The residential rental rates in the Saudi cities of Riyadh and Jeddah rose sharply in 2012 mainly due to demand for low and middle-income housing units from both Saudi nationals and expatriates, said a report.

There had been some sharp rises in rental rates in particularly emerging areas of both the Saudi capital Riyadh and commercial hub Jeddah as massive infrastructure investment across all sectors continued to drive the kingdom's real estate economy, stated property expert CBRE in its review on Saudi real estate market for 2012.

However, there are also areas in both Riyadh and Jeddah that have changed very little during 2012, it added.

In Riyadh, the rental rates have risen by between one per cent and 14 per cent for villas with the largest increases seen in the central areas. The variation for apartments is less, at between 3 per cent and 10 per cent, with the area under most pressure being the western part of the city, said the CBRE report.

However, in Jeddah, the eastern parts of the city have changed very little (around 1 per cent) for both types of accommodation, while the western areas are showing rapid growth at 20 per cent for apartments and 6 per cent for villas, it added.

CBRE pointed out that much of the increase in apartments was likley driven by new and better quality supply rather than increases on a like-for-like basis.

"There is no doubt that much of the existing housing in Saudi Arabia is in poor condition and needs to be refurbished or rebuilt, but there is significantly less time pressure on this process as the housing units do actually exist at present and do actually perform the function of housing," the property expert said in the review.
 
"The other housing requirements are in some respects self-inflicted. For example, the large-scale demolition of housing in Makkah has resulted in a need to replace a significant number of units in the city," it added.  

CBRE said in the Saudi real estate sector, the key issue over the past few years had been the growing problem of ‘social’ or ‘affordable’ housing, which remains largely out of reach for the majority of the population mainly due to the lack of financial products available to them.

The reason for the poor availability of products has its roots in the lack of security for lenders in the event of mortgage defaults. After at least 15 years of debate, the Real Estate and Financing Law was published by SAMA in mid-2012 in an effort to resolve these issues, said the CBRE report.

"Sadly, this has not proven to be the case, with most focus applied to finance companies rather than banks, although several additional laws have yet to be published. It is hoped that the law related to foreclosures will be specifically addressed in the ‘Execution Law’, but until this is published the issue remains unresolved."

The property expert said there appeared to be some recognition that the lack of a regulated real estate sector is acting against the interests of the Kingdom. "However, at this stage there seems to be little consensus on what the problems are and how they should be tackled," the report stated.  

According to CBRE, the key issues remain the activities of brokers, the lack of professional property management and the land trading market.  

On the office sector, CBRE said in broad terms the Saudi Arabian market was buoyant with strong ‘latent’ demand for office space. "However, in all three of the major cities there is some confusion as to the physical location of the Central Business District and the future office sector dynamics of each city," the property expert stated.

"For example, when faced with lease renewals and/or requirements for expansion space, tenants in Riyadh are struggling to decide whether they should stay where they are, move to a more ‘prime’ location in northern Riyadh or wait for prestige space in one of the master-planned mega office projects such as King Abdullah Financial District (KAFD)," it added

KAFD is located on a plot measuring 1.6 million sq m and is planned to eventually play host to two million sq m of prime office stock targeted at the financial sector and all of its ancillary needs including hotels, apartments and so on.
 
There is growing concern that this amount of space will simply overwhelm the office market when it becomes available, and when allied with geographic confusion as to the future office dynamics of the city, there is much to ponder for new and existing office occupiers.

Potential prime office market occupiers are also hampered by the attitudes of developers, many of whom simply will not entertain a lease of less than half of the entire building on which they are working.

CBre pointed out that the ‘Blue chip’ tenants were experiencing difficulty in securing proposals for office space, even though, by GCC standards, their requirements are substantial.
 
In Jeddah, the picture is more fragmented with new office space of varying qualities emerging all over the city, said the real estate expert.

It is difficult for new and moving office tenants to understand where they should actually be, quite often these decisions are eventually led by the preferences of the senior decision-makers who generally live in the emerging high-end districts of western and northern Jeddah, it added.

In Eastern Province the vacancy rate is substantially lower than in both Riyadh and Jeddah as a result of the strong demand driven by oil and gas companies entering the market, but despite this, significantly less office space is under development, said the CBRE in its report.

The last five years have revealed an interesting divergence in rental rates for office space that would be classified as ‘International Prime’ space and ‘Local Prime’ space in Riyadh. This reveals that there is currently an undersupply of top quality space of the standard required by international prestige occupiers who also require top quality maintenance and professional property management.

This quality of space is currently only found in two buildings; Kingdom Centre and Faisaliah Tower. Conversely, the data reveals falling rental rates for ‘Local Prime’ space across Riyadh and this type of space looks set for continued falls as the volume of stock continues to rise, it stated.  

Office rents in Jeddah have shown a small upward movement in general terms, but there is little or no separation between international and local prime space, largely because there is no ‘International Prime’ office space in Jeddah, the CBRE report added.-TradeArabia News Service