RIYADH: Riyadh's office real estate market continued to perform strongly in the second quarter of 2024 thanks to government investment incentives that are attracting international corporations to set up regional headquarters.
More than 120 international companies moved their regional headquarters to the Kingdom's capital in the first quarter of this year, a 477 percent increase compared to the same period in 2023, according to Savills' latest report on the Saudi commercial market.
The moves come after the Saudi government announced a series of benefits for companies setting up bases in the Middle East in Riyadh, including a 30-year exemption from corporate income tax, withholding tax on headquarters activities, as well as discounts and support services.
Ramzi Darwish, head of Saudi Arabia at Savills Middle East, said: “The Kingdom's ongoing efforts to diversify its revenue streams and create an attractive business environment are proving successful, as evidenced by the high number of international enquiries.”
He added: “In the second quarter of 2024 alone, almost 70 per cent of inquiries received by Savills came from outside Saudi Arabia, with a significant 50 per cent coming specifically from US and UK corporates.”
This growth in leasing activity was driven by sectors such as technology, media and telecommunications, consulting and engineering, manufacturing and IT, with 50 percent of deals involving new entrants, reflecting positive market sentiment for expansion.
The British property consultancy firm said the trend was expected to continue, underpinned by strong inquiries for the rest of the year.
The report also notes that increased leasing activity in the capital has led to an annual increase in rental prices in northern and northeastern Riyadh of 23 percent and 20 percent, respectively.
This increase in prices is accompanied by foreign direct investment in the city, which in the first quarter of 2024 increased by 5.6 percent compared to the same period last year.
“Limited prime office space in Riyadh, combined with strong business confidence, has resulted in Grade A occupancy rates of 98 per cent, with rental rates growing steadily, up 3 per cent quarter-on-quarter in the second quarter and significantly increasing in 13 percent year-on-year,” said Amjad Saif, head of transaction services at Savills in South Saudi.
Savills noted that the city's expanding market and promising economic prospects are attracting leading businesses from various industries, strengthening Riyadh's role as an important hub for regional and global commerce.
He also noted that well-known companies such as PayerMax and Ernst & Young have established their regional headquarters in the Kingdom.
Other notable firms include Northern Trust, Bechtel and PepsiCo, as well as IHG Hotels & Resorts, PwC and Deloitte.
The office real estate market in Riyadh
The UK-based company said that limited prime office space in Riyadh had driven its Grade A occupancy rate to 98 per cent by the end of the second quarter, with rents for these properties higher due to location, modern infrastructure and newer construction.
“This trend reflects the booming office market in the Saudi capital. However, driven by strong demand, the supply of Grade A office space is expected to increase significantly by the end of 2025. This expected influx of more than 650,000 square meters of new space is expected to expand tenant options and reduce the potential for a supply shortage,” Savills added in the report.
The analysis noted significant leasing activity in the second quarter of this year, primarily from engineering and manufacturing companies, followed by legal services and pharmaceutical firms.
According to Savills, around 60 per cent of office lease inquiries are under 1,000 square metres, indicating a growing preference for flexible and efficient working conditions.
Non-oil sector
Savills noted that Saudi Arabia's non-oil sector has become a key driver of the economy, expanding by 3.4 percent in the first quarter of 2024 compared to the same period last year.
The firm noted that moderate inflation in Saudi Arabia at 1.6 percent in May is a positive indicator for the non-oil business environment.
Savills, citing data from S&P Global and Riyad Bank, added that the purchasing managers' index remained steady in expansion territory at 56.4 in May, marking the 45th consecutive month above the neutral threshold of 50, indicating private sector growth Kingdom.
The latest S&P Global report on July 3 showed that the PMI stabilized at 55, driven by increased demand, higher output and employment growth.
In that report, Naif Al-Ghait, chief economist at Riyad Bank, noted that second-quarter growth figures indicate a positive outlook for Saudi Arabia's non-oil GDP, with expectations for growth of more than 3 percent.
He noted that the strong performance of the non-oil sectors throughout the quarter continued to drive economic growth and diversification efforts in the country.
In another report published earlier this month, Savills noted that Riyadh is projected to be among the 15 fastest-growing cities by 2033 thanks to a 26 percent increase in population and continued government spending on infrastructure.
The analysis showed that Riyadh is the only non-Asian city on the list, with its growth attributed to a population increase from 5.9 million to 9.2 million over the next decade.
In May, S&P Global also noted that the creation of free economic zones and a regional headquarters program could further increase the flow of foreign direct investment into the Kingdom.
