brands including Kempinski, Hyatt Regency, Movenpick and Aloft are all due to open this year. According to a recent survey of the regional hotel market by international consultancy firm Ernst & Young, the occupancy rate of Riyadh hotels was just 57 per cent last year and average room prices were lower than in Jeddah, Mecca or Medina.

There is one other factor which could skew the property market around the city in the coming years, both in terms of the commercial and residential sectors, and that is the metro system currently under construction. The experience of other cities suggest that development clusters could emerge around stations and the presence or absence of a line could dictate property prices in different areas, although it could be some time before the full effect is clear.

“It’s early days for the metro. It’s fairly extensive and it is planned to cover the whole city, so you can’t just say this area or that area will benefit,” adds Plumb.

“But the evidence from Dubai is that there’s a definite premium for residential and office space with direct access to stations.”