New initiatives such as the Saudi Vision 2030 and National Transformation Program (NTP) will help support the kingdom's real estate sector in response to the 2015 challenges of declining oil prices and resulting need to cut government spending, said a report.

There has been a major impact of the ‘new age of austerity’ and other macroeconomic challenges of weakened spending power, new tax law establishments and the introduction of new real estate investment traded funds on the real estate sector, stated JLL in its ‘2016 Year in Review’ report.

The annual report highlights the office, residential, retail and hotel markets across Saudi Arabia with detailed analysis of these sectors in Riyadh, Jeddah and Dammam Metropolitan Area (DMA).  

Despite a decline in Saudi Arabia’s GDP growth from 3.5 per cent in 2015 to just 1.6 per cent last year, liquidity in the market was eased by the major first time raise of a SR39.7 billion international sovereign bond sale.

The more positive outlook for the real estate sector began with the resulting government release of payments totalling $10.6 billion to contractors and the SR20 billion injected into the banking system, it added.

The recent Opec meeting has paved the way for a more positive 2017 economic outlook, with markets eased by an agreement to reduce oil production and more stable prices with an expected average of USD 50.3 / barrel according to Oxford Economics.

“The real estate market in Saudi Arabia has inevitably followed in the wake of macro-economic effects brought about by fluctuating oil prices. The government’s major plans to energise the market have resulted in a more positive outlook for 2017 in line with measures to counteract reduced government and consumer spending,” remarked Jamil Ghaznawi, the country head of JLL, Saudi Arabia.

In an effort to diversify the economy and open the real estate market to smaller investors, the capital market authority introduced new rules in 2016 allowing the formation of the Real Estate Investment Traded Funds (REITs) on the local stock exchange.

"The market is optimistic that by introducing REITs, the National Transformation Program’s (NTP) goal to increase real estate contribution to GDP from 5 to 10 per cent annually will be achieved in addition to creating more transparency in the market," said Ghaznawi.

“In addition these funds could help provide an exit strategy for those developers seeking to create income producing assets rather than developments for sale,” he added.   

The report also highlights 2016 as an active year for white land tax and home financing which both have implications for the real estate market in 2017 as the changes start to come into effect.  

Riyadh Market

On the office market in the Saudi capital, JLL said it has been relatively inactive in terms of project materialisation given the number of projects under construction.

In 2017, the majority of office space will be delivered from one project; the first phase of ITCC (160,000 sq m). Year-on-year office rents increased marginally by one per cent due to an increase in rents outside of the CBD area for grade A and B buildings, it stated.

Market wide quarter-on-quarter rents decreased by almost four per cent. Vacancies also affected by the economic slowdown, it stated.

In the residential market, approximately 4,000 units entered in the fourth quarter of 2016. A further 25,000 units are expected to enter the market this year.

In an effort to increase housing supply in the Kingdom, the government has taken initiatives to work with the private sector this year. Apart from Year-on-year rents for both villas and apartment, both of which decreased by four per cent, residential performances remained relatively stable across the board in Q4 2016. This has been largely the case in sale and rent prices throughout 2016.

In the retail market there were no further completions in Q4 2016 however, looking ahead to 2017, there are a number of regional and super regional centers in the pipeline.

Community center rents remained unchanged both Quarter-on-quarter and Year-on-year. Super regional centers on the other hand continue to show marginal decreases both Quarter-on-quarter (-1 per cent) and Year-on-year (-2 per cent). A trend which is likely to continue throughout 2017. Vacancies increased marginally Year-on-year and reached 9 per cent as of Q4 2016.

In the hotel market there were no changes to the Riyadh hotel supply during the last quarter of the year and the total number of rooms was 11,800 at the end of the year.

A further 4,300 keys are initially expected for 2017, among them several projects postponed from 2015 and 2016.
The decline in demand from the business and public sector segments of the market highlights the need for Riyadh’s hospitality to diversify and to reduce its reliance on business tourism, it stated.

Jeddah Market

The beginning of 2016 saw office rents soften before marginally decreasing over the remainder of the year reflecting the contracting economic conditions in the market.

Current supply of office space in Jeddah reached almost 984,000 sq m in Q4 2016. The most notable completion in 2016 was Emaar Square, which added almost 24,000 sq m to the market and was the largest completion in Jeddah since the Headquarters which entered the market in 2014.

Year-on-year vacancy rates remained stable in Q4 2016 at 6 per cent despite a number of vacancies over the last two quarters. Further declines in lease rates and occupancies are expected over 2017, said the JLL report.

In the residential market, although there were limited notable completions in 2016, the projects which did complete were part of a growing concept of quality lifestyle developments.

A total of 4,000 units were added to the market over the last quarter. The first half is expected to see a number of developments enter the market which were delayed from 2016. Following the continuous growth witnessed in 2015, apartment rental growth slowed over 2016 and Q4 2016 saw a further slowdown in Year-on-year apartment rents which increased marginally by less than 1 per cent.

Sales prices decreased across the board in Q4 2016 for both apartments and villas. Sales prices may decrease further in 2017, given the decrease in residential transactions by 16 per cent in 2016, compared to 2015, according to the Ministry of Justice.

In the retail sector the largest completion in 2016 was Al Yasmin Mall, the first quality shopping center to open in the area, which added over 58,000 sq m of quality retail space. Current supply of retail space in the market stands at 1.15 million sq m.

Expansion plans within Jeddah seem to be put on hold until there is more economic clarity.

The hotel sector in Jeddah has been active over 2016 with six hotels opening throughout the year. The materialisation of several projects in 2016 has increased the supply of quality hotel keys in Jeddah by around 1,200 keys which is a 14 per cent increase compared to last year. Looking ahead, further completions are expected in 2017, said the report.

Damam Metropolitan Area (DMA)

In the residential market the supply of units in the DMA was approximately 340,000 units at the end of the year. Approximately 9,000 units entered the market over the year.

There were no major completions in the second half. Future supply may face some delays in materializing as some large scale projects, such as the remaining phases of Al Khobar Lakes, face delays.

Rents increased by three and four per cent respectively over the second half of 2016. This is expected to slow further in 2017. Sales prices remained unchanged over the last six months. Prices are expected to show signs of decreasing in 2017.
 
In the retail sector there were no major completions in the second half of 2016. Current supply of retail space in the DMA in Q4 2016 was 1.024 million square metre. Only one neighbourhood center is expected to complete in 2017, it stated.
 
In the hotel market the second half of 2016 witnessed the opening of two internationally branded hotels in the region. Although a number of hotels are currently in advanced stages of construction, only one hotel is expected to open in 2017, said the report.

On the future outlook, JLL said among the major opportunities in 2017 are the opening of the Saudi stock exchange to foreign investment, white land tax and the introduction of REITs.

There is also expected to be continued investor interest in the affordable housing sector and alternative asset classes such as healthcare and education.

The report also highlights a number of potential risks to the real estate market, including continued tensions in the region leading to more resources being dedicated towards security and defence, which will likely mean cutbacks in spending for other sectors.

Other risks include the restriction in the number of pilgrims, weakened oil prices and delays in infrastructure projects which are all highlighted by the report to potentially impact the real estate market in 2017, it added.-TradeArabia News Service