An undersupply of prime office stock is holding the commercial market back in Saudi Arabia, as companies struggle to find suitable office space for business expansion plans, the Knight Frank report reveals.

Knight Frank's Saudi Arabia Office Market Review 2018 says "there have been a number of notable commercial office transactions throughout 2018, as key occupiers both from the public and private sector look to expand or move to upgraded premises".

But the report also notes that the market continues to be dominated by a lack of Grade A stock and a large supply pipeline.

Market wide rents and occupancy levels under pressure since 2016, trend to continue

Knight Frank say this trend will continue amid increasing levels of supply and subdued occupier demand.

"Key prime schemes continued to perform better than the market average as a result of a lack of high-quality stock. However, a major headwind is that a large portion of upcoming supply falls within this category, which could put pressure on performance in this segment.

"Against the backdrop of a highly elastic supply dynamic, we see rents for Grade B assets softening further in the short term where buildings that suffer from poor accessibility and parking arrangements will struggle for occupancy," the report said.

"Increase in demand to remain subdued"

The report notes that while there has been an improvement in business sentiment in 2018, Knight Frank believes that any increase in demand will remain subdued in the short term, with rents and occupancy likely to remain under pressure as increased demand will be met with new supply.

"Vacancy rates can, therefore, be expected to rise to place downward pressure on rents. In this context, we expect landlords to continue offering incentives in order to maintain occupancy levels amid an increasingly competitive market.

Demand for office space to pick up

"Longer term, we see demand for office space picking up from current levels as economic reforms under the National Transformation Plan (NTP) and Vision 2030 start feeding through the wider economy, translating into an acceleration of growth in the non-oil private sector," the report continues.

"Moreover, the implementation of various urban regeneration initiatives including mixed-use communities and large-scale infrastructure projects is expected to act as a catalyst for the real estate market.

"Furthermore, it is expected that the planned wave of privatisation will boost investment and foster growth in the business environment creating favourable conditions for the office sector," the report said.

Partner at Knight Frank Saudi Arabia, Saud Sulaymani, said there are many promising projects in the works that could be the "catalyst" for the real estate market.

“Going forward, the implementation of various urban regeneration programs, mixed-use communities, and large-scale infrastructure projects is expected to act as a catalyst for the real estate market in the Kingdom," Mr Sulaymani said.

Source: Knight Frank.

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