Retail sector demand supply balance challenges in KSA

An exclusive piece contributed By Oliver Morgan, Partner, Real Estate Development & Asset Management Georgii Pashchenko, Manager, Real Estate Development & Asset Management, Deloitte.

Historically, prime shopping malls in KSA have shown remarkable resilience, rebounding quickly from the COVID-19 pandemic. Deloitte analysis shows that over the past three years, these malls have consistently maintained robust occupancy rates and achieved steady annual rental rate increases of 2-3%. According to the Economist Intelligence Unit (EIU) forecast, total expenditure is expected to rise by 10.5% from 2024 to 2027. However, competition is accelerating more rapidly than demand, hence there will be reprofiling of what is considered ‘prime’ retail within the KSA market. Deloitte anticipates significant growth in the prime shopping mall sector in Jeddah and Riyadh, with new developments adding approximately 265,000 sqm (a 42.7% increase) to prime shopping malls in Jeddah and 1,460,000 sqm (a 40% increase) to organised retail in Riyadh, respectively. This expansion outpaces the anticipated rise in expenditure, highlighting a potential flight to quality, as competition grows faster than consumer spending in the near term.

The rapid expansion of the e-commerce sector is expected to exert additional pressure on existing retail assets. Deloitte forecasts that the e-commerce market in the GCC region will reach a substantial $50 billion by 2025. This surge is likely to impact those physical retail spaces that have not invested in experiences to draw in consumers.

Despite an expanding market, established retail properties in the Kingdom may face significant risks. The intensifying competition and evolving consumer preferences could put considerable market share at risk over the next three to five years, unless significant repositioning of these centres is undertaken, and technology is embraced to understand consumers.

Case study: Prime shopping malls in Jeddah might lose up to 50% of footfall in 3 years

Jeddah, has five prominent shopping malls with a total gross leasable area (GLA) of 620,000 sqm, strategically located along major roads. Projections indicate that tourist spending, and the population’s total disposable income are expected to increase by 25% and 7%, respectively by 2026. Despite these positive aspects, footfall at the existing malls may decrease by 25 50%, with revenue potentially falling by 20-45% in 2026 compared to 2023 levels. According to Deloitte’s analysis, the introduction of two new prime shopping malls, adding a combined 265,000 sqm of GLA in key locations will reprofile spend across the catchment areas of the sub-markets within Jeddah. Conventional real estate strategies or standard cost-cutting measures will not be able to address such a shift. Asset owners will need to embrace new strategies to ensure long-term viability.

The role of technology in maximising retail real estate net asset values Asset owners can leverage technology to their advantage. To effectively compete with digital counterparts and emerging shopping malls, we focus on three key strategies for digital transformation:

Turn malls into ‘smart’ experiential assets: Deloitte anticipates a tectonic shift in real estate strategies, moving from a focus on mere space provision and tenant management to a more service and experience-oriented approach. Asset owners can leverage their assets’ prime locations by forming strategic partnerships with established e-commerce companies. Having F&B, entertainment and a programme of experiences that match the wants, needs and desires of their asset’s local catchment area, will be key to the battleground for spend, as we move away from the traditional owner-tenant relationship to a much more integrated partnership model. Changing mobility patterns will also necessitate a rethink on logistics as consumers seek convenience and faster delivery times whilst prioritising best value.

Arm decision-makers with advanced analytics: Deloitte’s study reveals that asset owners typically have access to only one-third of the data related to their assets, while 52% is held by facility managers and 18% by tenants. To enable data-driven decision-making, it is crucial to consolidate this information into a single environment and enhance it with consumer insights. Real-time, high-quality analytics are essential for maintaining competitiveness in asset management. Connecting existing CCTV networks with footfall tracking systems can yield valuable customer insights. By further integrating data on consumption profiles—derived from the analysis of people’s mobility patterns (in and outside centre), demographic information and financial data—with tenant turnover, asset owners can obtain granular, real-time insights into mall performance. Such comprehensive data infrastructure supports agile decision-making and will make asset owners who are armed with comprehensive data on their catchment areas, sought-after partners by leading retail brands.

Embrace agility to gain a competitive edge: Traditional retailers must compete with e-commerce companies whose business models are agile and cost effective, allowing them to test features and evolve faster. It is crucial for asset managers to first enable a strategic digital model that enables a proper analytical infrastructure and then changes how mall management conducts business – from asset management to product management. Asset owners can introduce a specialised product management team, responsible for iterative hypotheses testing and product turnaround, empowering them with the necessary resources to balance brick-and-mortar malls with the agile e-commerce experience.

Asset owners can uncover new opportunities and enhance their real estate net asset values by utilising technology in response to the evolving digital economy. By transforming malls into smart-experiential assets, employing advanced analytics for strategic decision-making and implementing an agile approach, they can create a strong framework that both competes with and complements the digital retail realm.