Lease rates in Saudi prime shopping malls drop 5% in last 18 months: Knight Frank

A shopping center in Saudi Arabia

The retail sector has been one of the most significant casualties of the COVID-19 pandemic, with headline lease rates in prime shopping malls across Saudi Arabia falling between 1% and 5% over the last 18 months, according to Faisal Durrani, Partner and Head of Middle East Research at Knight Frank.

“In fact, during Q2 alone, rents in the Kingdom’s best shopping malls declined between 1.5% and 3% in Riyadh, Jeddah and Dammam,” Durrani told Argaam in a telephone call.

“Hugely reduced footfall as a result of the pandemic and repeated restrictions on international arrivals has been a double whammy for the retail market. That said, the reopening of the border to tourists from 49 nations this week, combined with ‘revenge spending’ from surging domestic tourism may help to cushion the market from further sharp declines.”

The number of malls in the Kingdom’s major cities reached 344, with an occupancy area of over seven million square meters, according to Knight Frank.

A total of 2.23 million square meters is expected to be added by 2023. The following table illustrates the geographical location and area of malls in various cities:

Source: Knight Frank

Elsewhere, Durrani expected e-commerce to see a compound annual growth rate (CAGR) of 7% between 2020 and 2024, hinting at continued challenges for physical stores, particularly as some shopping habits may have been permanently altered by the pandemic.

Furthermore, online retailing continues to boom in the Kingdom, chipping away at demand for new bricks and mortar stores. E-commerce sales rose 28% to a record level of SAR 22.5 billion in 2020.

“In general, we expect rents to remain suppressed, particularly as new retail completions look set to accelerate. Furthermore, online retailing continues to boom in Saudi Arabia, chipping away at demand for new bricks and mortar stores,” he noted.

While demand for new space from retailers has been mute, developers have taken note of changing attitudes and expectations from consumers, with the majority of new supply focussing on lifestyle or experience-based retail developments, where placemaking is central and retail comes second to activities and experiences that drive increased dwell times, Durrani concluded.