The boom in the economy in Saudi Arabia, over the six years prior to 2016 has led to real estate opportunities on every corner. However, the slowdown in 2016 and 2017 has revealed several glaring challenges.
I am yet to understand the zoning of new developments. There doesn’t seem to be any clear guidelines or demographical analysis on what the ideal retail leasing mix is for each development.
To put it simply: Zone A has 10,000 residents. Each household earns an average income of 13,000 SAR (US$3,500) per month. With approximately 2,500 households per zone, the total revenue potential of the zone is 32,500 000 SAR (US$8,666,000).
If we unpack this further: on average, 6,500,000 SAR (US$1,733,000) per month is likely to be spent at supermarkets and 3,250,000 SAR (US$866,600) at restaurants and coffee shops in the area. To put these figures in perspective, a typical plaza restaurant would need to earn 5,000 SAR (US$1,300) a day to break even.
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So, the question is: how many retail spaces should be put into the area? Or, from a property developer’s point of view, how many square metres can one rent to tenants? And this is where we are missing the mark. Through the boom, all retail and restaurant brands embarked on an expansion drive. With new international brands entering the market every day, newly installed franchisees are now starting to feel the pressure on their growth strategies.
With supermarket, restaurant and coffee shop owners having to meet the demands of their shareholders or franchisors, new malls and plazas are sprouting up all over KSA. This is all good in theory. However, as you can see from the figures above, we are slowly walking into an economic death trap. For new restaurant owners, the first store will yield a healthy turnover and growth is feasible until there is pressure to scale the business and meet franchising demands. But is this really sustainable in the long-term? Ordinary citizens are reliant on an average salary. Coupled with the rising cost of living, it will be difficult to keep up financially.
We forget that our customer only has a limited budget, which decreases as the cost of living escalates every month. On top of this consumer pinch, landlords fill the plaza or strip mall with a poorly selected mix of tenants to ensure they meet their monthly targets. What is intended to give the consumer choice quickly backfires as the plaza’s landlord is doing little to create variety for consumers while putting pressure on retailers.
This has a knock-on effect as retailers are likely to reduce staff and expenses to ensure survival which leads to poor service, product outages and customer dissatisfaction. Sustainable solutions to address these issues in the long-term include:
- Appropriate zoning per area
- Cap on malls and plazas per area
- Healthy tenant mix in plazas
- Rental escalations per annum
- Rental reductions for tenants
- Marketing campaigns to drive traffic to plazas and malls
- Slow down the building pipeline
Retailers and landlords to find common ground in order to avoid empty plazas and unhappy retailers.
Martin Venter is a restaurateur and COO of restaurant, FMCG and real estate company, HB Brands, in KSA. Email him at Martin.Venter@hbbrands.com or follow him on Twitter: @Martin_Venter1.
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