Landlords must keep up with changing retail markets or fail

Abd Rabbo Ammar/Abaca via Reuters Connect

Saudi Arabia’s retail sector has undergone a revival over the past couple of years. Economic growth, the delivery of good-quality assets and a repositioning of concepts have helped to bolster a once under-pressure real estate asset class. 

The volume of prime real estate due to be delivered over the next decade gives us good reason to be excited about what is to come in the kingdom.

But for landlords the retail market is not something to be complacent about.

Developers are focusing on the evolution of the mix within their assets. As we have seen both regionally and globally, they are looking at ways to provide a broader range, give visitors a reason to increase dwell time and encourage repeat footfall. 

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This has led to an increase in food and beverage and entertainment offerings. Developers such as Saudi Entertainment Ventures (Seven) are looking to provide “best in class” entertainment concepts.

This has helped to improve performance and attract a range of retailers to establish and increase footprints in the kingdom, amid relatively limited supply of quality buildings. 

The recovery and subsequent growth have been achieved alongside a dramatic rise in the value and volume of e-commerce sales. While e-commerce channels have considerable room for growth, we believe bricks-and-mortar retail in Saudi Arabia will continue to dominate and will be the go-to channel for consumers for many years to come. We expect strong growth for the foreseeable future.  

The lack of high-quality supply remains a major issue, with construction efforts facing delays because of a backlog of projects. Consequently, supply and demand are strained. Furthermore, the shortage of supply is hindering the retail sector’s ability to provide specialised spaces that align with up-and-coming retailers’ needs. 

E-commerce sales have risen dramatically, but we believe bricks-and-mortar retail will be the go-to channel for Saudi consumers for many years

The slow progress of future supply favours existing retailers, especially in institutional retail, who have secured their positions within the market in terms of space, location and leasing.

This has led to a shift in dynamics. Landlords can adopt a stringent approach when it comes to negotiations and ultimately dictate rents and lease terms to prospective occupiers.

Subsequently, high-quality retail assets – namely, shopping malls – have been able to command investment yields similar to offices, with a promising outlook for the next 12 months. However, this is based on current market conditions and an optimistic expectation that recent growth rates will continue. 

In fact, we expect consumer demand to moderate, with future retail spending over the 10-year period to 2033 expected to grow by only 1.8 percent a year on average. This is a marked decrease from the growth rate over the previous 10 years.

The delivery of additional retail stock, in the medium to long term, should provide much-needed relief and redress the balance in the favour of retail tenants. While this new supply provides opportunities, there are also risks. Many landlords will be looking to secure lease commitments from a sizeable but limited pool. 

Not achieving success could mean landlords find themselves delivering assets with significant void periods and extended operating costs. Being the last to the party could be catastrophic to long-term viability. 

This will particularly be the case for developments that lack distinctive, unique selling points compared to other schemes. Landlords must not become complacent and expect the existing market trajectory to continue at the same pace or even in the same direction. They cannot afford to remain inflexible. 

In the not-too-distant future, the most successful landlords will be those who are now planning ahead to understand the changing nature of the market and how this will drive development requirements. Fortunately, a number of landlords are continually reappraising their positions and we remain hopeful that the vast majority will follow suit. 

Hattan Alsharif is senior research analyst at CBRE, Saudi Arabia