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KSA | RETAIL 2016

The Power of RetailersKSA Retail Mall Market Overview

Kingdom of Saudi Arabia

2 The Power of Retailers | KSA Retail Market Overview | 2016 | Kingdom of Saudi Arabia

IntroductionThe Kingdom of Saudi Arabia retail markets

offers developers and investors a unique

proposition. Driven by strong fundamentals

including population growth and in particular

high percentage of generation Y&Z, coupled

with rising disposable income, limited

entertainment options and harsh climates,

developers and retailers are posting relatively

strong retail performance.

A number of key challenges exist which have

hindered the pace of development within the

sector. An opportunity exists to develop retail

formats (specifically malls) in the Kingdom that

will be in line with regional counterpart such as

The Avenues (Kuwait City), Bahrain City Centre

(Manama), Mall of Dubai (Dubai) and Mall of

Emirates (Dubai). Colliers’ research indicates

that the one of the biggest challenge developers

and owners face is the uncertainty in dealing

with major retailers an aspect that is also

arguably unique to KSA.

In this paper, Colliers studies this uncertainty to

provide clarity on non-parity between developer

and retailers and what may be considered in

engaging more mutual benefit. In finding such

parity, Colliers believes this will allow developers

and their tenants (retailers) to formulate a better

working relationship that can translate into

better utilisation of retail in KSA.

Stuart GissingRegional Director | Middle East

[email protected]

Imad DamrahManaging Director | Saudi Arabia

[email protected]

Hani TamimiDirector | Development Solutions

[email protected]

Bilal SiddiquiManager | Development Solutions

[email protected]

mailto:[email protected]




3The Power of Retailers | KSA Retail Market Overview | 2016 | Kingdom of Saudi Arabia

Key Drivers of Retail DemandAn analysis of the key factors driving demand for retail space, specifically malls, helps to anticipate future growth trends. It is evident that KSA’s strong fundamentals are contributing to the positive outlook for the retail sector while also providing opportunities to further develop the sector:

Population & Demographic StructureA steadily expanding population base and urbanization make Saudi Arabia’s demographics highly attractive for retailers. It is expected that KSA’s population will increase from c. 32.3 million in 2016 to c. 34.3 million by 2019.

KSA Historic Population Growth Rates KSA Projected Population Growth Rates

Macroeconomics

Despite slightly lower projected growth rates than historical levels, the annual rate of population growth in KSA should stay above 2% for the foreseeable future. This is expected to be a boom for the retail sector as population has a direct effect on potential market size.

Retail Spending Trends

Climate

Population & Demographic

Structure

Rising GDP per Capita

& Disposable Income

Retail Mall

Demand

Lack of Entertainment

Options

2011*(e) 2012*(e) 2013*(e) 2014*(e) 2015*(f)

Saudi Non Saudi Total (mln)

19.4

1

8.97

19.8

4

9.36

20.2

7

9.72

20.7

0

10.0

7

21.13

10.3

9

28.38 29.20 29.99 30.77 31.52

2016*(f) 2017*(f) 2018*(f) 2019*(f)

Saudi Non Saudi Total (mln)

21.5

5

10.6

9

21.9

7

10.9

8

22.3

8

11.2

4

22.7

9

11.4

9

32.25 32.95 33.63 34.28


Approximately 65% of the population is composed of generations Y and Z. This digitally sophisticated younger generation of up to 35 years old, make up a significant proportion of the consumer base owing to their purchasing power.

Lack of Entertainment OptionsDue to the lack of globally recognized entertainment options such as cinemas or Intellectual Property type entertainment concepts (such as Sega World), retail malls are considered the only acceptable and widely accessible family entertainment option within the Kingdom.

Weather ConditionsArguably, Saudi’s climate also plays a major role in populating retail malls. For example, the hot and dry weather in Riyadh, or hot and humid weather in Jeddah make indoor facilities (such as malls) popular leisure destinations.

Projected Increase in Disposable Income

Historic Increase in Disposable Income

Source: SAMA, Colliers Analysis

Source: EIU, Colliers Analysis

Various studies have demonstrated the high propensity and sophisticated level of consumption for generations Y and Z. The country’s young demographic structure indicates that the retail market should evolve faster than other countries that have an ageing population.

The growth in personal disposable income level should drive expenditure on consumer retail products such as electronics, grocery and apparel, which in turn can increase demand for retail and retail mall GLA.

Both operators and customers confirmed the effect of climate on retail patterns, and this trend has been further confirmed by various consumer surveys. Thus, malls become entertainment/socializing centres in addition to shopping locations. This further increases retail malls’ significance in the local economy and requires developers to offer more than just “shopping space”.

Rising GDP per Capita and Disposable IncomeAccording to Economist Intelligence Unit, the disposable income of KSA’s residents has increased from c. SAR 674 bn in 2011 to c. SAR 1,062 bn in 2015 (58% increase). Growth in disposable income is projected to slow down with an increase from c. SAR 1,147 bn in 2016 to c. SAR 1,485 bn in 2019 (30% increase).

2011 2012 2013 2014 2015

Personal Disposable Income (SR bn) % Change

674

822904

9831062

9.8%

22.0%

10.0% 8.7% 8.0%

2016 2017 2018 2019

Personal Disposable Income (SR bn) % Change

1,147

1,242

1,3521,485

8.0%8.3%

8.8%9.9%

Years

Saudis

Non-Saudis

1 20 40 60 80+

Demographic Structure of KSA


Source: EIU, Colliers Analysis

Retail Spending TrendsFood retail sales are defined as expenditure on food related items that are consumed off premises. These include sales from convenience stores to large scale hypermarkets. Sale from non-food retail is defined as expenditure on all other items except for food retail.

Consumer spending is almost equally divided between food and non-food retail and is expected to continue on this path in the foreseeable future.

Historic Retail Spending Trends

Projected Retail Spending Trends

2011 2012 2013 2014 2015

Food Retail Sales (SR bn) Non Food Retail Sales (Sr bn)

Retail Sales (SR bn) Food % of Retail Sales

Growth in Retail Sales (%)

6.2%13.6%

5.5% 5.4% 5.5%

2011 2012 2013 2014 2015

146

158

304

48%

164 181

346

47%

172 192

365

47%

181

204

384

47%

192 21

3

405

47%

2016 2017 2018 2019

2016 2017 2018 2019

Food Retail Sales (SR bn) Non Food Retail Sales (Sr bn)

Retail Sales (SR bn) Food % of Retail Sales

Growth in Retail Sales (%)

205

225

430

48%

6.0%

219

240

459

48%

233

235

488

48%

6.9%

246 27

0

516

48%

6.2% 5.8%


Key DemographicsColliers has conducted an in-depth analysis of retail malls in KSA with a major focus on the cities of Riyadh, Jeddah, Dammam and Al Khobar. In order to better understand the retail market in these cities, it is necessary to know the key demographic factors that shape the retail landscape.

Supply Characteristics – 2015 Year End

Key Demographics – 2015 Year End

Source: Colliers Research


Although Riyadh has a fair amount of malls under construction, GLA per capita is the lowest. This is expected to increase in the coming years due to strong forthcoming supply, planned to be c. 2.4 mn sqm out of which c. 412,000 sqm is currently under construction.

Disposable income is an important indicator that signifies the amount of money available for retail spending. Jeddah’s households income is less, in absolute amounts than other major cities, however, the lower household size (4.9 as opposed to 6.1 in Riyadh) has a positive effect on overall disposable income.Tourism spending is an important factor which increases the overall spending in retail malls, and drives demand for retail space. According to Colliers’ analysis and data from MAS it is estimated that tourist spending comprises 10-20% of the total spending in retail malls for cities like Jeddah, Dammam and Al Khobar. This can partly account for higher GLA per capitaCapita in these cities when compared with Riyadh’s.

Supply Analysis

Market Overview

Annual Disposable Income per Household

0.480.38

0.27

Riyadh Jeddah Dammam Al Khobar Retail Mall Supply (Sqm) Confirmed Forthcoming Supply (Sqm) GLA/Capita (Sqm)

1.6661.532

0.836412

105 0.196

47

128

168

Riyadh Jeddah Dammam Al Khobar

Population (mln) Household (mln)

Disposable Income (SAR bn)

6.15

4.08

6.151.01

0.84 0.29

166 KRiyadh

152 KJeddah

160 KDammam Al Khobar


Quality of Supply 2015 Year End

Line Shop Rental Rate Performance – 2015 Year End

It is worth noting that the planned supply of malls in Riyadh equates to c. 2.4 million sqm of GLA as multiple developers and investors are attempting to capitalize on the market opportunity. Much of this supply is in the form of super regional malls (average size of mall is c. 130,000 sqm), however only 17% of this is under construction, while the rest remains under planning. This can be attributed to the challenges of developing a super-regional mall, some of which are listed below:

1. capital intensive development which increases payback period for the developers

2. difficulty in identifying suitable location with easy accessibility, which is considered vital for the success of these developments. Many location factors play a role in making it more attractive, such as:

> catchment area characteristics (demographics, income profile, and residential density)

> competitive developments in the surrounding area

> visibility of the development

3. the need for differentiation from existing supply (which also includes design elements) and the ability of the development to respond to the changing needs of consumers in the short, medium and long term

In terms of competitiveness of supply, Colliers has created a grading criteria to assess malls in the form of primary, secondary and unclassified supply. Some of the factors used to classify supply include location, accessibility, parking, specifications and amenities, and retail product offering. Since malls are of various sizes and offering,

this grading helps quantify the market variances in a more granular manner to identify true demand supply gap in each city.

Retail centres and malls have been under development within Jeddah for a relatively longer period of time; hence its share of unclassified supply is the largest (as most tend to be older properties). Furthermore, it is the only city where primary supply has the highest concentration, followed by secondary and then unclassified supply. This partly accounts for the competitive retail environment in Jeddah, which can be seen in the below graph:

39%

42%

19%

Dammam Al Khobar

39%

34%

27%

RiyadhJeddah

32%

47%

21%

2,625

122%

18%

66%

Riyadh Jeddah Dammam Al Khobar

Primary Malls Secondary Malls (SAR/Sqm) Premium (%)

3,549

3,089

3,654

2,138

1,648

Primary Supply Secondary Supply Unclassified Supply (Thousands Sqm)

599,

204

520,

401

412,

539

327,9

40

351,8

75

156,

132

528,

554

783,

966

353,

342


Based on the line shop lease rate comparison of primary and secondary grade malls in the three cities, the following should be noted:

> The variation in rents among mall types illustrates the growing rental premium of primary grade malls over secondary malls, as primary malls generally feature a better tenant mix and location that are capable of attracting higher footfall.

> In comparison to Riyadh and Dammam / Al Khobar, Jeddah’s primary grade malls have much lower premium rates over the city’s secondary grade malls. This could be due to many factors such as the competitive structure of the city and residents’ preference towards community centres (evident by their strong performance) etc.

> Many of the community centres (most of which are classified as secondary due to lack of entertainment facilities) within Jeddah are themed plazas with consistent brand representation along central locations. Hence, they are able to charge high lease rates which are slightly lower than primary grade malls.

> For Dammam & Al Khobar, the much higher premium of primary grade malls over secondary grade malls is primarily due to the much lower quality of secondary grade malls.

> Within the local market of Dammam Al Khobar, Al Khobar commands higher lease rates than Dammam, as supply of primary grade malls is limited in Dammam, while secondary is dispersed throughout both cities. The higher lease rates in Al Khobar therefore are mainly due to the inferior quality and tenant mix in Dammam.

> Dammam is more focused on local tenants in its product offering, while primary grade malls in Al Khobar are in line with Riyadh and Jeddah in terms of tenant mix, offering and quality.


A Note on Forthcoming SupplyIn order to better engage visitors and meet the requirements of mall tenants, developers of malls, that are currently under construction or planning, are focusing on “Differentiation”.

Much of this strategy is focused around the aspect of “size” as a differentiation factor. Emphasis of this approach is to provide super regional malls (with GLA greater than 150,000 Sqm) or smaller retail centers (with GLA less than 20,000 Sqm), with a sustainable product mix, which allocates higher GLA for entertainment and/or F&B. Additionally, parking ratios are being

improved with easier access to the property. The result is a product centered mall/center with a focused target market and corresponding product mix..

Although the strategy is commendable, it lacks other elements to provide the essence for long term distinction. As mentioned previously (in demand drivers), recent retail trends have shifted the primary objective of a mall from “shopping” to “socializing”. In our opinion, a successful approach to dominate the sector would be a retail mall that is a “Product Centered Attractive Destination for Socializing”.

Objective Strategy ResultStrategy Focus

Sustainable Product Mix with Higher Areas for:> Entertainment> F&B> Parking

Concentration on:> Design> Quality> Supporting Components

(Hospitality, Office, Residential)

Offering of: > Theme> Strong Brand Selection

and First to Market Brands> IP type Entertainment

Product Centered

Attraction

Destination for Socializing

Diff

eren

tiatio

n

Level 1

Level 2

Level 3

Size

Portrayal

Experience


SummaryRiyadhRiyadh’s retail sector has witnessed strong performance in recent years, despite the

considerable increase in available retail GLA. The volume of retail that remains under

construction is much lower than those in the planning process. However, Riyadh has

been able to absorb high amounts of retail GLA historically in 2008-2010 when a

number of super regional malls (Riyadh Gallery, Hayat Mall, Panorama Mall, and Othaim

Mall Rabwa’s Renovation) were delivered with a combined GLA of c. 370,000 sqm. This

is driven by retail being one of the few available recreational activities in Saudi Arabia,

suggesting that the market may support a higher GLA per capita and higher average

spend. However, it is important to note that many factors such as location, competition,

catchment area specifics, and mall management must be considered before initiating

the development of retail malls. For existing malls, the current market dynamics should

push rentals upward while keeping occupancies at similar levels.

JeddahOverall, the retail sector in Jeddah is performing well. However, it might not be able

to fully cater to the increase in demand for retail space. Growing demand and limited

availability of land might restrict forthcoming supply and shift supply dynamics towards

smaller centers (which is already evident). This might make the operating environment

of the current supply more positive in terms of potential increases in rents with

sustained occupancies.

Dammam Al KhobarWith the introduction of forthcoming supply, competitiveness within the market will

likely increase and the Dammam/Al Khobar market dynamics may potentially change.

This may set new trends in the retail mall sector within Dammam/Al Khobar and the

extra supply will likely put pressure on existing stock that may require them to revisit

their operating strategy by restricting rental growth to sustain current occupancy levels.

Jeddah

Riyadh

Dammam Al Khobar


Sample DetailsIn order to better engage major retailers, it would be prudent to understand their presence in the market. For this purpose, Colliers has assessed a sample of malls in ten major cities throughout KSA.

Malls assessed are located across Riyadh, Jeddah, Dammam Al Khobar and Other Cities with a total GLA of more than 1.5 million sqm. Other cities include:

> Al Ahsaa

> Madinah

> Qaseem and others

Sample Distribution by City (%)

Sample Distribution by Type

Source: Colliers Analysis

Source: Colliers Analysis

The total sample comprises community centres, regional malls and super regional malls. The average mall size by category is:

> Super Regional Malls: 100,000 Sqm

> Regional Malls: 51,000 Sqm

> Community Centres: 26,000 Sqm

The sample of malls is well distributed across the cities and with a good representation over various categories. This ensures that data is not biased and hence makes it possible to understand the presence of these retailers and their ability to negotiate somewhat more favorable lease terms.

The Power of Retailers

Riyadh

28%30%

17%

24%

Jeddah Dammam Al Khobar

Other Cities

Super Regional Malls

Community Centres

Regional Malls

50%

29%

21%


Space OccupiedMall tenants, in general, are locally franchised in KSA and arguably have an accepted position of strength when negotiating lease terms with developers. Colliers has collated and analyzed the majority of recognized retail outlets within targeted areas of Saudi Arabia and their franchise partners. Retail franchises are ranked according to the area they lease within line shops (categorised as shops with area less than 500 sqm). Colliers has considered only line shops in this analysis as this segment is the most important indicator of overall rental rates a mall is able to command.

Generally, other categories (such as junior anchors and anchors) are normally priced in comparison to line shops (and lower due to much larger sizes), while other types of products, such as food courts and hypermarkets, have a different set of retailers that occupy them. The top five retailers of line shops (Top 5) within each mall is established to understand their overall presence within a mall.

According to the graph on the left, the top 5 retailers occupy c. 39% of line shops within malls. The remaining space is occupied by different retailers that have relatively lower number of brands in their portfolio.

Riyadh has a strikingly large concentration of top 5 retailers within its malls (c. 53%) which shows that their activity is concentrated in the capital. This could be due to limited supply of malls (measured by GLA per capita) in Riyadh compared with Jeddah and Dammam & Al Khobar.

Variance from RentIn addition to the space they occupy, the top 5 retailers have also been assessed on their overall average rent paid per sqm. This is then compared to the average of that particular mall to gain further understanding of ability such retailers have in any negotiation process.

The top 5 retailers within malls pay approximately 19% less than the average of the overall line shop lease rate of the mall. Compared to the area that they lease (39%), and the value they bring to the property (i.e. a portfolio of recognized brand names), the discount attributed towards the top five seems reasonable and much lower than what is typically thought by many developers.

Riyadh’s top 5 tenants pay a rent which is much closer to the average, partly due to the fact that the top 5 tenants compriseing such a large portion of the tenants (53%), therefore their rent has a bigger impact on the variance from average lease rates. This could also be due to the relatively limited supply of malls in Riyadh which may suggest that both tenant and landlord have a closer appreciation of lease values.

Line Shop Space Occupied by Top 5 (%)

Line Shop Lease Rate Variance of Top 5 (%)


Riyadh

53

31

Jeddah

Average Space Occupied

30

Dammam Al Khobar

37

Other Cities

39%

Riyadh

-13

-21

Jeddah

Average Lease Rate Variance of Sample

-17

Dammam Al Khobar

-24

Other Cities

-19%


Line Shop Space Occupied and Variance from Rent Comparison (Top 5)


Closer Look at Super Regional Malls

Colliers also compared the specifics of super regional malls with the overall sample. It is interesting to note that while the line shop space occupied in super regional malls by the top 5 retailers is less than the overall sample, the variance from average rent is similar. At first this might seem in contrast to the overall relationship between size and lease rate, however, it can be explained by:

> Super regional malls typically have a lower share (in terms of percentage) of line shops when compared to regional malls. One of their major strengths lies in their ability to offer more financially viable spaces for junior anchors and anchors, which are more preferred by top 5 retailers in a super regional setting.

> Even though the top 5 occupy a lower percentage of line shops, they occupy a considerably larger share of junior anchors and anchors within these malls. This allows them to have the same bargaining power as if they occupy a larger percentage of line shops.

Average Space Occupied

Variance from Average Rent

53

31

-13 -19

Super Regional Malls Overall Sample (%)


Colliers examined the data more closely to understand the various possible relationships that exist between different variables.

Closer Look at the Sample

The GLA of malls under assessment has been indexed, with the largest mall in the sample equating to 10 on the index. Mall size comparison with space occupied by top 5 roughly indicates that as mall's size increases, space occupied by top 5 decreases, as revealed in our analysis of super-regional malls.

Mall Size vs. % of Line Shop Space Occupied by Top 5

Average Rent vs. Top 5 Lease Rate Variance


Line Shop Space Occupied vs. Top 5 Lease Rate Variance

While the area occupied by the top 5 retailers has a broad range from near 0% to 90%+, the lease rate variance seems to have a cap at c. -40%. Some interesting insights from the above graph can be concluded as (numbering refers to the numbers on the prior chart):

1. This particular mall (labelled as 1) appears to have limited the rent discount for top 5 tenants. However, a closer look at the property reveals that while it is one of the prominent malls, its overall lease rate is lower than its comparable sample which indicates that the mall itself trades with a rent discount compared with its competitors.

2. The sample circled as number 2 is interesting as it shows malls have varying power to negotiate lease rates for the top 5 tenants. This is evident due to the area occupied being roughly similar, while the lease rate variance is between 10% and 35%.

3. For the mall labelled as 3, the rent variance is high, while at the same time area occupied by the top 5 tenants is also higher. This means that other tenants in this mall pay substantially higher than the top 5. A closer look at the property shows that due to its location in other cities and its small size, the developer may have availed more favorable terms for the top 5 retailers to increase the overall appeal of the mall. This likely enabled the development to pass the majority of rental premiums to the remaining occupants.

A comparison of average mall rent compared with the top 5 lease rate variance indicates that the best performing malls in terms of lease rate (highlighted) have top 5 variance ranging from c. -8% to -22%.

This indicates that mall operators still have the ability to command high lease rates despite providing discounts to the top 5.


Aver

age

Rent6,000

5,000

4,000

3,000

2,000

1,000

0-40 -30 -20 -10 0

Top 5 Lease Rate Variance from Average (%)

GLA

Scal

e 12

10

8

6

4

2

00 20 40 60 80 100

% of space occupied by Top 5

% o

f spa

ce O

ccup

ied

by T

op 5100

80

60

40

20

0-50 -40 -30 -20 -10 0Top 5 Lease Rate Variance from Average (%)

2 The high space occupied by top 5 (greater than 80%) is only present in malls of smaller sizes.

1 The concentration of malls over here indicates that the average space occupied by top 5 (c. 39%) is respective of mall size.

3 This particular mall has c. 65% leased to top 5, however, the variance is high.

1 This particular mall has c. 45% leased to top 5 , however, the variance from average is almost nonexistent.

2 These malls have almost similar areas occupied by top 5, however, variance from average ranger between -10% and -35%.


SummaryIn summary, it can be seen that much of the

perceived discussion around strong tenant

conditions to taking up space within malls (with

higher discounts), may arguably be slightly

overstated. Their negotiating power is related to

the size they occupy (on average, c. 39% in line

shops) and the overall value they bring to a mall.

The top 5 are typically the first to occupy space

in a mall, while it is still under development, and

which bears them no assurance of success. Their

presence in the early phases reduces the risk of

development and eases the complex process of

leasing for the developer, as it further attracts

other retailers.

This exercise highlighted some important aspects

of mall operator’s relationship with its top 5

tenants, which we hope will provide a more

favourable outcome for new mall developments.

554 offices in 66 countries on 6 continents

$2.5 billionin annual revenue

over 16,000 professionals

2 billionsquare feet under management (excluding residential properties)

Copyright © 2016 Colliers International.

The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

For further information, please contact:

Stuart GissingRegional Director | Middle EastMAIN +971 4 453 [email protected]

Imad DamrahManaging Director | Saudi ArabiaMAIN +966 11 273 7775MOBILE +966 50 417 [email protected]

Hani TamimiDirector | Development SolutionsMAIN +966 11 273 7775MOBILE +966 55 999 4156 [email protected]

Bilal SiddiquiManager | Development SolutionsMAIN +966 11 273 7775MOBILE +966 55 028 [email protected]

Colliers International

Al Faisalah TowerRiyadh | Kingdom of Saudi ArabiaMAIN +966 11 273 7775

Jameel Square Jeddah | Kingdom of Saudi ArabiaMAIN +966 12 610 5900

Colliers International Middle East

Colliers International is a global leader in commercial real estate services, with over 16,000 professionals operating out of more than 554 offices in 66 countries. A subsidiary of FirstService Corporation, Colliers International delivers a full range of services to real estate users, owners and investors worldwide, including global corporate solutions, brokerage, property and asset management, hotel investment sales and consulting, valuation, consulting and appraisal services, mortgage banking and insightful research. The latest annual survey by the Lipsey Company ranked Colliers International as the second-most recognized commercial real estate firm in the world.

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