The Saudi Arabian Real Estate Market Review Q3 2020 released today by Knight Frank Middle East forecasts that Saudi Arabia’s GDP has contracted by 7.0% in the year to Q2 2020, whilst over the same period, the oil and non-oil sectors contracted by 5.3% and 8.2% respectively.
Macroeconomic Outlook
Saudi Arabia’s Purchasing Managers’ Index (PMI), shows that economic activity and business conditions are improving whilst still being in contractionary territory. In Q3 2020 Saudi Arabia’s PMI averaged a reading of 49.8, showing that the private non-oil economy continued to contract over the last quarter. The latest monthly reading of 50.7, the highest reading since February and an indication of expansion in economic activity, provides some cause for optimism.
This view is shared by the IMF, where in its latest World Economic Outlook it revised up Saudi Arabia’s GDP for 2020 from a 6.8% contraction to a 5.4% contraction. The IMF’s forecast GDP growth in 2021 remains unchanged at 3.1%.
Office Market
Saudi Arabia’s Ministry of Investment granted 506 foreign investor licences in H1 2020, compared to 586 a year earlier. This decrease in activity is as a result of lower issuance levels in Q2 2020 where licence issuance declined by 47% year-on-year. Whilst April and May saw relatively anaemic levels of activity in terms of licence issuance, activity rebounded sharply in June which alone accounted for nearly half of the licences issued in Q2 2020.
According to a report from Jadwa Investment Company, around 1.2 million expatriate workers are expected to leave Saudi Arabia this year. The economic recession and resultant retrenchment in employment levels as a result of the pandemic, will affect demand for office space in the short run. Whilst some of this demand will be recovered as economic growth returns, it is unlikely that initially we will see all space that has been discarded reabsorbed, as firms are likely to adopt a varied range of post-COVID workplace models where the same quantum of space is simply no longer required. Concepts such as co-working may suffer the most as a result of behavioural changes, although the provision of space as a service may accelerate as the default form of demand as firms look to reduce capital expenditure expenses.
Residential Market
In the year to date to Q3 2020, transaction volumes decreased by 28% compared to the same period a year earlier, with the total value of residential transactions decreasing by 38% over the same period. Despite the decline in transaction volumes, residential sales prices have remained relatively resilient. Pre-pandemic, we saw prices stabilise across many cities in Saudi Arabia and this trend appears to be continuing despite the economic headwinds that Saudi Arabia faces.
The exemption of property from VAT and the introduction of a lower property tax will help end-users, developers and the government achieve its aims of increased levels of home-ownership and private participation in the real estate sector. More so, the decision by the government to bear the tax burden for properties up to SAR 1 million will ensure that affordability is not curtailed by this tax. Finally, a clear and standalone property tax may help provide long-term clarity and confidence to the sector, which in turn is likely to underpin development activity and demand.
Retail Market
Given the scale of lockdown measures in early Q2 2020, which caused all but essential retail activity to cease and the suspension of living allowance payments, resident based retail spending in Saudi Arabia is expected to decline by 10.9% in 2020. These forecasts by Oxford Economics were calculated prior to the increase in VAT and therefore we are likely to see resident based spending decline more than this headline suggests, with total spending unlikely to return to 2019 levels before 2023.
Saudi Arabia’s e-commerce industry, whilst nascent, is rapidly growing and the pandemic has fast-tracked this growth trajectory. To support and regulate growth the Saudi Arabian Ministry of Commerce and Investments implemented its e-commerce law in January 2020. The law will provide significant consumer protection and rights, which are likely to underpin consumer confidence.
Hospitality Market
Despite the current challenges the hospitality sector faces as a result of the pandemic, Saudi Arabia has continued to push ahead with its tourism development strategy. In September 2020, Saudi Arabia’s Tourism Development Fund signed an agreement worth SAR 160 bn to help finance tourism projects in the Kingdom. This continued level of commitment and investment will be key in ensuring that tourism accounts for the targeted 10% of GDP by 2030.
With travel restrictions being eased on a gradual basis, where resident and business visa holders are able to enter and leave Saudi Arabia as of 15th September 2020, and with all travel restrictions expected to be lifted after January 1st 2021, we may begin to see pressure alleviate across the sector. However, as this is likely to be a gradual process, we expect hotels to continue implementing cost-cutting measures across the Kingdom.
Taimur Khan, Associate Partner at Knight Frank Middle East commented: "Despite stringent lockdown measures and a weaker economic backdrop, Saudi Arabia’s real estate market has shown resilient performance in most parts. With economic activity beginning its gradual recovery to pre-pandemic levels, we expect that activity in the Kingdom’s real estate market will follow suit. This will be further aided by the exemption of property from the recently hiked rate of VAT and the introduction of a lower property tax, which will be beneficial to end-users and developers and help the government achieves its aim of increased levels of homeownership and private participation in the real estate sector."
Read the report here – https://bit.ly/3odXk24
