While most of the attention on Saudi Arabia’s property market focuses on the residential segment, the country’s retail real estate sector is quietly presenting itself as an attractive alternative. Indeed, many of the factors that have made the residential sector a widely discussed opportunity also apply to retail development. A burgeoning economy, favourable demographic growth projections and undersupply all suggest that retail investments in the Kingdom should offer handsome returns.

Number Leads

Given that the economy grew by 6.77% in 2011 and maintained a similar trend at around 6% throughout 2012, it is easy to understand the optimism regarding growth in general, and in the property market in particular. This economic health has undoubtedly bolstered the income levels of local consumers and their confidence in the country’s prospects. GDP per capita was SR78,906 ($21,028), according to the Central Department of Statistics and Information. Other figures put the individual wealth of Saudi citizens even higher. For example, the “Global Wealth Report” of the Credit Suisse Research Institute estimates that the average per capita income in the Kingdom rose by 56% from 2000 to reach $35,959 in 2011.

This has been supported by a strong environment for consumer lending. According to the Saudi Arabian Monetary Agency, bank lending increased by 5% in the fourth quarter of 2011 to SR242bn ($64.5bn). Consumer lending also seems to be on a sure footing. Credit card debt declined by 3.7% to SR7.7bn ($2.05bn) at the end of 2011. This does not necessarily suggest a cutback in consumer spending. Indeed, strong incomes and a sound credit environment underpin a high level of consumer confidence in the Saudi market. According to the Global Consumer Confidence Index published by global market research company Nielsen in October 2012 for the third quarter of the year, Saudi Arabia is among the top-10 countries for consumer confidence, garnering an index score of 113 compared to a global average of 92 (a score below 100 demonstrates consumer pessimism). Saudi Arabia also scored highly on the MasterCard Worldwide Index of Consumer Confidence for the first half of 2012.

Key Confidence

It is clear that Saudi Arabia has a significant body of individuals with strong purchasing power and an environment conducive for retail uptake. As such, demand for retail space in the Kingdom should be strong. On the other hand, supply in the market seems low compared to its counterparts in the region. According to global real estate services firm Jones Lang LaSalle (JLL), the amount of space in the country has risen rapidly, with mall-based retail floor space increasing by 80% in Jeddah and 65% in Riyadh since 2005. Nonetheless, these two markets appear to remain undersupplied. According to retail sector consultancy Sacha Orloff Group, Riyadh and Jeddah have retail space of 0.2 sq metres per capita, well below the levels in Bahrain, Qatar and the UAE. This will begin to change as mall-based retail space is expected to reach 1.3m sq metres by the end of 2014, according to Sacha Orloff. Nonetheless, these measures still suggest that consumers in the Kingdom are underserved or, at the very least, could absorb more retail space.

Going Up

The current situation should see some price pressure applied to rental rates in the malls of Saudi Arabia’s two major cities. According to global real estate services firm Colliers International, prime rental rates in Saudi shopping centres in the first quarter of 2012 were €62 per sq metre per month. This offered a prime yield of 11%, an attractive figure for investors and one that is slightly higher than those currently being achieved in the residential market. The environment for retail development, therefore, looks very strong. For example, at the King Abdullah Financial District, there is an expectation that the 3000 sq metres of retail space brought to the market over the next two years will be snapped up. Indeed, developers speaking with OBG suggested that retail currently offers the best returns of any segment in Saudi Arabia’s real estate market.

Strong Prospects

As the biggest retail market in the region, Saudi Arabia certainly offers strong potential for real estate investment. David Macadam, head of the retail division at JLL in the Middle East and North Africa, commented in a press statement alongside the “Saudi Arabian Retail Landscape” report that, “Despite its unique challenges, Saudi Arabia remains an exciting retailing opportunity. Retailers across the spectrum are increasingly looking to enter this market to cater to a large and growing domestic demand, driven by its sizeable young population. Those retailers and retail centres that can create a uniquely Saudi experience will be the ultimate winner as they will be able to fully capitalise on the market’s potential and increasing levels of spending power available to the Kingdom’s consumers.”

The JLL report mentions the importance of religious tourism as an opportunity for retail growth, and it certainly seems that the focus of developers’ attention is on the country’s western coastal region. In September 2012, for example, Jabal Omar Development Company, the property largest developer in Saudi Arabia, announced that it had guaranteed the $1.3bn in funding needed to build 10 hotels in its $5.3bn mall and hotel development project in Makkah. The company has already started basic development on a 2.2m-sq-metre plot near the Grand Mosque. The development, which will be constructed in five separate phases, will eventually be home to some 38 hotels and the largest shopping mall in the Kingdom, which is expected to be complete by 2017 (see Makkah chapter).

Gearing For Growth

The largest shopping mall operator and owner in the country, Arabian Centres, a subsidiary of Fawaz Al Hokair Group, is also eying expansion in the western region. The company, which operates 13 malls in total, 12 of them in Saudi Arabia, and around 800,000 sq metres of leasable area, is planning to double its gross leasable area (GLA) in the market over the next five years. This will include the Al Yasmeen Mall in Jeddah and the Taif Mall in Taif, both of which are expected to be opened in the second half of 2013. Al Yasmeen Mall will have a GLA of 94,260 sq metres, while Taif Mall’s GLA will total 34,194 sq metres. Alongside these two developments, Arabian Centres is looking to open three more shopping malls in the central region, in Riyadh, as well as two more malls in the eastern region, in the cities of Jubail and Dammam.

Branching Out

However, activity is picking up not only in the Grade A and upper-middle segment of the market. Dubai-based retail conglomerate Landmark Group announced in November 2012 that it will bring its neighbourhood mall concept to Saudi Arabia in tier B and C cities. The strategy is to avoid the rush to the large urban centres and concentrate on marginal cities with population sizes between 350,000 and 600,000 people. The malls will be opened under the Oasis Centre brand, with the first one operating from November 2012. Within 12 months, the firm hopes to operate in four locations through an investment of Dh800m ($217.8m). Landmark aims to eventually be present in over 30 cities. Neelesh Bhatnagar, director of Oasis Centre, told UAE’s Gulf News, “Unlike the UAE, Saudi Arabia does not have too many malls, and these are mostly located in the big cities of Riyadh, Jeddah and Al Khobar. The next growth wave in Saudi retail will be in secondary locations, and that is where we want to be.”

This suggests that there could be a rush to bring more retail supply to the Saudi market. Indeed, according to commercial real estate giant CB Richard Ellis, the country will see an additional 2m-3m sq metres of GLA brought on-line over the next three to eight years. This draws a perfect illustration of the current undersupply in the market.

Given the salient demand drivers that are in place in the Kingdom, including strong demographic growth, rising incomes in certain segments and encouraging consumer sentiment, the retail segment will likely provide compelling opportunities for investors and developers in the short to medium terms. Furthermore, while Riyadh and the western region may be getting the most attention for now, the demographic and urbanisation trends reshaping the Kingdom should mean that there will be investment opportunities throughout the country.