JLL expects Saudi residential market to witness shift towards rentals

Riyadh – The Saudi real estate sectors remained soft during the second quarter (Q2) of 2020, although the residential market remained somehow active and witnessed the delivery of numerous key projects across the kingdom’s major cities, according to JLL’s 2020 mid-year review report.

Meanwhile, delays in the handover of projects can be expected over the short-to-mid-term, as the higher value-added tax (VAT) imposed is seen to increase the cost of residential developments and sale prices.

In an attempt to stimulate demand for the affordable housing segment in Saudi Arabia, the Minister of Housing agreed to absorb the increased VAT for first time buyers on units worth SAR 850,000 or less.

“A reprioritisation of household spending will continue, and we expect to see a shift towards the rental market as it becomes comparatively more attractive and cost competitive. This could see performance trends reverse, whereby sale prices begin to slowdown and rental rates will pick up in the longer-term,” said the head of research for JLL MENA, Dana Salbak.

The increased VAT may potentially drive land prices down from their current inflated levels, hence, an increased tax could, therefore, benefit developers by cutting their overall cost of development, she continued.

Furthermore, the kingdom's office sector witnessed downward pressure on rental rates. Moving forward, many corporates will be focusing on alternative ways to optimise and streamline workspaces to include a shift into smaller and fitted-out units.

The Saudi retail market is forecast to remain in the downward cycle due to the VAT hike and the suspension of public sector allowances. However, the entertainment market is still growing in Saudi Arabia, with demand exceeding the available supply. This could reduce the impact of additional costs over the short to medium term.

Additionally, the strict preventive measures and the prevailing travel suspension continued to impact Saudi Arabia’s hotel sector during Q2-20.

Considering the importance of the tourism industry to the kingdom's diversification efforts, the Ministry of Tourism launched a $4 billion (SAR 15 billion) tourism development fund to support the development of various mega-projects and finance for investors, a move that is predicted to support the construction sector and ensure the delivery and development of hotels in Saudi Arabia in the long-run.