Saudi VAT hike: Real-estate demand affected; prices could surge

CBRE says tripling of VAT will cause sale prices, development costs to increase

  
Image used for illustrative purpose. Buildings are seen from the top of Mount Al-Noor in the holy city of Mecca, Saudi Arabia January 16, 2016.

Image used for illustrative purpose. Buildings are seen from the top of Mount Al-Noor in the holy city of Mecca, Saudi Arabia January 16, 2016.

REUTERS/Amr Abdallah Dalsh

The recent tripling of value-added tax (VAT) to 15 percent in Saudi Arabia could hamper the recovery of property demand in the kingdom, according to a new analysis.

Demand in the real-estate market has been low, with rental rates for office space in Jeddah alone dropping by 6 percent during the first half of 2020, according to a report released on Monday by CBRE, a real-estate services and investment firm. The trend is primarily due to slower business activity, prompting some developers to either delay or reduce the development of properties, particularly in the office segment.

Government reforms have been rolled out to mitigate the impact of the pandemic in the Gulf state. Landlords have offered flexible contract terms to support tenants. CBRE stated that the kingdom has so far launched a set of stimulus packages valued at more than 120 billion riyals to support the private sector.

“However, with the recent tripling of VAT to 15 percent, further fiscal measures are expected to weigh down the recovery for domestic demand,” it said.

According to CBRE, the cost of developing or buying a residential property is likely going to increase as a result of the VAT hike. The inflationary effect will likely have a negative impact on domestic demand.

“Sale prices and the cost of development are expected to increase, subsequently impacting demand and absorption rates in the short-term, due to the increase in VAT,” said the firm.

CBRE also noted that the country’s gross domestic product (GDP) is estimated to decline by 7.5 percent this year, impacting the overall business and consumer sentiment across the kingdom.

New supply

While the property market continues to be under pressure, some new developments are expected to be delivered.

In Riyadh, the commercial market will see an uplift in terms of quality offering upon the completion of the King Abdullah Financial District (KAFD), which will add 850,000 square metres of gross leasable area (GLA) to the wider market.

Within the residential segment, the Riyadh market is expected to witness the delivery of around 120,200 units between the second half of the year and 2022. This will be led by mega developments, such as the KAFD Residences and the Ministry of Housing East Gate Phase 3.

In Jeddah, the housing ministry started handing over new units to the beneficiaries of its Ruba Jeddah development, which will add approximately 1,300 units to the market this year.

A significant number of mid-quality housing developments are also scheduled to be delivered over the next two years, such as Al Jawhara Residence, as investors and developers continue to take initiatives to establish affordable housing projects associated with the government’s Sakani programme, CBRE said.

(Writing by Cleofe Maceda; editing by Seban Scaria)

Cleofe.maceda@refinitiv.com 

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