WORKING FLAT OUT

Saudi Arabia 2016 | CONSTRUCTION & REAL ESTATE | REVIEW: REAL ESTATE

Despite formidable macroeconomic headwinds, Saudi Arabia's ongoing development programs are attracting sizeable investments into the Kingdom's real estate sector with impressive results.

As the world's largest oil producer, ongoing tribulations in commodity prices have dented the economy of the Kingdom of Saudi Arabia. Around 90% of its revenues stem from oil, and as crude slipped below the $30/bbl level in 2015 the Kingdom posted the region's greatest deficit of $90 billion, with a repeat performance likely this year, too. Nonetheless, exciting reforms are in progress, with the government pursuing a program of economic diversification to mitigate the effect; one that has included radical steps to enable broader foreign participation in key sectors, not least finance and construction.

REFORMS

Of note, the Saudi stock market (Tadawul) has been opened to direct foreign investment, and furthermore, the Saudi Arabian General Investment Authority (SAGIA) is to permit 100% ownership of retail and wholesale business to maximize foreign investment. Moreover, according to Housing Minister Majed Al Hogail, by the end of the 2017-18 financial year the Kingdom's Real Estate Development Fund, today financing roughly SAR190 billion worth of projects, is looking to raise funds through a sukuk issuance, likely in 2017. Reforms target no less than a doubling of the real estate sector's contribution to GDP to 10% by 2020.

The share of GDP attributed to construction in KSA fell to SAR31,369 million in 1Q2016 from SAR31,741 million in 4Q2015. The figure had averaged at SAR27,445.88 million in the 2010 to 2016 period, peaking at SAR32,001 million in 3Q2015 and troughing at SAR21,969 million in 4Q2010. As Mohammed K. Alduraibi, the CEO of Da'em Real Estate Inv. Co., put it in a TBY interview, “The government is pushing to be close to the developers. This follows the international thinking that a government cannot solve a housing problem alone." The government has indeed been fostering such partnership deals between property developers and foreign investors within the context of a new construction program set to construct 1.5 million homes by 2024. The proposed arrangement sees the developer shouldering the risk, while the ministry assists with initial financing. A tangible shortage of affordable housing is felt by the Kingdom's young citizens as the population continues to exceed 21 million. By opting to play regulator, the government has effectively passed the gauntlet to the private sector as far as home building is concerned. As an additional stimulus to real estate development it envisages cutting the average approval and licensing period for new residential estate projects from 730 days to 60 days by 2020. Moreover, around $15.7 billion has been set aside for a loan guarantee program over the next five years to facilitate home buying.

Close to 70% of Saudis are below the age of 25. Addressing their call for a larger pool of affordable residential buildings, the so-called “White Land Tax" is set to charge 2.5% tax per annum of the value of undeveloped land to curb hoarding for speculative purposes. As much as 40% of land within major cities remains undeveloped, according to Gulf Business. Official calculations estimate that the tax could ultimately reduce market prices in provincial Saudi Arabia by up to 40%, thus stimulating demand and, by extension, the local economy. Moreover, returns of around SAR30 billion are anticipated from newly developed land according to the Jeddah Chamber of Commerce.

The National Transformation Program (NTP) 2020 enables GCC investors to capitalize on business central to the economic reforms currently afoot. And while the scheme is a pan-GCC affair, it goes hand in glove with Saudi Arabia's Vision 2030. A key beneficiary of NTP 2020 is the real estate sector, with anticipated growth in new units from 4 to 7% per annum by 2020. By that year, too, the government intends for the share of residential property financing to climb from 8% of non-oil GDP to 15%.

RESIDENTIAL

The residential market has long been characterized by a shortage of available properties and an insufficient development pipeline. Touching on a social factor exacerbating this situation in the country, Bader Ibrahim Saedan, Managing Director of Al Saedan Real Estate, explained to TBY that “We used to have extended family houses, but now everybody wants to live alone. The trend is going from big units to smaller ones ...and we are in tune with this, doing our part to meet that demand."

The government's decision in late 2014 to set the loan-to-value ratio at 70% served to price out many in the middle class. Unsurprisingly, retail real estate loans rose just 8% in 2015, a quarter of the 34% seen in 2014. Somewhat remedying this, the KSA's Central Bank subsequently raised the maximum loan-to-value ratio to 85%, which should see a better sector performance in 2016. Furthermore, the minimum apartment size qualifying for a loan from the Real Estate Development Fund (REDF) declined from 240sqm to 175sqm. The government is working to mitigate any upward pressure on prices for smaller properties.

In Riyadh, roughly 17,000 residential units entered the market in 2015, the bulk being standalone villas, or the increasingly popular small apartment buildings, where notably no projects exceeded 150 units. On a larger scale, the Green Oasis and the second phase of the Manazil Qurdoba, respectively envisaged 930 and 700 residential units. For FY2016, Riyadh could potentially see 28,000 additional units.

Returning to 2015, roughly 2,250 land plots were delivered to end users as part of Riyadh's Eskan Airport Project, marking the sole major affordable housing project in that city. The 20,000 new units handed over in Jeddah over 2015 took the form of standalone villas and small apartments, raising residential supply to around 789,000 units as of 4Q2015. Salman Bay Housing and several of the Eskan projects are expected to add significant units to the market. As the year changed, roughly 15,000 affordable units were under construction within the Eskan and Salman Bay Housing developments, with a further 15,000 earmarked. In 2015 average rentals rose prominently by 6% YoY in November in Riyadh, and on average by 11% in Jeddah as fewer citizens digested down payments. In contrast, in Riyadh, YoY villa sales prices shed 6%, while in Jeddah growth of 6% was observed for the period. Official data confirms that residential transactions in Jeddah had slid 19% year-to-November 2015, and by 11% in Riyadh. The serviced apartment sector was more vibrant in Jeddah, too, where two properties of Ascott were delivered in Q42015, including the Ascott Sari Street and the Citadines Al Salamah. All eyes are now on how the “White Land Tax" plays out.

COMMERCIAL PROPERTY

Limited fresh supply in Riyadh kept office rents relatively stable throughout 2015 at SAR1,056 per sqm, while vacancy rates were rigid at 16%. In Jeddah, however, the market observed an early 7% average YoY rise in rents. Yet occupiers remained wary regarding the prospects of expansion due to expected curbs in government spending, whereby the indicators are for higher rents in 2016. In Jeddah a 7% average YoY rise in rents resulted, which also reconfirmed its status as the secondary business center after the capital.

RETAIL

Saudi Arabia's population is set to reach 34.3 million by 2019, prompting a palpable race to supply the goods and social amenities that citizens want. The resulting climate of price-based competition will, in the short term, likely result in higher vacancy rates and cheaper rents. Riyadh is estimated to see a 60% rise in quality retail space supply over the coming five years. Furthermore, 100% foreign ownership of retail and wholesale enterprises will likely boost demand for retail space from international players. According to the central bank, the Saudi Arabian Monetary Agency (SAMA), the stake of retail sales transactions in total climbed around 14% YoY in 9M2015 with strong demand in Jeddah.

In conversation with TBY, Khalid Bin Ali Sehaibany, General Manager of Hamat Property Co., which currently manages a gross leasable area (GLA) of 550,000 sqm, revealed that this would be “doubled by 2017 to 990,000sqm. We are working on Riyadh Park, Tabuk Park, and Tilal, and we have another three plazas in the pipeline." Enumerating the gap in the local market, he added that the Kingdom still required “an extra 5 million sqm of GLA to meet demand by 2023." He argues that economic performance will enable this shortfall to be met “within seven to eight years." Current total GLA in Saudi Arabia is 4 million sqm and total GLA needed is 5 million sqm, but around 4 million will be in Riyadh, Jeddah, and the Eastern Province.

HOTELS

Tourism is a vital part of the country's economic plurality, and the NTP 2020 target is to boost Umrah pilgrimage numbers from 6 million a year to 15 million by 2020, which will naturally stimulate the hotel segment further. Mecca and Medina foresee 30 million annual visits by 2025 by official numbers.

The hospitality sub-sector has seen regional consolidation, and duly returns on hotel investments and rental earning have bottomed out. The government is adamant that tourism should extend beyond the pilgrimage segment. That said, Riyadh's hotel market saw the delivery of just two hotel projects in 2015, as the Movenpick and Hilton Doubletree introduced a total of 635 rooms. Sector data estimates that an additional 8,900 rooms could arrive between 2016 and 2018, thereby upping current supply by 84%.

In Jeddah in 2015, only the Radisson Blu Plaza, with 112 keys, opened its doors, although a further 8,000 hotel rooms are foreseen over the next three years, again doubling the existing stock. Naturally, this will take its toll on average daily rates (ADRs), which had moderately declined to $233 in YTOctober 2015, with a flat occupancy rate of 58%.

The Kingdom, in the throes undergoing economic diversification, must now meet the affordable housing needs of its citizens, and the government knows that this is a task best accomplished together with the private sector.