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The Saudi Arabia Real Estate Market Review Q4 2020 released today by Knight Frank Middle East shows that whilst COVID-19 has certainly curtailed activity in the market, market performance has, in most parts, remained resilient.

Macroeconomic Outlook

Saudi Arabia’s Purchasing Managers’ Index (PMI), which tracks the country’s private non-oil economy, indicates that both economic activity and business conditions are improving and Saudi Arabia’s economy may yet finish the year in a stronger position than expected.

In Q4 2020, Saudi Arabia’s PMI averaged a reading of 54.2, a marked increase from the Q2 and Q3 average readings of 46.7 and 49.8 respectively. The index shows that the private non-oil economy has firmly moved into expansion territory during the last quarter of 2020 and its December 2020 index reading was the highest in 12 months.

This upturn in business activity is likely to underpin a stronger than expected GDP reading in Q4 2020 and as a result Saudi Arabia’s GDP in 2020 is likely to contract less than the 5.4% rate initially forecast by the IMF.

Office Market

Saudi Arabia’s Ministry of Investment granted 812 foreign investment licences during the first nine months of 2020, compared to 840 licences during the same period a year earlier.

Riyadh’s office market performance continued to soften in the year to Q4 2020, with Grade A rents falling marginally by 0.7% to SAR 1,450 per sq.m, whilst Grade B rents declined by 2.9% to SAR 745 per sq.m. The vacancy rate for Grade A office space increased by one percentage point from Q4 2019 to reach 7% in Q4 2020, whilst the Grade B vacancy rate increased by three percentage points to reach 31% over the same period.

Rental performance in Jeddah’s office market remained subdued in the year to Q4 2020, where Grade A and Grade B rents fell by 4.2% and 8.0% respectively. On average Grade A rents were recorded at SAR 1,000 per sq.m and Grade B rents at SAR 688 per sq.m. The vacancy rate across Grade A office spaces increased by two percentage point from Q4 2019 to reach 16% in Q4 2020, whereas the Grade B vacancy rate increased by four percentage points to reach 30% over the same period.

The Dammam Metropolitan Area’s (DMA) office market performance continued to soften in the year to Q4 2020, with Grade A rents falling by 4.8% to SAR 906 per sq.m, whilst Grade B rents declined by 8.6% to SAR 602 per sq.m. The vacancy rate for Grade A office space increased by one percentage point from Q4 2019 to reach 25% in Q4 2020, whilst the Grade B vacancy rate increased by two percentage points to reach 39% over the same period.

Residential Market

The recent decision to exempt real estate transactions from 15% VAT and the introduction of a lower property tax has helped to boost activity in the residential market.

Riyadh’s residential market registered fragmented performances in the year to Q4 2020, with residential apartment sales prices increasing by 1.6% to an average of SAR 3,317 per sq.m, whilst residential villa prices decreased by 2.0% to SAR 3,700 per sq.m over the same period. The total volume of residential transactions increased by 11%, whilst the total value of residential transactions declined by 6% in the year to Q4 2020.

In Jeddah, in the year to Q4 2020 average residential apartment sales prices decreased by 2.0% to SAR 3,721 per sq.m. Average villa prices fell by 3.1% to SAR 4,859 per sq.m over the same period. Residential transaction volumes and values in Jeddah increased by 17% and 16% respectively in the year to Q4 2020, a trend driven by a notable increase in the uptake of mortgages provided by banks and financial institutions.

In the year to Q4 2020, residential market performance remained fragmented in the Dammam Metropolitan Area (DMA), where residential apartment sales prices increased on average by 0.8% to SAR 2,930 per sq.m, whereas average residential villa sales prices fell by 5.1% to SAR 3,235 per sq.m.

Over this period, the volume of residential transactions saw a decline of 9%, whilst the total value of residential transactions increased by 3%.

Retail Market

Market performance in Riyadh’s retail market softened in all segments in the year to Q4 2020, with average regional and super-regional mall rents falling by 2.3% to reach SAR 2,680 per sq.m, whilst average community mall rents fell by 3.4% to reach SAR 1,975 per sq.m. The market-wide vacancy rate in Riyadh increased by four percentage points in the year to Q4 2020 to reach 19%. Average vacancy in the malls where landlords offered explicit incentives such as rent free period and discounted rental rates to retain existing tenants and capture new demand remained resilient.

Whereas, vacancy rates trended higher where such incentives were not offered.

Rents in Jeddah’s retail market continued to soften in the year to Q4 2020, with average regional and super-regional mall rents falling by 2.7% to SAR 2,669 per sq.m, whilst average community mall rents fell by 3.1% to reach SAR 1,735 per sq.m. The market-wide vacancy rate in Jeddah increased by seven percentage points to reach 17% in the year to Q4 2020. This increase continues to be driven primarily by small and medium sized retailers vacating due to limited concessions being offered to support occupiers.

The DMA’s retail market softened across all segments in the year to Q4 2020, where average regional and super-regional mall rental rates fell by 2.6% to reach SAR 2,299 per sq.m, whilst average rental rates for community malls dropped by 3.0% to SAR 1,640 per sq.m. The market-wide vacancy rate in the DMA increased by six percentage points to reach 11% in the year to Q4 2020.

Hospitality Market

Average daily rates in Riyadh softened by 8.9% in the year to December 2020, while occupancy decreased by 11.1 percentage points. As a result, market-wide RevPAR levels decreased by 25.8% over this period. As travel restrictions began to ease across the Kingdom in mid-September, Riyadh recorded marginal improvements to both ADR and occupancy rates.

In Jeddah, ADRs fell y-o-y by 34.7% as of year to date December 2020, whilst occupancy decreased by 20.1 percentage points. As a result, market-wide RevPAR levels decreased by 57.6% over the same period. The resumption of Umrah pilgrimage for Saudi nationals and residents in early October and for international pilgrims in early November resulted in a 7.2 percentage point increase in occupancy since September. Over this period, despite ADRs falling by 7.3%, RevPAR increased by 11.2%.

Despite the challenges faced with the global pandemic, DMA’s tourism market was the most resilient compared to other major Saudi Arabian city markets. Year to date December 2020, ADRs in DMA grew by 1.4% y-o-y, whilst occupancy levels decreased by 2.6 percentage points. Over this period, RevPAR fell by 3.4%. The market’s resilience primarily stemmed from domestic leisure demand, as Saudi nationals looked to travel domestically rather than internationally.

Taimur Khan, Associate Partner at Knight Frank Middle East commented: "whilst Saudi Arabia’s real estate market will face challenges in parts, particularly its hospitality and retail sectors, the fundamentals underpinning its real estate market remain steadfast for the long-term."