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Saudi Arabia Real Estate Report Q1 2011

The global financial crisis appears to have had a greater impact on Saudi Arabias commercial real estate sector - and the Riyadh office market in particular - than the economy as a whole. In the interviews that we conducted in mid-2010, our in-country sources indicated that there have been sharp adjustments to rental rates, yields and capital values in that sub-sector. At the beginning of 2010, a major issue had been a contraction in lending by the countrys banks to the private sector. It has also become apparent that the views of bond investors towards the large developers have become more cautious.

Nevertheless, it seems that the sectors fortunes are improving. Our sources in Saudi Arabia indicate that rental rates, in Riyadh if not Jeddah, are firming up again. Notwithstanding that some commercial tenants are awaiting the completion of brand new projects prior to moving from their current accommodation, there is little evidence that tenants have the upper hand in lease negotiations with their landlords.

The government-led development and diversification of the Saudi Arabian economy remains central to the prospects of the commercial real estate sector. The government has the need (in terms of promoting social stability) and the ability to sustain double-digit growth in spending. As a matter of policy, it is promoting the diversification of the economy away from oil. The result is the development of new industries, new cities and need for new office and retail space. Saudi infrastructure plans are a key plank of our positive view on the kingdoms growth prospects, but financing conditions have been very unhelpful. Our Infrastructure team sees an improvement in H210, and a number of recent developments support this view.

In spite of the challenges of the last year or so, vacancy rates remain at levels that are significant, but not indicative of past speculative excesses. At this stage, we remain confident that demand and supply for new space will grow at about the same pace. The implication of this is that Saudi Arabia is a relatively unusual country, given that rental yields should stay broadly unchanged over the 2011-2015 forecast period. The main exception is the office sub-sector in Riyadh, where yields should fall gradually towards normal levels over the next four years.

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