The Saudi city of Jeddah has witnessed a general slowdown across all its real estate sectors in the first quarter due to demand-supply mismatch and the country’s overall macroeconomic scenario, according to a report.

The existing demand-supply mismatch is expected to widen as more retail and office supply is expected to enter the market with the easing of backlog projects, stated property iexpert JLL in its Q1-2016 Jeddah Real Estate Outlook.

The report assess the latest trends in the office, residential, retail and hotel sectors across Jeddah in the first three months of the year.

On the residential market, JLL said the villa market saw a 5.4 per cent decline in sale prices and 2.5 per cent fall in rentals over the quarter.

The decline in prices reflects the continued loss of buyer sentiment as a result of the previous 70 per cent loan-to-value ratio, while rents also decreased as they are generally considered less attractive than apartments due to their higher cost.

The apartment sector fared somewhat better than the villa sector, with both prices and rents remaining basically stable over the quarter, it added.

According to the latest survey by the Eskan Committee of the Jeddah Chamber of Commerce and Industry, current supply stands at 793,000 units.

A total of 4,000 units (consisting of standalone villas and apartment buildings) entered the market in the first quarter. The most notable project completed was Da’em Residences, which added 120 apartments to the market.

Saudi Arabia’s Central Bank announced that it will allow specialised mortgage companies to increase their maximum contribution to home financing to 85 per cent.

This is a positive step towards increasing access to home loans and is expected to stimulate demand and will also likely change the current performance rates for villas and apartments, stated JLL in its report.

However, it is still too early to anticipate what impact this will have on the market. The developers of Jeddah Tower (previously known as Kingdom Tower) have announced that the tower is currently 20 per cent complete and scheduled for completion in 2018, it added.

Jamil Ghaznawi, the national director and country head of JLL Saudi Arabia, said: "In the residential segment, sales prices continued to decrease marginally while rents started slowing down in Q1 after continuous growth in 2015. It is also interesting to see that higher quality residential developments are being launched in response to buyer demand for additional amenities."

On the other hand, the office market witnessed a further slowdown in the growth of lease rates, which is expected to continue due to demand constraints throughout 2016, noted Ghaznawi.

Historically, the government and public sector have led demand for office space in Jeddah, but going forward we expect a shift in demand towards private firms as there is hardly any new project announcements, he added.

During the first quarter, about 33,000 sq m of gross leasable area (GLA) was added. This included the completion of Al Andalus Crown Tower on Madinah Road, which added 12,000 sq m of GLA, as well as a smaller office building called Strek located on Prince Sultan Street.

The total supply surged to 925,000 sq m of GLA. Further completions are expected throughout the year, including the Al Khair Tower which will add approximately 43,000 sq m of GLA to the market, stated the JLL in its report.

On an annual basis, average lease rates increased by two per cent. However, the quarter on quarter (Q-o-Q) lease rates decreased marginally by one per cent. Vacancy rates have remained relatively stable at five per cent as of Q1 2016; down from six per cent in the previous quarter.

Looking ahead into 2016, demand for office space from the public sector is expected to decrease after the Ministry of Finance restricted new hires, said the property expert.

In addition to the ministry's announcement that no new projects will be introduced, demand for office space from the construction sector is expected to decrease as well. This will shift the demand from the public sector to the private sector.

Office spaces located north of Madinah Road and Sultan Street have increased lease rates ahead of the completion of the new airport. This should increase demand for office space within close proximity, it stated.
 
Meanwhile, in the retail market lease rates have showed signs of stabilisation in Q1 as vacancies are absorbed. With more projects materialising over 2016/2017, lease rates are expected to remain stable or decrease marginally, said the JLL in the report.

But with a year on year (Y-o-Y) reduction of nine per cent in the value of retail sales, it could affect retail footfall which in turn will impact demand for retail space.

On the hotel market, JLL said the sector has been impacted by the general economic slowdown as a result of lower oil revenues affecting various demand drivers. With declining visitors, the hotel sector has begun to show signs of weakening across Jeddah.

Interestingly, new supply is expected to be added as a number of hotels are set for completion later this year, and it remains to be seen how they will perform in this economic scenario,” he added.

JLL report pointed out that there have been no new additions to the market over the last quarter and supply remained at 8,600 keys.

With a number of projects in the pipeline, 2016 should see a faster pace of hotel delivery with around half of the 3,200 keys forecasted for 2016 expected to materialise.

The key projects include: Radisson Blu Al Salamah, the Ritz Carlton, Movenpick City Star, Assila Hotel and Elaf Galleria. YT February occupancy rates have decreased to 68 per cent; 5 per cent lower compared to the same period in 2015.

Consequently, YT February Available Daily Rates (ADR) and Revenue per Available Room (RevPAR) have decreased by five per cent to $229 and 11 per cent to $156 respectively. The likely reason for this is declining business visitors amid an economic slowdown.

According to JLL, the economic slowdown has already impacted performance rates for Jeddah’s hospitality sector. Should the planned projects for 2016 materialise, it is expected to cause further declines in hospitality performance rates over the next two years, it stated.

With the development of the new airport, Prince Majed Road will become the new gateway to Jeddah and a number of hotels are already under construction or planned in close proximity.

The area surrounding the Jeddah Haramain Railway station, which will be used to transport pilgrims to Makkah and Madinah, should also see increased demand, and consequently supply, for hotel rooms in the future as the station nears completion, it added.

On the retail sector, JLL said the first quarter saw two key completions: Al Khayyat 3 and Yasmin Mall. These added just over 70,000 sq m of GLA to the market. The total supply of retail space currently stands at approximately 1.2 million square meters of GLA.

While Y-o-Y lease rates have increased for both regional and super regional centres, changes in Q-o-Q lease rates suggest that they have peaked as super regional rates remain stable and regional centres decreased marginally by one per cent as of Q1 2016.

Higher materialisation is expected over the next two years after 2015 saw a slowdown in the number of projects entering the market, said the report.

A further 56,000 sq m of GLA is expected to be delivered in 2016, while 2017-2018 is expected to add over 900,000 sq m of retail space to the market in Jeddah. However, some delays and cancellations are expected, it added.-TradeArabia News Service