Article
Upcoming supply to alleviate demand pressure as landlords need to remain cognizant of market shifts
Saudi Arabia’s retail sector has undergone a revival over the last couple of years with the effects of the pandemic seemingly a long distant memory.
February 5, 2024
Robust economic growth, the delivery of new good quality assets as well as the repositioning of existing retail concepts has helped bolster a once under pressure sector and real estate asset class. The sheer volume of prime real estate due to be delivered over the course of the next decade gives us good reason to be excited for what’s to come in the Kingdom.
Today, retail developers continue to focus on the evolution of their retail mix within their assets. As we’ve seen both regionally and globally, developers are looking at ways to provide a broader offering within their assets and giving their visitors a reason to increase their dwell time and encourage repeat footfall. This has led to an increase in F&B and entertainment with developers such as SEVEN looking to revolutionize the market by providing best in class entertainment concepts across the Kingdom.
This evolution has helped to improve overall performance and attract a range of new and incumbent retailers to establish and grow their footprints in the Kingdom, amidst relatively limited quality supply levels. This recovery and subsequent growth have been alongside the dramatic rise in the value and volume of e-commerce sales channels. Whilst e-commerce channels have considerable room for growth, we believe that brick-and-mortar retail in Saudi Arabia will continue to dominate and will be the go-to channel for consumers for many years to come with strong growth expected for the foreseeable future.
The lack of quality supply within the sector has been and remains a key issue with construction efforts facing delays due to the backlog of projects. Resultantly, these compounding factors are underpinning a strained supply and demand dynamic within the retail market. Furthermore, the supply shortage is hindering the retail sector’s ability to provide specialized commercial spaces that align with up-and-coming retailers’ needs. In addition, the slow progress of future supply is favouring existing retailers, especially in institutional retail, who have managed to secure their positions within the market in terms of space, location and lease to a degree.
This has led to a shift in dynamics whereby landlords are benefiting from the current market conditions, being able to adopt a stringent approach when it comes to their negotiation strategy and ultimately dictating rents and lease terms to prospective occupiers for their schemes.
Subsequently, quality retail assets, namely malls, have been able to command similar investment yields to offices with a promising yield outlook for the next 12 months. However, current status-quo is based on current market conditions and optimistic expectations for recent growth rates continuing into the future. In fact, we expect consumer demand to moderate, with future retail spending over the 10-year period to 2033 expected to grow by 1.8% per year on average, a marked decrease from the historic rate of growth over the preceding 10 years.
Looking ahead, the delivery of additional retail stock, in the medium to long term, should provide much needed relief and readdress the balance more in the favour of retailers. Whilst this new supply provides opportunities, there are also risks which will arise. Many landlords will be looking to secure the lease commitments from a sizeable but limited pool, not achieving substantial success in this endeavor could mean landlords find themselves delivering assets with significant void periods and extended operating costs. Being the last to the party in this regard could be catastrophic to any chance of long-term viability, this will particularly be the case for developments which have a lack of distinctive unique selling points compared to other upcoming schemes. In short, landlords, must not get complacent and expect the existing market trajectory to continue at the same pace or even in the same direction or remain inherently inflexible or stagnant. In the not too distant future, the most successful landlords will be those are planning ahead today to understand the changing nature of the market and how this will drive their development requirements. Fortunately, there is a number of landlords who are continually undertaking such positions and we remain hopeful that the vast majority will follow suit and will not be a case of history repeating itself.
This evolution has helped to improve overall performance and attract a range of new and incumbent retailers to establish and grow their footprints in the Kingdom, amidst relatively limited quality supply levels. This recovery and subsequent growth have been alongside the dramatic rise in the value and volume of e-commerce sales channels. Whilst e-commerce channels have considerable room for growth, we believe that brick-and-mortar retail in Saudi Arabia will continue to dominate and will be the go-to channel for consumers for many years to come with strong growth expected for the foreseeable future.
The lack of quality supply within the sector has been and remains a key issue with construction efforts facing delays due to the backlog of projects. Resultantly, these compounding factors are underpinning a strained supply and demand dynamic within the retail market. Furthermore, the supply shortage is hindering the retail sector’s ability to provide specialized commercial spaces that align with up-and-coming retailers’ needs. In addition, the slow progress of future supply is favouring existing retailers, especially in institutional retail, who have managed to secure their positions within the market in terms of space, location and lease to a degree.
This has led to a shift in dynamics whereby landlords are benefiting from the current market conditions, being able to adopt a stringent approach when it comes to their negotiation strategy and ultimately dictating rents and lease terms to prospective occupiers for their schemes.
Subsequently, quality retail assets, namely malls, have been able to command similar investment yields to offices with a promising yield outlook for the next 12 months. However, current status-quo is based on current market conditions and optimistic expectations for recent growth rates continuing into the future. In fact, we expect consumer demand to moderate, with future retail spending over the 10-year period to 2033 expected to grow by 1.8% per year on average, a marked decrease from the historic rate of growth over the preceding 10 years.
Looking ahead, the delivery of additional retail stock, in the medium to long term, should provide much needed relief and readdress the balance more in the favour of retailers. Whilst this new supply provides opportunities, there are also risks which will arise. Many landlords will be looking to secure the lease commitments from a sizeable but limited pool, not achieving substantial success in this endeavor could mean landlords find themselves delivering assets with significant void periods and extended operating costs. Being the last to the party in this regard could be catastrophic to any chance of long-term viability, this will particularly be the case for developments which have a lack of distinctive unique selling points compared to other upcoming schemes. In short, landlords, must not get complacent and expect the existing market trajectory to continue at the same pace or even in the same direction or remain inherently inflexible or stagnant. In the not too distant future, the most successful landlords will be those are planning ahead today to understand the changing nature of the market and how this will drive their development requirements. Fortunately, there is a number of landlords who are continually undertaking such positions and we remain hopeful that the vast majority will follow suit and will not be a case of history repeating itself.
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