05/12/2018 07:42 AST

Saudi Arabia's office market rents and occupancy levels have been under pressure for the past two years and this trend continues into 2018 amid increasing levels of supply and subdued occupier demand, said leading global property expert Knight Frank.

Key prime schemes continued to perform better than the market average as a result of a lack of high quality stock, stated Knight Frank in its report. The Saudi Arabia Office Market Review 2018 provides an overview of the most recent developments in the sector, in addition to insights on the outlook, with a focus on the key markets of Riyadh, Jeddah and Eastern Province.

Whilst 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, the market continues to be dominated by a lack of Grade A stock and a large supply pipeline, it stated.

According to Knight Frank, the 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, it stated.

Against the backdrop of a highly elastic supply dynamic, rents for Grade B assets are likely to soften further in the short term where buildings that suffer from poor accessibility and parking arrangements will struggle for occupancy, warned the industry expert.

Saud Sulaymani, the partner at Knight Frank Saudi Arabia, said: "Although we have seen an improvement in business sentiment in 2018, we believe 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 placing 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," he noted.

In the long-term, Knight Frank said it sees 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.

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

Sulaymani said the planned wave of privatisation was likely to boost investment and foster growth in the business environment creating favourable conditions for the office sector. "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," he added.

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