A number of Saudi developers have chosen to delay or downsize their plans for new office developments while hotel operators in the kingdom have also reassessed projects due to the impact of coronavirus, experts have revealed.

In Jeddah particularly, the office market continues to be under pressure, recording a 6 percent decline in rental rates during the first half of 2020, according to new research from real estate consultants CBRE.

It said this trend is primarily due to slower business activity as a result of repercussions of Covid-19 and the wider macroeconomic conditions, leading to a number of developers choosing to either delay or reduce development of new office spaces.

The government of Saudi Arabia launched a set of stimulus packages totalling more than SR120 billion to support the private sector during the pandemic, but with the recent tripling of VAT to 15 percent, further fiscal measures are expected to weigh down the recovery for domestic demand.

According to CBRE's Real Estate Market Outlook H1 2020 for Saudi Arabia, GDP is estimated to decline by 7.5 percent in 2020, impacting the overall business and consumer sentiment across the kingdom.

Asma Dakkak, senior manager, CBRE Consulting, said: “Demand for office space is primarily driven by business activities and the growth of SME’s supported by the government incentives and initiatives. A prominent trend witnessed in the market, is the introduction of innovative and flexible office offerings, with potentially larger allocations of space per employee.”

Dakkak added that the quality offering across the Riyadh market will see an uplift upon the completion of KAFD, adding 850,000 sq m to the wider market, with the total amount of quality office space in Riyadh estimated to have reached 4.5 million sq m in H1 2020, and is projected to increase to 5.4 million sq m by 2022.

CBRE noted that demand for residential property in Saudi Arabia will shift to smaller unit sizing with affordable rates.

Driven primarily by growing residential demand, the Riyadh market is expected to witness the delivery of around 120,200 units between now and 2022, led by mega developments such as KAFD Residences and Ministry of Housing (MoH) - East Gate Phase 3.

Despite the Covid-19 effect on the Jeddah market, a significant number of mid-quality housing developments are expected to be delivered over the next two years as investors and developers continue to take initiatives to establish affordable housing projects associated with MOH’s Sakani Program.

Regarding the retail sector, CBRE said demand from residents and the growing numbers of tourists, supported by the entrance of international operators, is pushing rental rates down in the medium term, as significant new supply enters the market while in Jeddah, developers are adopting new strategies by introducing retail spaces within mixed-use developments in a bid to secure steady footfall and healthy performances.

CBRE added that the kingdom's hospitality sector has been heavily impacted by Covid-19, leading many hotel operators to either postpone or announce the temporary closure of their hotels.

Jeddah’s hospitality performance witnessed a significant decline in H1, recording a 32 percent decline in occupancy levels and a 37 percent decline in average daily rates (ADR) from H1 2019.

Some developments may face delays or even be placed on hold due to current market conditions, CBRE said, adding that government initiatives, such as the relaxation of visas and the enhancement of leisure and entertainment within Riyadh, are expected to support demand growth in the city.