Saudi real estate outlook: VAT, COVID-19 add to challenges

Decline, recovery dependent on rate at which global economy, mobility return to normal

Image used for illustrative purpose. Aerial view of cityscape at night, Riyadh, Saudi Arabia.

Image used for illustrative purpose. Aerial view of cityscape at night, Riyadh, Saudi Arabia.

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Saudi Arabia’s real estate market will continue to face challenges this year as the coronavirus pandemic causes businesses across all sectors to struggle and consumers to reduce spending, a new analysis says.

The increase in the value-added tax (VAT) from 5 percent to 15 percent will also add to the turbulent conditions faced by both property end-users and developers, Knight Frank said in a report released on Thursday.

The economic activity in the kingdom has contracted amid the coronavirus pandemic, underpinned by low energy prices, coupled with the oil production cuts and slowdown in the non-petrol sectors. Analysts have forecast that the outbreak is expected to have a material impact on the local economy, with the country’s gross domestic product (GDP) and employment estimated to fall this year by 7.5 percent and 9 percent, respectively.

“This weaker economic backdrop, combined with the hike in VAT… will also mean challenging conditions for Saudi Arabia’s real estate market as both corporates and consumers s ale back discretionary spending plans,” said Taimur Khan, associated partner at Knight Frank Middle East.

“Overall, the depth of the contraction and rate of recovery will be dependent on the rate at which the global economy and global mobility returns to some form of normality. These factors will underpin demand and activity in the hydrocarbon, travel and tourism and wholesale and retail trade sectors, all of which form significant parts of Saudi Arabia’s economy,” he added.

Impact on the residential market

Across Saudi Arabia, transaction volumes in the year to the second quarter of 2020 dropped by 13 percent compared to the same period last year, as lockdown measures hampered sales activity.

In Riyadh alone, transaction volumes and values fell by 47 percent and 20 percent, respectively, while apartment sales prices fell by 1.2 percent on average. Residential villa rates, however, went up by 3 percent.

In Jeddah, where average villa sales prices fell by 2.8 percent and apartment sales prices increased by 2.6 percent, the total volume and value of residential transactions plummeted by 23 percent over the same period.

According to Knight Frank, the move to triple the VAT may not help the sector recover in the short term, but will only strain finances.

“From a developer’s perspective, we are likely to see this increase in VAT put pressure on cash flows. However, this is likely to be a short-term challenge given that eventually this cost will be recoverable,” the report noted.

Despite the challenges, developers are likely to continue to execute projects. “However, in an attempt to stimulate demand and recover costs, we may see the introduction of more end-user favourable incentives from developers,” it said.

Office Market

Office rents in Riyadh showed “fragmented performance” in the year to the second quarter of 2020, with Grade A rents softening marginally to 1,455 Saudi riyals per square meters, while Grade B rents fell by 2.8 percent to 753 riyals per square meter.

In Jeddah, Grade A office rents fell by 8.1 percent, while Grade B rents declined by 8.9 percent.

Retail market

About 18 percent of the retail supply in Riyadh is said to be empty, up by three percentage points in the year to the second quarter of 2020.

Overall, the market performance of Saudi’s retail market also softened during the same period, with the average regional/ super-regional mall rents falling by 2.6 percent to reach 2,676 riyals per square meter, while average community mall rents fell by 5.4 percent to reach 1,980 riyals per square meter.

Hospitality market

The sector has been facing challenges in attracting hotel guests as a result of the pandemic, especially since Hajj and Umrah have been reduced in scale significantly this year.

The kingdom’s corporate, leisure and religious tourism, in particular, has come to a standstill since March 15, 2020, when international arrivals were curtailed.

“Looking forward, it is reasonable to expect a rise in leisure visitation on a domestic level not only to traditional destinations but also to secondary cities such as Abha, Baha and Al Ahsa,” Knight Frank said.

(Writing by Cleofe Maceda; editing by Seban Scaria)

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© ZAWYA 2020

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