By Paul Handley

RIYADH, Dec 14, 2010 (AFP) - Driving north on Riyadh's King Fahd artery, one office building after another sports a gigantic telephone number: the international sign of a desperate search for tenants.

Then just at the northern terminal of the road looms a massive development, the King Abdullah Financial District (KAFD), which in 2011-2012 will add another 16 office towers to the market, with plans for 20-30 more to follow.

And elsewhere in the Saudi capital, other huge office towers and parks are pushing ahead.

The question is, has Riyadh got the Dubai disease?

Not likely, say industry experts, but there is a problem and it is going to get worse.

"It's bad. If you build an office tower that's not different, you are committing suicide," said Sari Anabtawi of the Riyadh office of Colliers International.

Some 20-25 office towers have hit the market in the past 18 months, and they average 20-30 percent occupancy, he said.

From about 800,000 square metres (8.6 million square feet) of office space in Riyadh in 2009, another 1.25 million square metres is slated to come on line in the next two years, according to Colliers.

The overall vacancy rate is 27 percent, up from 20 percent a year ago. And while the private sector is part of the problem, the bulk of the new capacity will come from government investors.

The Public Pension Agency is developing the 10 billion dollar KAFD, which in its first phase should deliver some 800,000 square metres to the market. That includes skyscrapers up to 75 floors for the Capital Markets Authority, the Tadawul stockmarket and leading banks.

Nearby the pension agency is also building four 20-storey towers for the Information Technology and Communication Complex.

Another big builder is the General Organisation for Social Insurance, which is developing Granada Business Park, with 134,000 square metres of leasable space, and Olaya Towers, with 80,000 square metres.

John Harris, director of Jones Lang LaSalle in Saudi Arabia, said that Grade A office space like in KAFD will get tenants, but Grade B space could stay empty.

"A lot of supply is not well-thought-out" in terms of marketability, he said.

However, he added, "Public sector demand is huge."

Many government agencies and programmes could move into commercial properties, he said, like the justice ministry which leased 24,000 square metres alone last year.

KAFD, modelled somewhat on Dubai's International Financial Centre, will easily draw finance industry-related firms, with the government using a combination of carrots and sticks to ensure it fills up, according to industry sources.

Even so, KAFD marketing officer Khalid al Zaid acknowledges the sales challenge.

"We are not worried but we have to work at it," he told AFP at the Cityscape Riyadh conference this week.

"The demand is very, very slow," Alwaleed Binzouman, general manager of the Saudi branch of Century 21, said of the current rentals market.

After resisting for a year, some King Fahd Road building owners have slashed rental prices on brand new buildings by 40 percent, to around 240 dollars a square metre per annum.

"And they are still not getting customers," he said.

Dubai's Damac Properties, hit hard by the emirate's real estate crash, has held off developing their prime site in central Riyadh.

"We see what's happening in Riyadh is like what happened in Dubai three to four years ago," said Ehab Shouly, Damac's senior vice president.

Liked Dubai, many land owners had plunged into the business not fully cognisant of the market, he said.

"But I don't think it's going to be as bad as Dubai," he said.

One major difference between Dubai, whose 2008-2009 property collapse shook the financial foundations of the government, is that in the emirate every sector was vastly overbuilt: offices, hotels, residential, and retail.

In Riyadh and Saudi Arabia generally, housing is in very short supply; the hotel sector is firm; and retail, while also facing a glut in areas, is not a disaster, say industry experts.

Moreover, sitting on a 500 billion dollar pile of reserves, and with oil prices one-third higher than budgeted for, the Saudi government is in solid shape.

And thirdly, many private developments are backed by cash, as banks have been reticent to lend to them.

Nevertheless, the government needs to step in to soften the glut by attracting more small and medium sized businesses, who will take up second and third grade properties, said Shouly.

"Otherwise you are going to end up with a lot of vacant space."

pmh/ak/bpz

Copyright AFP 2010.