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Jeddah City Profile ­ June 2010

Jeddah: Planning for Growth

Last November's floods have resulted in a tightening of planning controls, which will act as a brake on new supply in some areas of the city. Jeddah is investing heavily to improve its infrastructure. Investment in water, drainage and major transportation projects form the core of the wholesale urban renewal issues that could significantly change the face of Jeddah over the next 10 years. The housing sector remains the most buoyant real estate market at the present time. Developers are shifting interest within this sector to more affordable housing, which will receive a major boost from the eventual passage of the long delayed mortgage law. The office market continues to move in the favour of tenants who are benefiting from more competitive market conditions in the face of an increasing choice of space and more flexible leasing terms. There are increasing opportunities for sale and leaseback arrangements as owners seek to free up capital currently tied up in real estate.

Photo: 2010 © Yazeed Mohammed Al-Khulaifi

2 on.point · MENA City Profile: Jeddah · June 2010

Economic and Demographic Overview

Key Statistics ­ Saudi Arabia

2009

Population (Million) Nominal GDP (Billion USD) Real GDP Growth Oil Export Revenues (Billion USD) Inflation GDP Per Capita (USD) Real Non-Oil GDP Growth Budget Surplus (Billion USD)

Source: Jadwa, SAMA, IMF and Jones Lang LaSalle

The cyclical outlook is very positive and GDP is expected to increase by 4.4% this year and almost 5% in 2011. Government: The expansionary stance culminated in a 13.7% rise in projected state expenditure in the 2010 budget, to a record level of SAR 540 billion. According to government projections, the state's fiscal deficit will widen to SAR 70 billion in 2010 after a smaller than expected shortfall of SAR 45 billion in 2009. The government added 70,000 civil service employees in 2008 ­ the biggest year-on-year increase in more than two decades and further increases in staffing levels in 2009 and early 2010. With the government absorbing so many employees, it is no coincidence that they are the biggest source of demand in the office space market. Construction: Saudi Arabia's construction sector grew 3.9% in real terms in 2009 ­ faster than the 2.2% growth registered in the previous year. This is partly a reflection of the knock-on effect of government infrastructure spending. The Kingdom's real estate sector is still suffering from a shortage of housing units, a fact that has shielded it from sharp price corrections. The demand for new housing will continue, steered by the growing indigenous population. Manufacturing: In 2009, the manufacturing sector GDP growth slowed sharply to 1.7% from almost 6% in 2008. The value of petrochemical and plastics exports from Saudi Arabia, for instance, fell 21.5% between January and September of 2009, according to preliminary data of the Central Department of Statistics (CDS). Inflation: Inflation has fallen from 10% in 2008 and is forecast by local economists to be in a range between 4-5% for the next two years. The one part of the inflation calculation that has remained stubbornly high has been the inflation of residential rents, which according to government surveys is still running at close to 10%. The persistence of rental inflation should help support the economics for home ownership versus rental across Saudi Arabia.

2010 F

26.4 423.0 4.4% 187 4.4% 15,887 4.2% -18.7

2011 F

26.81 468.7 4.9% 4.0% 17,481 4.5%

25.6 369.2 0.15% 157.4 5.1% 14,424 3.0% -12

Economic Commentary

The Saudi economy enjoys scale, growth and stability attributes, which have seen it weather the recent economic crisis relatively well. Although oil continues to account for the majority of national income, the broadening economic base meant that even though oil revenues fell by 50% in 2009, the overall economy recorded a marginal increase in real GDP of +0.1%. This stability has been achieved by the government reinvesting surplus revenues into the private sector through large infrastructure projects and increased spending on the education and health sectors. The government has also stimulated the economy by pouring money into the household sector through large increases in civil service employment and wages. The banking system has been strictly regulated and has proved itself to be solid during the crisis. Despite a couple of high profile defaults, there have been no bailouts and no collapses of banks or other financial institutions. Nonetheless, there has been little new credit available to the private sector over the past 12-15 months. Despite being awash with liquidity, bank loans to the private sector rose only 2% in 2009, down from a 27% expansion a year earlier. Total domestic credit growth (including lending to public entities) fell about 5.4% last year. Initially banks were cautious because of the global crisis, and built up cushions in their loan to deposit ratios. More recently the banks have been reluctant to lend to private business because of the shock defaults of local family groups with debts of over USD 10 billion. As a result, they are currently holding almost SAR 100 billion of deposits with the central bank while they wait to feel more confident about risk. There are signs that banks are starting to lend again on new real estate projects, but at conservative ratios and with robust risk management.

on.point · MENA City Profile: Jeddah · June 2010 3

Demographic Profile

Jeddah's population is estimated at around 3.4 million, accounting for some 14% of the national total. Over the period 2004-2009 this grew by a Compound Annual Growth Rate (CAGR) of 2.3%. There are an estimated 1.6 million expatriates in Jeddah, comprising 47% of the total population, the highest ratio of expatriates anywhere in the Kingdom. With a young demographic profile (43% of the Saudi population is currently aged between 20 and 34), a continued growth in the expat population and a fall in the average household size, there are expected to be increased demand for residential property in Jeddah over the next few years.

Property Clock

The Jeddah market is continuing to experience a slowdown in office and retail sectors. These sectors have seen increased levels of new supply enter the market at a time of subdued demand resulting from the global economic slowdown. This has resulted in falling rents and higher vacancies in recently completed buildings, compared to past levels. The residential sector however, has seen an improvement in consumer confidence and more demand for rental apartments. As a result, some locations have experienced rental growth even though the overall market has continued to decline during the last six months. The residential sector is expected to be the first sector to see a recovery in market conditions. The limited number of new hotel rooms to enter the market over the past year have been quickly absorbed. Quality hotels have experienced a slight decrease in occupancies over the past six months but average room rates and RevPAR remain stable.

Jeddah Property Clock Q2 2010

Source: Jones Lang LaSalle Note: The property clock is a way of locating the relative position of the different sectors within their short-term prime rental cycles. Asset classes can move around the clock at different speeds and directions. Hotels position on the clock represents the RevPAR rather than rents which is calculated as Occupancy x ADR.

4 on.point · MENA City Profile: Jeddah · June 2010

Office Market

Supply

The Jeddah office market continues to experience a period of significant new supply. A total of 67,000 sq m was completed in 2009, including Jameel Square as well as the Shemeisy, Bin Suleiman and HMS buildings. Most of this new development is located in the north of the city along Madinah Road and the west on Tahlia Street. Completions would have been higher but for a number of projects where construction has been delayed or placed on hold in an environment of scarce credit. Similar levels of construction are expected during 2010, with a number of new projects due to complete over the second half of the year In the longer term, there are three large new projects that could add more than 150,000 sq m to stock in 2011/2012. There is over 50,000 sq m of office space at Kings Road Tower on Malak Road on 24 levels. VIP floors at the top of this project will offer separate access / extra parking. The Zahran Business Center will deliver 50,000 sq m of space on Amir Sultan in 2011. This project was originally being offered on a strata basis but has recently been acquired by new owners who are now taking it to the market for lease. The Headquarters project on the Corniche is understood to have secured additional funding and the developer is now proceeding with this 51 storey tower. Between 40-50% of the tower has been sold on a strata basis, mostly to local family businesses and high net worth individuals. This project is forecast to deliver 60,000 sq m of space by the beginning of 2012. The Bay La Sun Business Park is emerging to the north of Jeddah in the King Abdullah Economic City. SAGIA and Emaar have moved offices, and the next building of 35,000 sq m will be complete by the end of 2010. Serviced office operator Makateb Business Centers is the first tenant and will be offering turnkey offices for small or large businesses.

While there continues to be demand from private sector tenants, these leases have tended to be smaller. Leases signed recently include PwC (3,000 sq m), Punj Lloyd (1,000 sq m) and Mars Foods (750 sq m) at Jameel Square, Regus (1,000 sq m) at Bin Suleiman Center, and the Islamic Development Bank (600 sq m) and LG (600 sq m) at Jeddah 101.

Performance

There has been little change in average rents for newer buildings in the northwest of the city over the past six months, with demand generally keeping up with completions in this sector. While asking rents have remained relatively stable in good quality buildings, it is noticeable that landlords are much more flexible about negotiating lease terms and providing incentives to tenants. Older buildings in the middle of the city are experiencing increased vacancy levels. There have been few recent deals to establish benchmark rentals in this sector, but average rents will certainly have declined, as the market moves in the favour of tenants. Quoted office rents vary from SAR 500 up to SAR 1,350 per sq m depending on the location and age of the building. The average new building is quoting asking rents of around SAR 800 per sq m, plus 10% service charge.

Office Rents and Occupancy

Anticipated Future Supply ­ Major Projects

Projects Sakura Building (2010) Rasam Building (2010) Kings Road Tower (2011) Zahran Business Center (2011) Headquarters (2012) Xenel Tower (2013) Jeddah United Company (2014)

Source: Jones Lang LaSalle

GLA (sq m) 21,500 19,000 50,000 44,000 60,000 32,000 39,467

Source: Jones Lang LaSalle, Q2 2010

Market Outlook

With a number of large new projects being completed in the northwest of Jeddah over the next two years, tenants will have increased opportunities to upgrade to better quality space and some occupiers are expected to be pulled out of central Jeddah (which has no well defined Central Business District) to suburban locations. The level of new supply is expected to increase further over the next two years with more stock being delivered to the Jeddah market than over the last two years. The completion of more office space in Bay La Sun project at KAEC will also have a dampening effect on the performance of the Jeddah market as it will be competing with Jeddah for tenants. The market is therefore expected to remain competitive, even as the economy starts to grow again. While Jeddah does not face the same level of new supply associated with the new Financial District in Riyadh, the office employment drivers from government and multinational tenants are not as strong in Jeddah as in the capital.

Demand

Tenant demand started to recover in the second half of 2009 and this recovery has continued into the first half of 2010. The strongest demand has come from those sectors associated with the big increase in public spending on infrastructure, healthcare and social education. A number of large new deals were announced towards the end of 2009, reducing the stock of vacant office space available in the Jeddah market. In the Shemeisy Centre on Amir Sultan, over 9,000 sq m on three floors was leased to a joint venture between the Saudi Railway Company and the Saudi bin Laden group. Further south, the HMS Group leased over 6,000 sq m in the bin Hamad Building to the Faisal Hospital. The quasi-government Islamic Conference Group has rented a new 11 storey tower at King Abdullah and Madinah Road.

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Residential Market

Supply

The Jeddah residential market remains dominated by small developers and individual owners, with the larger developers delivering just 2,010 additional units to the residential market in 2010.

Demand

There are two broad indicators of residential demand, sales activity and household formation levels. The notary office of the Makkah Region (of which Jeddah is a part), registered 37,000 property sales in 2008. Unfortunately no data has yet been released for 2009 and there is also no breakdown of how many of these sales are outside of the city, or the ratio of residential to commercial sales. Separately the Ministry of Commerce estimates that new household formation will result in demand for around 40,000 new housing units per annum over the next few years. Assuming that Jeddah represents 75% of that total, then demand for around 30,000 new housing units per annum can be supported from the changing demographics of the city. It is however estimated that at least half of this demand will be for low-income housing.

Anticipated Future Supply ­ Major Projects

Projects Lamaar Towers (2012) Jeddah Gate (2013) Asfan Phase 1 (2014) Diamond (2015) Al Mada Tower (2015) Shams Al Arous (2016) Ewaan Project (2016)

Source: Jones Lang LaSalle

Units 550 6,000 2,500 300 998 10,000 2,500

Performance

While residential prices were generally flat in Jeddah during the adverse economic conditions of 2009, districts to the south and east of the city have reported declines in the first half of 2010 as a result of last November's floods. Research from local bank Saudi Fransi reveals a mixed picture of residential price movements. Apartment prices in Central and Southern Jeddah have declined by 4-9% over the past six months, while prices have increased marginally in the more affluent areas to the north of Jeddah. Villa prices in north Jeddah are also reported to have increased over the past six months. Land has traded well over the first half of the year, suggesting that confidence is recovering. While there has been a healthy level of land sales, this has not yet translated into an increase in land prices in most areas.

The future supply is likely to be reduced as applications for planning permission and building permits are being reviewed with extra scrutiny after the impact of the record rainfall and floods in Jeddah in November 2009. Most of the new supply in major projects comprise mid-market apartments appearing in the new sub-divisions running to the west of the Haramain Highway and along Prince Miteb. Villa developments are also being undertaken in the districts between Sary Street and the Ubhur Creek (Shatea, Zahra, Basateen), and north of Ubhur Creek along the west side of the Madinah Highway. The completion of major medical and educational uses has stimulated further residential development north of the Creek, with new locations for the CBA University, Thuray University and Battarjee Medical School. The South Hospital is also close to completion with 500 beds. Two gated communities targeting the expatriate sector have been announced for development in the Rawdah and Zahra districts. There has been a shift in developer focus from up-market developments aimed at the affluent, to more affordable communities. Ewaan's Fareeda will be one of the first such schemes to start construction later this year. At Asfaan, Kinan have constructed their sales center and model villas, while Sumou have also announced a major project called Jeddah Hills. These large new communities represent Jeddah's future expansion and will be developed in the corridor running north from the KAIA airport along the Madinah Highway up to Rabigh. At King Abdullah Economic City, the Bay La Sun apartments developed by Emaar have opened this year, generally priced at over SAR 1 million. The next residential development within this project `Hawadi' is much more affordable, offering a range of apartments and duplexes geared to the middle class incomes, priced between SAR 250,000 and SAR 750,000. Large districts in the south east of Jeddah have been set aside by the municipality for development of low-income housing. These areas will be needed to accommodate the population that will eventually be resettled from the Khozama and Ruwais districts that are to be redeveloped by publicprivate consortiums.

Residential Prices (per sq m) by District

Source: SAMA, Jones Lang LaSalle, Q2 2010

Market Outlook

Supply has been restrained by tight credit and disruption to the planning process from the November floods. At the same time household demand is recovering along with the economic cycle so we expect rental and sales values to remain relatively stable in the short term, before increasing over the 18-24 month timeframe.

6 on.point · MENA City Profile: Jeddah · June 2010

Retail Market

Supply

Following a period of high supply over the past two years, the supply tap has been turned off in respect of new shopping centres in Jeddah. There have however been a couple of major new completions over the past six months. Stars Avenue on Malak Road has added around 38,000 sq m of stock in the Ana retail strip. The opening of the largest new project, Central Park (on the Old Airport lands) has been delayed in the face of slow absorption levels, but this centre should be operational in the next six months.

Performance

Average rents vary between SAR 1,800 and SAR 2,500 per sq m for unit stores in major malls such as Red Sea Mall, Mall of Arabia, Aziz Mall, Andalus and Stars Avenue. Rents for anchor tenants are lower, averaging between SAR 600 and SAR 1,500 sq m. Average rents for street retail vary between SAR 1,000 for secondary locations up to SAR 4,000 per sq m for prime locations in Tahlia Street, Rawdah, Malak Road and Amir Sultan. Prices for food outlets vary between SAR 2,000 up to SAR 4,000 per sq m in malls and between SAR 1,200 to SAR 3,000 on major streets. There has been no general increase in retail rents in the Jeddah market during 2009 and early 2010. Performance has been constrained by sluggish consumer spending and increased retail supply in new locations. Older centres have suffered from the introduction of large new malls and have to offer rent concessions or holidays to retain existing tenants. In some cases, tenants have still left existing centres (e.g. Carrefour who decided to leave the Jamjoom Centre).

Anticipated Future Supply ­ Major Projects

Projects Central Park (2010) Jeddah City Centre (2010) Flamingo (2010) Lamar Tower (2012) Jeddah Gate (2012)

Source: Jones Lang LaSalle

GLA (sq m) 130,000 50,000 65,000 26,000 75,000

Retail Rentals

While there have been no major new announcements of additional retail malls over the past six months, there remains a steady supply of retail space due for completion over the next two years. Most of this space is coming in showroom formats or beneath high-rise office buildings such as Jameel Square or Kings Road Tower. Another upcoming retail format is for the inclusion of retail space within hotels and other mixed-use developments. An example of this trend is the Park Hyatt, which is leveraging its marina setting to attract up-market F&B operators.

Demand

There has been a clear shift of tenant interest toward the large new malls such as Mall of Arabia, Red Sea Mall, and Andalus Mall over the past six months. Street retailing does however remain in demand, especially the street facing units beneath office buildings like Jameel Square, where space fronting Tahlia Street has been taken by Van Cleef & Arpels, Chanel, Piaget and Fauchon. The largest lease within a retail mall was at the Shemeisy Centre where Options Furniture has taken a 5,000 sq m outlet.

Source: Jones Lang LaSalle, Q2 2010

Market Outlook

The retail market still needs some time to absorb the recent shopping centres and further declines are expected in average rents over the short term. The pace of decline is however stabilising compared to the slump of the last 12 months. With supply limited largely to retail components of high-end mixed-use projects introduced as developers try to make sense of high land values and densities in strategic locations, the Jeddah retail market has the opportunity to pause for breath and respond to increasing confidence and retail sales over the next 12 months.

on.point · MENA City Profile: Jeddah · June 2010 7

Hospitality Market

Supply

Jeddah saw the addition of just two quality hotels during 2009 and there have been no further additions in 2010 to date. · The 5-star Park Hyatt has 142 rooms located on the Corniche across from the InterContinental. Amenities include a marina, restaurants and a conference/banqueting centre. · `Elaf' is a new local quality chain launched by SEDCO. They have opened a 147 room 4-star hotel in SEDCO's Red Sea Mall. According to statistics from the Tourism Information and Research Center (MAS), there are some 18,000 hotel rooms in Jeddah, accounting for 8.7% of the total for Saudi Arabia. Jeddah ranks behind Makkah and Madinah but ahead of Riyadh in terms of room stock. Around 17% of the Jeddah hotel inventory is in the 5-star category, with a further 28% of rooms in the 4-star category. There are two hotels under development beside the Mall of Arabia close to the airport: Marriott Courtyard and Four Points Sheraton. Elsewhere, Holiday Inn Express is converting a hotel in downtown Jeddah and has also announced plans to develop a hotel in the Industrial Valley at King Abdullah Economic City (KAEC). Already under development in KAEC is a 4-star hotel in the Bay La Sun Business Park, which will be operated by Southern Sun. Looking further ahead, Rocco Forte will be bringing his unique approach to a project on Tahlia Street, where excavation has now begun. The Kempinski will be adding its presence to the other 5-star towers on the Corniche, with a new hotel being developed by the Al Issa Group. Jeddah's hotel room supply is estimated to increase to around 5,519 quality hotel rooms by 2013.

Demand

The seasonality of the Jeddah hotel market is modulated somewhat by demand from three different sources: business travel, summer tourism and religious tourism. A number of transportation investments are going to increase travel capacity, in particular the new KAIA airport terminal and the highspeed railway linking Jeddah to Makkah, Madinah and the King Abdullah Economic City. Contracts for the rail link have now been awarded and civil works have already commenced. Other plans that could stimulate additional hospitality demand within the Jeddah market. JDURC plans to create more parks and improve public spaces such as the Corniche and Tahlia Street, which should sustain additional domestic demand. The business travel market is likely to be further stimulated by the proposed large new conference centre in Jeddah.

Performance

Despite the impact of flooding and the H1N1 virus in Q4 last year, Jeddah's hotel metrics held up reasonably well. RevPAR and occupancy of quality hotels in Q1 2010 is greater than that of same period last year. Compound growth of 5% was observed in RevPAR from 2004 to 2009 though quarterly average was slightly lower than the annual average. Quality hotels in Jeddah were able to sustain the increase in RevPAR and occupancy and successfully absorbed the 142 rooms added by Park Hyatt in the 5-star category.

RevPAR and Occupancy for Quality Hotels

Anticipated Future Supply ­ Major Projects

Projects Marriott Courtyard (2011) Four Points Sheraton (2011) Novotel (2012) Kempinski Hotel Jeddah (2012) Rocco Forte Hotel (2012) Cop Hotel (2013)

Source: Jones Lang LaSalle Hotels

Rating 3 4 4 5 5 4

Rooms 300 300 160 250 159 600

Source: Jones Lang LaSalle Hotels, Q2 2010

Market Outlook

Business travel is expected to increase this year in line with growth of the economy. With the future supply of rooms being relatively modest and delivered gradually, the market is expected to recover slowly over the next few years. The sustained restoration of the city's infrastructure and leisure scene and the upgrading of the water front area that is already taking place (e.g. the Prince Abdul Majeed fountain and the development of the public entertainment areas that include parks) is expected to prolong the hospitality sector. The expansion and future development of the city will introduce new hospitality projects, especially targeting new areas to the north of the city.

8 on.point · MENA City Profile: Jeddah · June 2010

Jones Lang LaSalle MENA Offices

Jeddah Jameel Square Level 9 Suite 952 Tahliya and Andalus Streets PO Box 40538 Jeddah 21511 Saudi Arabia Tel: +966 2 283 4025 Fax: +966 2 283 4050 Riyadh Abraj Atta'wuneya South Tower, 18th Floor King Fahd Road Olaya District Riyadh 11683 Saudi Arabia Tel: +966 1 218 0303 Fax: +966 1 218 0308 Cairo Nile City Towers 22nd Floor, North Tower Ramlet Boulak Corniche el-Nil Street Cairo Egypt Tel: +20 2 24 61 8527 Fax: +20 2 24 61 8501

Abu Dhabi Al Niyadi Building 10th Floor Offices 1003 & 1004 Airport Road PO Box 36788 Abu Dhabi, UAE Tel: +971 2 443 7772 Fax: +971 2 443 7762

Dubai Emaar Square Building 1, Office 403 Sheikh Zayed Road PO Box 214029 Dubai UAE Tel: +971 4 426 6999 Fax: +971 4 365 3260

Contacts:

To find how Jones Lang LaSalle can assist in making real estate decisions in Saudi Arabia, please contact: John Harris Head of KSA [email protected] Said Bajaber Head of Jeddah office [email protected] Gaurav Shivpuri Director ­ Capital Markets [email protected] Deepak Jain Head of Strategic Consulting [email protected] Khalil Al-Arab Market Intelligence Analyst [email protected]

Authors:

Fayyaz Ahmad Manager ­ Research [email protected] Craig Plumb Head of Research ­ MENA [email protected]

www.joneslanglasalle-mena.com

COPYRIGHT © JONES LANG LASALLE IP, INC. 2010. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without prior written consent of Jones Lang LaSalle. It is based on material that we believe to be reliable. Whilst every effort has been made to ensure its accuracy, we cannot offer any warranty that it contains no factual errors.

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Microsoft Word - R12319 Jeddah CP June2010