Dubai, UAE – The Saudi Arabian Real Estate Market Review Q2 2020 released today by Knight Frank Middle East forecasts that Saudi Arabia’s GDP is expected to contract by 7.5% in 2020, a trend is set to be underpinned by a slowdown in activity in both the oil and non-oil sectors.
Macroeconomic Outlook
As global lockdowns came into effect, demand for oil plummeted, and oil prices followed soon after. In an attempt to support oil prices, OPEC+ agreed to reduce production from May 2020. This reduction is expected to have a material impact on Saudi Arabia’s GDP, given that its oil sector accounts for 40.2% of GDP.
As economic activity contracts, employment in Saudi Arabia is expected to follow suit with a 9.0% contraction forecast in 2020. Total employment in Saudi Arabia is expected to return to 2019 levels by 2022.
Office Market
The Saudi Arabian Ministry of Investment granted 348 investor licenses in Q1 2020, up 19% from a year earlier. The first quarter of 2020 was reported to be the strongest quarter of investment interest in 10 years, however, we may begin to see interest wane as firms look to scale back expansion plans as a result of the economic fallout caused by the COVID-19 pandemic.
Rents in Riyadh’s office market continue to register fragmented performance in the year to Q2 2020, with Grade A rents softening marginally to SAR 1,455 per sqm, whilst Grade B rents declined by 2.8% to SAR 753 per sqm.
Jeddah’s office market performance remained subdued in the year to Q2 2020, with Grade A rents falling by 8.1% to SAR 967 per sqm, whilst Grade B rents declined by 8.9% to SAR 685 per sqm.
The Dammam Metropolitan Area’s (DMA) office market continued to soften in the year to Q2 2020, with Grade A rents falling by 8.5% to SAR 884 per sqm, whilst Grade B rents declined by 10.9% to SAR 590 per sqm.
The Kingdom’s workspace requirements are shifting from traditional office spaces to a more tech-savvy, elegantly designed and flexible environment. As Saudi Arabia’s economy continues to diversify, its workplace needs are shifting where more collaborative and flexible workspaces will be required going forward. In an environment where costs are likely to be much more closely scrutinised, such flexibility is likely to be in even higher demand going forward.
Residential Market
Across Saudi Arabia, transaction volumes in the year to date to Q2 decreased by 13.0% compared to the same period a year earlier, with the total value of residential transactions decreasing by 2.7% over the same period.
The Saudi Real Estate Refinance Company purchased a portfolio of mortgages worth over SAR 3 billion in July 2020, with the move aiming to provide additional liquidity to the market, allowing for additional loans to be issued in order to increase the home ownership rate across the Kingdom.
The hike in VAT from 5% to 15% is likely to add to the challenging market conditions that both end-users and developers are facing. From a developers’ 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. To help curtail the impact this will have on affordability, the Ministry of Housing will absorb the increased VAT payment for first time buyers for unit’s worth up to SAR 850,000.
Retail Market
On the back of weaker economic prospects, the increase of the VAT rate from 5% to 15% and the suspension of living allowances, consumer spending in Saudi Arabia is expected to fall by 5.5% in 2020 according to data from Oxford Economics. More so, consumer spending is expected to only surpass 2019 levels by 2022.
Market performance in Riyadh’s retail market softened in all segments in the year to Q2 2020, with
average regional/ super-regional mall rents falling by 2.6% to reach SAR 2,676 per sqm, whilst average community mall rents fell by 5.4% to reach SAR 1,980 per sqm. The market-wide vacancy rate in Riyadh increased by three percentage points in the year to Q2 2020 to reach 18%.
Rents in Jeddah’s retail market continued to soften in the year to Q2 2020, with average regional/ superregional mall rents falling by 3.8% to SAR 2,645 per sqm, whilst average community mall rents fell by 4.1% to reach SAR 1,745 per sqm. The market-wide vacancy rate in Jeddah increased by four percentage points in the year to Q2 2020 to reach 14%.
Despite the challenge bought about by COVID-19 and the increasing utilisation of e-commerce, the Saudi Arabia retail market’s outlook for the long-run remains strong, particularly in locations which offer suitable entertainment and leisure demand drivers to help accelerate retail spending.
Hospitality Market
The Saudi Arabian government has launched a SAR 15 billion tourism fund as part of the first phase of its National Tourism Strategy, which aims to develop 38 sites across seven destinations by 2022. As part of Vision 2030, the Saudi Arabia government is aiming for the tourism industry to make-up at least 10% of its total GDP, up from 3% currently.
With the international arrivals being curtailed across the Kingdom, corporate, leisure and religious tourism has come to all but a standstill since 15th March 2020.
Given the current challenges associated with inbound corporate visitation, cities that have historically been centres of business activity have faced challenges attracting hotel guests. Areas which have traditionally received religious visitation have fared no better given that Hajj and Umrah have been reduced in scale significantly this year.
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. In response to declining revenues, owners are looking to cut costs universally at an unprecedented scale - a trend which is likely to continue into next year.
Taimur Khan, Associate Partner at Knight Frank Middle East commented: “The COVID-19 pandemic is forecast to have a material impact on Saudi Arabia’s economy, with GDP and employment forecast to decline in 2020 by 7.5% and 9.0% respectively. This weaker economic backdrop combined with the hike in VAT from 5% to 15% will also mean challenging conditions for Saudi Arabia’s real estate market as both corporates and consumers scale back discretionary spending plans. 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.”
Read the report here - https://bit.ly/30LMoPs
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Thomas Farmer, Thomas.Farmer@me.knightfrank.com
Knight Frank has grown to become the world’s largest privately owned global property agency and consultancy company and has a strong presence in the Middle East with offices in Dubai, Abu Dhabi, and Saudi Arabia.
Together with its New York-based affiliate Newmark, Knight Frank has an impressive global footprint network across 60 territories, 520+ offices and 21,500 property professionals and as the world’s leading international property consultant, they continue to build on their long-term global presence across the residential and commercial property and service sectors.
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© Press Release 2020
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