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Rent in Saudi skyrockets as developers fall behind
Supply-demand mismatch in Saudi may cause you to pay even more rent for your house and office space. Banque Saudi Fransi’s John Sfakianakis gives us an overview
May 10, 2011 5:20 by kippreport
Outside of Riyadh, commercial plot prices did not witness double-digit gains in any neighborhood. Prime plots in some posh Jeddah districts – such as the Corniche and Prince Sultan Rd. – rose more than 5 percent from H2 levels, but they remain cheaper than 2008-2009 levels. The average cost for commercial land in Jeddah of SR5,067 per sq m is almost 15% above Riyadh levels. The five most-expensive neighborhoods for commercial land were in Jeddah, with prices ranging as high as SR22,583 per sq m on the Corniche.
Land prices vary greatly in Makkah, where there are a lot of rundown neighborhoods adjacent to grand new developments surrounding the Holy Mosque, site of the Kaaba. Land within the immediate radius of Islam’s holiest site would easily stretch above SR50,000 per sq m. This territory is not included in the survey.
The cost of commercial land per sq m ranges from SR708 per sq m in south Makkah to a high of SR6,833 in the east Makkah district of Batha Quraish, making it the sixth most-expensive district measured by the survey. Prices there are still about 15 percent below peak levels in late 2008-early 2009, although they have steadily risen in the past year. Batha Quraish is situated close to the entrance of the territory enclosing the Kaaba.
Eastern Province land prices for commercial purposes climbed most in Dhahran, where the median price was up almost 4 percent from H2, although still 12 percent below levels from two years ago. In Alkhobar and Dammam, land prices edged higher after falling consistently in each survey conducted since the second half of 2008. Alkhobar land prices, up 2 percent from a year ago, are still down almost 17 percent from peak levels.
YOUNG FAMILIES STRUGGLE ON RENT
Mounting rents for apartments and villas have been a principal thrust behind Saudi inflation in recent years, and the H1 survey showed leasing rates continued to climb in most neighborhoods. Rent inflation as measured by the Central Department of Statistics has held at or near double-digit levels since mid-2007. Many young families have been unable to afford to buy their homes, opting to rent instead, while a large proportion of expatriates, who account for almost a third of the population, prefer to lease their homes partly due to limited buying opportunities.
Consistent with mounting sale prices, rents on villas rose much more quickly than apartments in H1. High-demand smaller villas (300-400 sq m) leased for a country-wide median price of SR52,875, up 5 percent from H2 and almost 15 percent from a year ago. Jeddah villa rents rose most rapidly by a median 10.9 percent from H2 to SR80,000, while in Riyadh the median price climbed 7.7 percent to SR56,375.
In Riyadh’s North C district, rental rates for small villas have soared almost 32% in the past year – the sharpest rise in the country – to SR61,083. Rents are most expensive in North Jeddah, where an equivalent villa costs SR113,333, on average, per year, up 14.5 percent from a year ago.
Landlords typically extend rental contracts of between one and three years. Tenants, as a result, may experience the pull of rental inflation only every few years. Leasing rates for large apartments (135-190 sq m), meanwhile, went up most in Alkhobar, climbing 7.6 percent compared with H2 to an average SR29,417. Country-wide, the median rent for an equivalent flat climbed a moderate 0.9 percent over the same period to SR32,459. Rates increased modestly in all Riyadh neighborhoods except the east, where they fell 6.2 percent.
Reflecting the continued improvement in the business climate, office rents rose across the board in H1. The median office rental per sq m was SR387 in Saudi Arabia in H1, up 8.1 percent from H2 – yet still down a substantial 21 percent from H2, 2008 levels. Up to the second half of last year, leasing rates for office space were falling rapidly as private sector growth stagnated following the onset of the global financial crisis.
Average H1 prices varied across the Kingdom from a low of SR305 per sq m in Dammam to a high of SR757 per sq m in North Jeddah. Alkhobar office rents showed the sharpest rise in H1 of 10.6 percent. Rents in that Eastern Province city had fallen the most following the financial crisis. The median rate of an Eastern Province office is still 20% below peak 2008 levels, compared with smaller discrepancies of 8.4 percent in Riyadh and 1.5 percent in Jeddah.
The mismatch between supply and demand, particularly for smaller villas, will be a key challenge for state and private sector investors to address in the coming years. Saudi Arabia’s real estate market benefits from a consistent flow of indigenous demand that is poised to swell due to the young demographic. Focusing on affordability will be crucial. Since many Saudis earn less than SR8,000 a month, prevailing property prices are beyond their range of affordability.