Thousands of upgraded properties in Saudi Arabia see rental yield soar by up to 50%

Thousands of property owners in Saudi Arabia – particularly in Riyadh – are upgrading and retrofitting their assets to take advantage of the kingdom’s growing property market, experts said.

Carrying out upgrades and modernising properties can yield an increase in rent revenue of between 25 and 50 per cent in a market that has been relatively flat outside the capital Riyadh, where 44 per cent of the kingdom's real estate transactions took place.

With the influx of newer, modern buildings in the kingdom in recent years, rents for apartments or units in malls that were built 30 to 40 years ago are not yielding as high a rent. In addition, some residential properties are being transformed into office space to take advantage of Riyadh's commercial market, which is at near-capacity, analysts said.

Knight Frank said villa and apartment prices in Riyadh rose by 0.5 per cent and 4.5 per cent last year, but were down 2.5 per cent and 2 per cent in the next biggest centre, Jeddah. Apartment prices in the Saudi capital have grown 57 per cent since 2020 and villa prices are 32 per cent over the same period.

Riyadh is likely to see “relatively strong price growth” in the coming year, said Taimur Khan, head of Mena research at CBRE.

Office rents are also climbing at double-digit rates in Riyadh, according to CBRE, where a government initiative to locate regional headquarters is driving up prices and leading to new builds being pre-leased before they come on the market.

Underperforming assets

Saudi Arabia's property market, dominated by domestic demand, is seeing significant changes.

With 63 per cent of the Saudi population under the age of 30, developers are seeing new trends of rising demand for apartments and villas that are surrounded by communities.

There is also a sharp increase in demand for commercial space, spurred on by a government-led initiative that has seen elevated interest levels from national and international occupiers.

We are seeing old stock, like commercial space, like old malls, especially from the '80s and '90s, being retrofitted and transformed into modern spaces

Hattan Alsharif, senior research manager at CBRE

While much of the interest has been in new builds and off-plans, Chestertons said there were “thousands of existing, underperforming assets” in the kingdom, particularly in Riyadh where there has been a surge in population and demand for office space that outstrips supply.

Some properties, for example, might be in great locations but are currently unused or are underperforming due to high costs caused by energy inefficiencies.

A retrofit can improve a building's energy use and also introduce improved facilities management, which Chestertons said was an essential element of an asset’s ability to maintain value and operational effectiveness.

Several properties, when demand was not as high, that were poorly maintained and run down in terms of appearance, are getting facelifts to attract new tenants and command better rents.

“The properties are a mixture of hotels, shopping centres, office blocks and residential units,” Kevin Duffield, head of building consultancy and project management at Chestertons’ Riyadh office, told The National. “We are working with a number of clients who have a mix of these components in their portfolio.”

thousands of upgraded properties in saudi arabia see rental yield soar by up to 50%

Construction work on STC Square, in Riyadh. Photo: BEC Arabia

Mr Duffield declined to say how many they are working with, but said some of the buildings were “built as far back as the 1970s”.

“There are also some more modern buildings which, due to poor design or operation, either have legacy issues or are not performing at their best," he said.

"There is a number of reasons why these assets are currently underperforming, including not being properly maintained or being run down in terms of aesthetics and operation. Also, some assets are in the wrong location. For example, there may be a commercial building in a place where residential units are needed."

Hattan Alsharif, senior research manager with CBRE, said the trend of retrofitting or upgrading had been evident in Saudi Arabia for the past two years.

“We are seeing old stock, like commercial space, like old malls, especially from the '80s and '90s, being retrofitted and transformed into modern spaces in order to capitalise on the market and attract footfall," Mr Alsharif told The National.

“One of the best examples is Al Olaya, a central area in Riyadh, where you have the Kingdom Tower and the Shafaliya Tower. There are smaller commercial buildings, which are old, from the '90s and early 2000s, which are being retrofitted and upgraded in order to match the new, modern standards for businesses in order to attract new businesses."

The upgrading of properties is happening in all major cities in the kingdom, Mr Alsharif said. "For instance, we have a couple of older malls [in Jeddah] which are not modern at all," he added.

"Most malls back in the day didn't have F&B options and now they're starting to add those and they're starting to add leisure areas for kids and transforming them into modern spaces. So this is not just for Riyadh, this is applicable across the board in major cities."

thousands of upgraded properties in saudi arabia see rental yield soar by up to 50%

Laysen Valley, in Riyadh. Photo: Laysen Valley

Mr Duffield said there are several reasons for the assets to be underperforming, including “not being properly maintained or being run down in terms of aesthetics and operation”.

“Also, some assets are in the wrong location. For example, there may be a commercial building in a place where residential units are needed,” he said.

He said repurposing or modernising a property could be worth as much as 50 per cent more in rent to an owner who improves the layout, upgrades fixtures and fittings and enhances energy efficiency.

“This is location and demand-driven, but rental yield could increase by 25 to 50 per cent, based on what we have seen in current market examples,” he said.

Mr Duffield said the cost depends “on the target market and price for a particular location”.

Commercial nearly full

The push to retrofit properties comes as demand for commercial space, particularly in Riyadh, is at record levels and rents are climbing.

Rent for prime office space in Riyadh soared 20.7 per cent last year, while Grade A increased 13 per cent, CBRE said in its Q4 report.

Government rules introduced at the start of this year made it mandatory for international companies with government contracts to establish their regional headquarters in Saudi Arabia.

About 350 international businesses have committed or expressed a commitment to setting up their regional headquarters in Riyadh. As a result, Grade A office markets in cities like Riyadh are running at 97 to 98 per cent occupancy.

thousands of upgraded properties in saudi arabia see rental yield soar by up to 50%

New stock is to come to the market in locations including EzdiPark. Photo: EzdiPark

There is not any meaningful data to show there has been an exodus of companies from Dubai – traditionally the regional hub for most international companies – with most opting to establish a second headquarters in Riyadh.

"If anything, we've seen businesses opening more branches around the region and to be quite perfectly honest ... the Middle East is large enough to accommodate more than one global hub city," said Faisal Durrani, head of research Mena at Knight Frank.

Mr Alsharif said most of the planned office space is being pre-leased, with new stock coming to the market in locations including EzdiPark, STC Square, Laysen Valley and Diriyah.

"We have several key landmark projects coming online. However, the problem is the project completion is not keeping up with the demand," he said. "This all comes from the tail end of the pandemic, which put many of the projects on hold."

Construction boom

While Saudi Arabia's property market remains relatively stagnant, demand is expected to increase in the coming years, with hundreds of thousands of new properties due to be built to cater for influxes in population to major urban areas, both from other areas in the kingdom and from overseas.

S&P Global Ratings said real estate developers in Saudi Arabia are set to benefit from strong demand for properties, particularly in Riyadh, but who will largely be affected by interest rates changes, which could dampen new mortgage lending should they increase further.

Construction activity across the kingdom is rocketing.

Over the past 12 months, nearly $250 billion in contracts have been awarded towards building nearly $1.3 trillion worth of infrastructure unveiled since 2016.

Knight Frank said in its Destination Saudi report in April that the kingdom is planning to build 660,000 homes over the next six years – almost as much as Dubai’s entire housing supply. There are also plans to add 289,000 hotel rooms, six million square metres of office and 5.3 million square metres of retail space.

The projects announced include building whole new cities like Neom and large-scale tourism destinations along the Red Sea.

It is all geared towards Saudi Vision 2030, the kingdom’s blueprint for a future where economic growth is not underpinned by hydrocarbon revenue.

The real estate sector's GDP contribution is expected to rise to 10 per cent by 2030 from 6 per cent currently.

thousands of upgraded properties in saudi arabia see rental yield soar by up to 50%

The King Abdullah Financial District in Riyadh under construction in 2020. Getty Images

Mr Durrani said there have been "some discrete launches for a handful of projects", but no official openings of projects for sale to international buyers yet "as far as we are aware".

With 63 per cent of its population aged under 30, Mr Durrani said it has given rise to a new trend of apartment living and smaller villas that traditionally hasn't been seen in the kingdom.

"The kind of nature and flavour of the type of stock has changed quite a lot to cater to more of an international audience but also to the younger generation of Saudis that prefer more modern living, like open plan concepts," Mr Durrani said.

"They're happy to live in apartments. They're happy to live in townhouses they're happy to live in properties without boundary walls around them. They want to live in residential communities that come with facilities and amenities."

They also want on-site security and gyms, like most buildings in Dubai have, and are willing to compromise on space if reduces commute times.

The younger population gives rise to Saudis moving around the kingdom in search of better employment opportunities, with the capital proving most popular.

OTHER NEWS

15 minutes ago

Video: Strictly Come Dancing star Karen Hauer says Dave Myers helped her 'fall back in love with the show' - as she reveals sadness over Giovanni Pernice's departure

15 minutes ago

Video: British special forces were behind Dagestan terrorist atrocity that saw 20 killed including priest who had his throat slit, says ranting Putin TV star

15 minutes ago

Video: Fatima Payman: Anthony Albanese suffers major betrayal in the ranks as Labor figure turns against him risking her career - as Lidia Thorpe has a meltdown

15 minutes ago

Liverpool star Wataru Endo makes telling transfer demand to new boss Arne Slot

15 minutes ago

Urgent recall for luxury electric vehicle models

15 minutes ago

'Never give up!' - Nunez channels his inner Mo Salah as sensational Uruguay run continues

15 minutes ago

'Do Yaar' Shubman Gill and Abhishek Sharma Set for a New Chapter

15 minutes ago

Jenna Dewan shares breast-feeding photo with daughter Rhiannon as she celebrates 'one week of bliss' following baby's birth

15 minutes ago

2-year Treasury yield inches higher as investors await key data

15 minutes ago

Tennis-Wimbledon 2024 prize money: how much do winners of men's, women's and doubles finals get?

15 minutes ago

Warriors star sidelined again after humbling NRL defeat

15 minutes ago

Chelsea send offer to 1k-p/w teenager who scored 30 seconds into his debut

15 minutes ago

More car dealerships say CDK cyberattack has hurt their operations

15 minutes ago

Rishi Sunak urges voters not to 'sleepwalk' as he launches manifesto

15 minutes ago

Julian Assange flies out of UK after being freed in US plea deal

15 minutes ago

This cognac is 100 years old and is a collector’s dream centerpiece

15 minutes ago

Arizona Cardinals have a sleeper MVP candidate in 2024

15 minutes ago

3 more states to vote in congressional primaries Tuesday

15 minutes ago

Biden, Trump have debated before, but now the men and politics are vastly different

15 minutes ago

At least 24 killed by flooding, landslides after days of heavy rains in Ivory Coast’s largest city

15 minutes ago

French far-right leader Bardella seeks to reassure voters, EU partners on economic, foreign policies

15 minutes ago

7 products and services for a healthier, happier pet

15 minutes ago

Channing Tatum teases long-rumoured 21 Jump Street crossover with Men in Black

15 minutes ago

Scarlett Johansson reveals she is part of Jurassic World 4: ‘Script is incredible’

15 minutes ago

Kangana Ranaut's 'Emergency' gets new release date

15 minutes ago

‘Clean slate’: Snubbed Wallabies back from brink

15 minutes ago

Vogue World celebrates French style, Olympics amid razzmatazz, as menswear season wraps up in Paris

15 minutes ago

8 Best Linear RPGs With Almost No Exploration

15 minutes ago

Austin man finishes half marathon in record time while dribbling a basketball

15 minutes ago

Chinese and Japanese coast guard ships in stand-off around disputed islands

15 minutes ago

Ally McCoist sends warning to Jude Bellingham over on-pitch behaviour at Euro 2024... as pundit names the disastrous outcome that 'could happen' to England star if he is not careful

15 minutes ago

Luciano Spalletti rages at possibility his players are 'leaking tactics' to members of the press - as Italy coach brands them as 'WEAK' and claims 'they are hurting the national side'

15 minutes ago

Apple TV+ Joins ZDF On Medical Drama ‘KRANK Berlin’

19 minutes ago

Harry Rawlins, infantryman who survived close calls with reinforcements after D-Day – obituary

19 minutes ago

Dragon Age: The Veilguard's Skill Trees and Specializations Revealed

19 minutes ago

PM: Coalition unable to ‘land a single’ energy policy when last in government

19 minutes ago

BIG scoop: Orlando Pirates snap up Stellenbosch FC man!

19 minutes ago

Macron Issues Stark Warning: Victory for the far-right or far-left could lead to civil war.

19 minutes ago

Political infighting delays constitution of Gauteng government, DA wants six out the 13 MEC positions

19 minutes ago

WATCH: Afghanistan player delivers Oscar-winning performance with ‘fake injury’ at T20 World Cup