Saudi Mall Builders Ignore Oil Rout as Shoppers Want More

  • Two largest cities to add about 1 million sq m through 2017
  • Saudi Arabia has tenth of the shopping space of the U.S.

The highway that cuts through the middle of Riyadh, the Saudi Arabian capital, takes drivers past two shopping malls and another one under construction, each rising up soon after the last fades in the rear view mirror.

The outlets are emblematic of a retail building boom in Saudi Arabia that continues apace even as oil, the kingdom’s dominant source of revenue, slumps. Foreign and domestic companies are betting shopping demand will rise for years, bolstered by one of the world’s youngest populations and modern retail space that’s only a fraction of that in the U.S. on a per capita basis.

Riyadh is expected to add 565,000 square meters (6.1 million square feet) of gross leasable area through 2017, while the coastal city of Jeddah is set to complete 383,000 square meters, according to broker Jones Lang LaSalle Inc. Arabian Centres Co. Ltd., the kingdom’s largest mall owner, plans 19 new shopping centers in the next five years to add to the 17 it already has, according to chief executive officer Simon Wilcock.

In Saudi Arabia, there’s 30 centimeters of retail space per person and many smaller cities have no modern malls. China has 1.1 square-meters of gross leasable area per capita, while the U.S. has 3 square meters, according to the Middle East Council of Shopping Centres.

“The market is nowhere near saturation even though there is awful lot of development,” said Richard Morley-Kirk, country manager for Dubai’s Al Futtaim Group, which also plans to build a mall in Riyadh. “Do I think there will be growth next year? Absolutely.”

Saudi retail index has outperformed construction stocks since the oil slump.

Average monthly retail sales are up 15 percent this year even as the price of oil, which accounts for about 80 percent of the Saudi budget, fell by more than a third. At least half of all retail space is still made of outdated street shops or traditional markets known as souks which can be unbearable for shoppers during the summer heat, according to the shopping centers council.

“Retail is the only sector that’s strong and will remain strong in Saudi Arabia right now,” Ramzi Darwish, a consultant with Cluttons LLC, said in an interview in Dubai. “Going to the mall is part of people’s entertainment and owners of popular modern malls have the ability to charge premium rents.”

Arabian Centres plans an initial public offering next year, according to Muhanad Awad, CEO of FAS Capital, the financial and investment arm of the company’s parent Fawaz Alhokair Group. Another developer, Raj Real Estate Co., is planning to start building a 137,000 square-meter open air mall called Riyadh Walk.

Mall Owners

Shopping mall ski slope

Photographer: Gabriela Marj/Bloomberg

Mall owners from neighboring countries are also taking part. Majid Al Futtaim, which built an indoor ski slope in one of its Dubai malls, won approval for a 10.5 billion riyal ($2.8 billion) shopping center in Riyadh. Another mall owner, Al Futtaim Group, is planning to start construction of one of the kingdom’s largest centers next year with Ikea as an anchor tenant. Kuwait’s Alshaya Co., which distributes dozens of brands such as H&M and Victoria’s Secret across the Middle East, also plans a 6.5 billion-riyal mall in the capital.

“While the drop in oil price is something to be considered, we have many other factors that encourage us to steam ahead with the project,” Raj Real Estate CEO Walid Al Haza said in a phone interview. He cited new regulations set to encourage home building and the success of malls that mix entertainment and shopping.

Saudi Arabia has a greater need for modern space with amenities like air conditioning. With temperatures that can soar to 53 degrees Celsius (127 degrees Fahrenheit) in the summer, many families turn to malls for a place to stroll in air-conditioned space where children can also play in indoor playgrounds.

“Malls in Saudi play the roles of piazzas or town squares, not just places to shop,” said Jamil Ghaznawi, head of Saudi Arabia for Jones Lang. “Now more malls are being built with a much bigger focus on restaurants, cafes, playgrounds and children’s entertainment.”

Still, while most mall projects are moving ahead, Clutton’s Darwish said he knows of at least one foreign investor who is putting a planned shopping development on hold. A sustained period of low oil prices could lead to government cuts that would hit spending power in a country where about two thirds of people work for the state.

The Tadawul All Share Retail Industries Index, a measure containing 15 companies on Saudi Arabia’s stock market, dropped about 20 percent this year. It surged 33 percent last year and 56 percent in 2013.

Mall owners see the oil-price decline and a slowdown in government spending as opportunity to expand. A reduction in state projects leads to reduced costs for construction materials and labor, said David Macadam, CEO of the shopping centers council.

Prime Land

“Many of the prime pieces of land for new shopping centers have been owned for years” by wealthy trading families who are able to fund construction from revenue generated by their successful businesses, he said.

In Riyadh, the largest city, rents for super regional malls and community shopping centers climbed 3 percent and 1 percent respectively in the third quarter from a year earlier, according to a JLL report. Vacancy rates have dropped to 8 percent from 11 percent, the Chicago-based broker said, while estimating rents will rise further.

In Jeddah, rents at regional malls surged 6.7 percent in the past year. The kingdom’s second-largest city and the entry point for around 10 million pilgrims and religious visitors each year is seeing vacancy rates climb as tenants move to newer malls, JLL said. Large malls in the city command an annual rent of 3,300 riyals per square, while it’s about 2,900 riyals in the capital.

To lock in reasonable rental rates at new malls, tenants must sign leases three years before their completion. Once malls are open, the competition for the remaining space tends to be fierce, Morley-Kirk said.

“Developers are looking 10 and 20 years down the line,” said Andrew Williamson, head of retail at JLL in the Middle East and North Africa said. “They may slow construction if the economy turns but they won’t stop because demand is very high.”

Online shopping is also lower in the Middle East than in the U.S., with such purchases accounting for less than 4 percent of sales in the region, compared with about 11 percent in the U.S., according to Macadam, who said figures for Saudi Arabia are probably lower.

“People like to touch, feel and try the stuff they buy here. It makes the mall experience indispensable,” he said.

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