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Saudi real estate sector remained stable in Q3, says report

RIYADH, October 25, 2020

Saudi Arabia's real estate sector remained stable during the third quarter despite the economic headwinds, according to industry expert Knight Frank Middle East.
 
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 down 38% over the same period. Despite the decline in transaction volumes, residential sales prices have remained relatively resilient, stated Knight Frank in its Saudi Arabian Real Estate Market Review Q3 released today. 
 
The global industry expert said 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 SR1 million ($266,280) 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, stated Knight Frank in its review.
 
According to Knight Frank, Saudi Arabia is the only GCC country to have the depth of its GDP contraction revised up, where all other GCC countries have seen their outlook deteriorate further.
 
The kingdom’s Purchasing Managers’ Index (PMI) shows that economic activity and business conditions are improving whilst still being in contractionary territory. 
 
In Q3, 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, it stated.
 
"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.
Pandemic has decreased the country’s economy by 7% in the year to Q2 2020," stated the top property consultancy in its Q3 review. 
 
Saudi Arabia’s GDP has contracted by 7% 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.
 
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%.
 
On the office sector, Knight Frank said Saudi Arabia’s Ministry of Investment had 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 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, stated the report.
 
On the retail scenario, the expert said 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, said the report by Knight Frank. 
 
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, it added.-TradeArabia News Service



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