_The rise of the Saudi Arabian economy
The past decade witnessed substantial growth in Saudi Arabia’s economy on the back of rising oil prices and increased production.
This led to the expansion of the work force and increased government spending in areas such as infrastructure and real estate, education and healthcare, retail and telecommunications. However, the volatility in oil prices since the second half of 2014 ushered in a new economic landscape. Lower export revenues put pressure on spending, forcing the government to rethink its economic strategy and tighten its fiscal policy.
"The response has been a series of wide-ranging reforms aimed at diversifying the country’s economy and encouraging a more productivity-led economic model."
Saudi Arabia’s Vision 2030, and the ambitious targets set out in the National Transformation Plan (NTP), call for a shift from a state-led economic system to one driven by the private sector.
Riyadh
Riyadh’s GDP increased by 0.5% in 2017, down from 3.2% in 2016. Lower oil prices since 2014 have impacted GDP growth and employment, given the majority of the city’s employment and GDP is concentrated in consumer services (32%) industry (25%) and public services (27%), all of which have been impacted by the cut in government spending and the resulting decrease in disposable incomes.
As at December 2017 oil prices have reached $66, the highest price since November 2014, underpinned by increasing demand for oil and supply management by OPEC. This combined with an expansionary budget for 2018 and a focus on diversification means forecasts look more optimistic with 2018 GDP growth forecast at 2.3%.
The office market has remained subdued in Riyadh throughout 2017 on the back of a weak economic environment affecting activity levels.
The slowdown in economic growth and subsequent cutbacks in the job market weighed on occupiers’ expansion plans and on the performance of the office market. This is particularly true in Riyadh where government entities remain a key occupier of office space bearing in mind that Saudi Arabia began tightening public spending in 2016 to help narrow its fiscal deficit.
Average rental rates across Grade A and Grade B office space trended lower throughout 2017. Looking ahead, Riyadh’s office market is expected to remain tenant favourable.
Faced with a slowdown in demand, landlords are likely to become flexible in their lease terms in order to retain tenants and ensure higher occupancies. As such, we expect rental rates to remain flat through 2018.
Jeddah
Jeddah’s GDP increased marginally by 0.1% in 2017, down from 3.0% in 2016. Lower oil prices since 2014 have impacted GDP growth and employment, given the majority of the city’s employment and GDP is concentrated in consumer services (37%) industry (29%) and public services (22%), all of which have been impacted by the cut in government spending and the resulting decrease in disposable incomes.
As at December 2017 oil prices have reached $66, the highest price since November 2014, underpinned by increasing demand for oil and supply management by OPEC. This combined with an expansionary budget for 2018 and a focus on diversification means forecasts look more optimistic with 2018 GDP growth forecast at 2.1%.
Demand for office space in Jeddah remained relatively subdued in 2016 as commercial activity softened. This trend is likely to continue in the short term, before we start seeing a pickup in business activity from current levels.
Office rents trended lower in 2017, reflecting the contracting economic conditions. Meanwhile vacancies in Grade A office space maintained a relative stability as the supply side dynamics for prime commercial office space remain constrained with limited supply completions throughout the year. Commercial rents in Jeddah are likely to face downward pressure over the next
12 months. Vacancy rates could be adversely impacted by potential office space additions to the market as companies scale back on expansion plans in the short term. However, due to current economic conditions there are concerns over the prompt delivery of major projects with further delays in completions expected.