Saudi Arabia’s real estate sectors have recorded fragmented performance across cities and asset classes over 2022, according to global commercial real estate services and investment firm CBRE’s Saudi Arabia Real Estate Market Review Q4 2022 report.
Taimur Khan, Head of Research – MENA at CBRE, said: “Saudi Arabia’s real estate sector recorded improving key performance indicators in 2022, with performance almost uniformly improving across its offices, hospitality, industrial and residential sectors.
“However, with quality and suitable stock in short supply and the delivery of new projects still not on the immediate horizon in most cases, we continue to see activity not reach its true potential. In its key metropolitan centres, the delivery of this stock will be key in achieving future growth, in terms of prices, rents and transactions.”
Kep highlights
- Saudi Arabia’s GDP has closed the year with an estimated growth of 7.9%.
- In the year to Q3 2022 saw extended growths in oil-related GDP by 14.2% and 6.0% for non-oil GDP.
- Headline GDP is forecasted to sustain further growth in 2023 to a lesser extent by recording an increase of 2.5% in 2023.
- Saudi Arabia’s Purchasing Managers’ Index (PMI) provided the highest score of the year in November at 58.5 before settling at 56.9 in December.
- Upturns in Saudi and non-Saudi employment led to an annual increase of 14.8% in total employment during the second half of 2022.
Saudi office sector
Looking at Saudi Arabia’s office sector figures, occupier demand remained strong over the last quarter of 2022. This was particularly so in Riyadh, where stock levels remain anaemic at best, and many upcoming developments are mostly fully pre-leased. Grade A offices in Riyadh saw average rental rates increase by 5.8% year-on-year increase in Q4 2022, while Grade B rents rose by 1.5%.
As for average occupancy rates, both Grades A and B stock saw occupancy levels improve slightly to 99.2% and 98.7% in 2022, marking annual increases of 0.8 and 1.9 percentage points respectively.
- In Jeddah, Grade A office rents increased by 7.4% in the 12 months to December 2022, whereas Grade B rents remained unchanged.
- Occupancy rates for both Grade A and Grade B office rose to reach 90.6% and 76.0%, up from 87.8% and 74.6% in 2021.
- In the Eastern Province, Dammam and Khobar’s office markets saw Grade A rents increase by 7.9% and 6.2%, respectively, over the year to Q4 2022, with Grade B rents remaining flat.
- Grade A occupancy levels in Dammam and Khobar at the end of 2022 stood at 81.2% and 78.7% respectively.
Saudi residential sector
In 2022, residential transactions in Saudi Arabia experienced a 24.5% decrease compared to the previous year. Despite this, the total number of residential transactions reached 175,067 with a total value of SAR 126.5 billion, only showing a slight decrease of 3.7% YoY.
On a regional level, CBRE reported that total transaction volumes fell across the three major regions over the course of 2022, wherein Riyadh, Jeddah and the Dammam Metropolitan Area (DMA) total transaction volumes fell by 33.9%, 16.2% and 20.9%, respectively.
With regards to price performance in the residential sector, average villa prices in Riyadh, Jeddah and Dammam increased by 6.2%, 6.7% and 17.4% in 2022.
Khobar was the only major city to record a decline in average villa prices over this period, with prices falling by 4.4%. The apartment segment of the market showcased much poorer performance in the year to Q4 2022 overall, whereas only Riyadh saw average growth in the year, with prices increasing by 17.4%. Over this period, average apartment prices contracted across Jeddah, Dammam and Khobar by 0.2%, 1.1% and 4.4%, respectively.
Given the marked increase in interest rates, increasing development costs and uniform price growth over the last two years in all market segments mentioned above, a drop-off in demand and consequent slowdown or reversal in price growth has been expected.
Looking ahead, as affordable stock matching the quality and configurations required by owner-occupiers is delivered, we expect that we will see a gradual rate of recovery in activity levels.
Saudi hospitality sector
While the recovery has clearly not been uniform across all of Saudi Arabia’s hospitality markets compared to 2019, we have seen a marked rate of recovery ensue at a country level during the second half of 2022. With religious tourism returning in earnest, festivals and entertainment events in full swing across the Kingdom and corporate tourism picking up, almost all KPIs registered stellar growth in 2022. Saudi Arabia’s average occupancy rate improved by 17.2 percentage points year-on-year in 2022, while the ADR increased by 17.9%. As a result, its average RevPAR recorded an increase of 67.2%.
It is evident from the report that the recovery of the hospitality markets in Saudi Arabia has been uneven when compared to 2019, however, a notable improvement was observed at the national level during H2 2022.
With a resurgence of religious tourism, various festivals and entertainment events, and a rise in corporate tourism, almost all key performance indicators showed significant growth in 2022.
The average occupancy rate in Saudi Arabia improved by 17.2% YoY in 2022, and the Average Daily Rate (ADR) increased by 17.9%. As a result, the Average Revenue per Available Room (RevPAR) recorded a 67.2% increase.
On a city level, Dammam and Al Khobar saw a softening of occupancy rates, which fell by 8.0 and 2.5 percentage points year-on-year respectively. Over this period, this negative trend extended to ADRs in Khobar which fell by 3.6%, whereas Dammam’s ADRs increased by 4.1%. Overall, in Dammam and Khobar this has resulted in RevPARs decreasing by 10.8% and 7.8% respectively.
Year-on-year in 2022, the resumption of religious activities reflected positively on the holy cities of Makkah and Madinah leading to upticks in ADRs and average occupancy rates by 34.2% and 41.9% and 35.9 and 33.7 percentage points, respectively. In Jeddah and Riyadh, growth in the occupancy rate and ADRs has underpinned year-on-year respective RevPAR increases of 30.4% and 32.3%.
Saudi industrial sector
One of the key goals of Vision 2030 is to make Saudi Arabia a top global industrial and logistics center. The National Industrial Development and Logistics Program (NIDLP) has been launched to facilitate this by introducing changes in regulations, standards, and relocating certain activities to areas near major cities to form focused clusters for industrial and logistics purposes and related services.
With a high demand for industrial and logistics space and limited supply, fulfilling this aspect of Vision 2030 is crucial for several industries.
In Riyadh, average rent prices for warehouses registered an increase of 3.7% in Q4 2022 compared to the corresponding quarter in 2021. In Jeddah, average rents as at Q4 2022 stood dropped by 9.4% from a year earlier. Rental rate performance for industrial and logistics stock in Dammam and Khobar has been fragmented over the year to Q4 2022, with average rents increasing by 6.1% and declining by 21.1% respectively.
- In Riyadh, average warehouse rent prices increased by 3.7% in Q4 2022 compared to Q4 2021.
- In Jeddah, average rents dropped by 9.4% in Q4 2022 compared to Q4 2021.
- In Dammam and Khobar, average industrial and logistics rental rates increased by 6.1% in Q4 2022 compared to the previous year.
- Meanwhile, average rental rates for the same type of properties declined by 21.1% in Q4 2022 compared to the previous year.
In the future, it is expected that the industrial and logistics sector will continue to attract attention from both occupiers and investors. The sector is likely to maintain its strong performance due to limited supply and increasing demand. However, as the sector develops and high-quality international options become more accessible, the report anticipates a decrease in consistent performance.