Savills: Long-run positive impact of governments measures to trickle down Saudi economy

RIYADH — As governments around the Middle East continue to introduce initiatives and implement strict measures to fight the spread of the novel coronavirus, Savills, the leading global real estate consultancy, Sunday released a new report analyzing the impact on the Saudi market.

According to Savills, the Kingdom of Saudi Arabia (KSA) faces a difficult situation due to the declining global oil demand, dropping oil prices because of output disagreements with Russia, and the looming threat of the pandemic spreading globally and within the region.

As the largest and one of the most significant economies in the GCC, the Kingdom was among the first countries in the region to initiate stringent measures to contain the spread of COVID-19. All international flights to and from the country were canceled from March 15.

Major cities including Riyadh, Makkah and Madinah have been under a curfew since March 25, and Jeddah a few days later. Travelers arriving in the Kingdom were quarantined for 14 days. Failure on the part of residents to disclose travel history and health issues is an offense with fines up to $133,000.

David O’Hara, head of Savills KSA, said: “The country’s experience in dealing with MERS in 2012 has led to these quick and effective measures from the government. Its social and medical infrastructure is also well positioned to address the logistical challenges posed by the pandemic.

“These measures and support factors have so far been effective as the country has officially recorded only 1,299 cases till March 29, 2020, seven weeks after the first official case was recorded March 2, 2020. The society's commitment with the curfew orders has also helped in curtailing the further spread of virus.”

The government has stepped in to support the economy with monetary policies aimed at invigorating business sentiments and ensuring sufficient liquidity in the market. In the past few weeks, the Saudi Arabian Monetary Authority (SAMA) has announced a SR50 billion program to support the private sector, and aimed at promoting economic growth through a package of measures.

In addition to the measures announced by SAMA, the Ministry of Finance has announced urgent initiatives to support the private sector, especially small and medium enterprises and economic activities most affected by the virus.

The financial stimulus package of these initiatives reaches more than SR70 billion, which consists of exemptions and postponement of some government dues to provide liquidity to the private sector thereby enabling them to manage continuity of their economic activities.

O’Hara added: “The new policy measures will provide a much-needed support to the economy at this critical juncture. In the long-run, the positive impact of these measures will trickle down to the economy and the real estate sector. However, in the short-to-medium term, economic growth is likely to remain muted. As per latest estimates by Oxford Economics, non-oil growth is forecast to grow at 0.7% (from 2.8% previously) in 2020.

“This may have a negative impact on real estate activity in the country in the immediate future as expansion plans and market entry strategies may be postponed. The existing travel restrictions have already led to key policy decisions being delayed on a few of the ongoing mandates where our company is involved.”

Savills also reported that site inspections for new office leases have been postponed while the lease start date on a few contracts has been pushed back. Close to 80% of the active enquiries represented by Savills are ongoing but at a slow pace as companies struggle to start fit-out work on the new premises and key decision makers across multinational companies revisit their business strategy.

O’Hara concluded: “Most of the above-mentioned delays are purely because of the current challenges posed by COVID-19. Fundamentally, there is a strong demand for investment grade real estate across KSA. A few of the ongoing deals have been finalized in the last few weeks, indicating a long-term optimistic view most companies are adopting while considering their real estate requirement in the Kingdom.

“Over the last 12 to 18 months, the Kingdom has liberalized investments guidelines and opened up its economy to new business sectors. This has led to a surge in enquiry levels from regional and global companies keen to set-up /expand their operations in KSA. We anticipate a strong recovery in demand especially across the office and retail sector during H2 2020, provided the current situation is contained and business activity resumes at the earliest.”