In the past few years, Saudi Arabia has seen robust growth in the property sector, on the back of the region’s economic boom, huge liquidity and increasing population. Observers agree that the kingdom currently suffers from a lack of class-A office space, especially in the main commercial centres, but remain optimistic that the situation will be rectified in the near future.

Peter Bibby, Saudi Arabia country manager of global real estate adviser DTZ, says: “Generally there is a shortage of truly grade-A office accommodation throughout Saudi Arabia, and the best located and quality stock is in great demand, particularly in Riyadh”.

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“[However], we are optimistic that next generation of developments and the better ones currently under construction will start delivering those levels of specification demanded by the leading global occupiers.”

Despite rental appreciation, real estate experts do not yet feel that potential investors are put off by the price. “I would say that the supply of class-A space is limited… rents have been rising quickly in response. I don’t think this is putting off business – space is still less expensive than Dubai and the real problem is a lack of multi-tenant class-A space,” says John Harris, an emerging markets expert at Jones Lang LaSalle.

Mr Bibby agrees: “Office rental levels in Saudi Arabia would not appear to be a deterrent. Given the sheer scale of the economy and Saudi’s importance in the region, for many international companies, particularly those who wish to locate in the best buildings, the level of rent is not currently a key driver. The desire to participate in Saudi Arabia is more important.

“As with other markets, there is a point reached in any cycle at which the occupier will pay no more rent than is commercially viable for their business. That point has not yet been reached.”

Areas in demand for companies looking to start up in Riyadh include the central business district (CBD) near the Kingdom Centre, but the 8.6 million square feet planned Information Technology and Communications Complex – to be located in the Al Nakheel district – and the new King Abdullah Financial District (KAFD) will offer “attractive campus settings and pull the city to the north”, says Mr Harris.

Rents up

Rents are rising quickly. Jones Lang LaSalle estimated recently that at the top end of the market rents have reached SR111-SR139 ($30-$37) per square foot of gross area (up 30% over the past two years).

With most office buildings in Riyadh being of medium height – four to eight storeys – rents in this second tier are typically in the SR800-SR1200 range.

DTZ says that prime office rents currently range from SR70-SR186 per square foot for the most modern office space but rents are appreciating quickly. According to DTZ, the best rent achieved in Riyadh’s NCCI building in Olaya district was SR74 per square foot per year in 2003; in 2007 it had reached SR158 per square foot.

Rents are forecast to continue rising. DTZ’s Mr Bibby says that “with few high quality offices available, a limited supply and a growing level of demand from within the kingdom, other Gulf Co-operation Council (GCC) countries and the broader international marketplace, we anticipate that rents will continue to increase for the foreseeable future in the CBD and Riyadh generally.”

New developments

According to Brad Bourland, previously chief economist at the Riyadh-based Samba Financial Group but now head of research and chief Economist at Jadwa Investment, projects worth $300bn are under way or in the advanced planning stage in Saudi Arabia, and much of the development will be financed and owned by the private sector.

One such project is the SR100bn King Abdullah Economic City (KAEC), which its backers say is the largest private sector initiative in the kingdom. The Jeddah-based KAEC will provide some 40.9m square feet of office, hotel and mixed-use commercial space.

KAEC is one of several planned for Saudi Arabia, part of its plan to raise investment under its 10 x 10 programme to put Saudi Arabia among the world’s top 10 globally competitive investment destinations by 2010.

Economic viability

Observers say it is too early to predict the success of the new economic cities. Mr Harris says: “Saudi Arabia will be growing and developing quickly over the next decade, and these schemes will certainly get more than their fair share of demand.

“The government will push ministries and parastatal companies to support these projects, and, we expect, will also use ‘soft power’ to sign up the multinationals.”

Mr Bibby notes that “while people enquire about them, no party has yet asked us to take their interest to a more substantive level”.

Projects due for completion within the next few years in Riyadh include the flagship KAFD. Designed by Denmark’s Henning Larsen Architects, the 17.2 million square foot, $7.4bn KAEC will host the Capital Markets Authority, Tadawul (stock exchange) and various financial institutions.

Construction is due to start this year and its backers – it is owned by the Public Pension Fund – hope it will become the Middle East’s leading financial centre. “Urban quality will be exceptional,” says city planner Johannes Vindum, who has worked on the project.

The first phase of the Riyadh’s SR30m Al Anoud Tower is near completion and the second is on its way. This mixed-use complex next to the capital’s prominent Kingdom Center will provide some 107,639 square feet of office space.

UK-based consultancy Atkins has been hired to design the new SR1.8bn 50-storey Al Rajhi Tower. Completion is expected within the next two to three years.