CLOSE X

Register - if you don't have an account

Yes! Sign me up for Global Property Guide's fortnightly email newsletter.


Login - for registered users

Forgot Password?
Explore destinations
continent map couldn't be loaded Pacific Europe & Russia North America Latin America Asia Africa Middle East Caribbean

 


Financial Overview

Directory

Property Search

Global Statistics

Regional Statistics






Jan 22, 2018

Property prices are falling in Saudi Arabia


 

Saudi Arabia's real estate market has been declining, amid a weakening economy, fiscal and economic reforms, and political uncertainty. Property prices remained subdued in Q3 2017, despite the government's attempts at loosening barriers to obtaining mortgage finance. 

During the third quarter of 2017, Saudi Arabia's real estate index for the residential sector went down by 5.4% (-5.2% inflation-adjusted) over the previous year. On a quarterly basis, the index barely rose by 0.4% (-0.1% inflation-adjusted), based on the figures from Saudi's General Authority for Statistics (GAStat). 

  • The real estate index for residential plots fell by 5.4% (-5.2% inflation-adjusted) during the year to Q3 2017. Prices of plots had a meagre increase of 0.5% (-0.1% inflation-adjusted) from the previous quarter.
  • Apartment prices sharply fell by 7.4% y-o-y (-7.2% inflation-adjusted) in Q3 2017. On a quarterly basis, the price index of apartments fell by 0.2% (-0.8% inflation-adjusted).
  • Prices of villas declined by 0.4% y-o-y (-0.3% inflation-adjusted) in Q3 2017. Villa prices dropped by 0.1 (-0.7%inflation-adjusted) from the previous quarter.
  • The real estate index for houses declined by 1.8% y-o-y (1.7% inflation-adjusted) in Q3 2017. The price index also fell by 0.2% q-o-q (-0.8% inflation-adjusted) in Q3 2017.   

The real estate index indicator released by GAStat was launched this year, in April 2017, based on the available registry data of real estate transactions from the Ministry of Justice.

Out of 56 markets analyzed in Q3 2017, Saudi Arabia was ranked second to the bottom, making the country as one of the worst performers in the world, based on Knight Frank's Q3 2017 Global House Price Index. However, the index also showed improvement in prices, as prices went up by 0.7% and 0.5% over the past six and three months, respectively.

"The oil-dependent Saudi economy is struggling to gain traction, which along with the recent introduction of a levy on expatriate workers is stifling housing demand," according to Kate Everett-Allen of Knight Frank's International Residential Research.  

In Riyadh, the capital city, apartment prices dropped by 4% during the year to end-Q3 2017, according to Jones Lang LaSalle (JLL), but remained unchanged from the previous quarter. Sale prices of villas also fell by 5% y-o-y in Q3 2017, and by 2% on a quarterly basis.

Apartment prices in Jeddah also fell by 9.7% during the year to Q3 2017, and by 2% from the previous quarter, according to JLL. Sale prices of villas slightly fell by 0.5% y-o-y  in Q3 2017, however, prices were up from the previous quarter by 1.3%.

The Saudis have been encouraging residential investment

Saudi Arabia gdp per capita

Mindful of the lessons of the 1970s to early 1980s, the Saudis have in recent years spent their petrodollars cautiously, reinvesting a large portion of the windfall into real estate and encouraging foreign investment.

After deep recession in the 1990s, a Foreign Investment Law was passed in April 2000 to encourage a service-oriented economy. Seven months later a new Real Estate Law allowed legally-resident non-Saudis to own a private residence, provided they obtained a license from the Ministry of Interior.

In addition, the volatility of the local stock market from 2006 on encouraged investors to shift focus to real estate.

From 2002 to 2005, house prices rose by 13.7% annually while average land prices rose 16.5% per year, according to the National Commercial Bank Capital (NCBC). Strong house price rises have continued in recent years. During 2014, the average sales price of villas in Riyadh rose by 4% to 7% while apartment sales prices increased by 6% to 9%, according to KPMG Real Estate Advisory.

The law passed in 2000 also allowed ownership of real estate by foreign investors in order for them to conduct their business activities and have accommodation for their employees, again with Ministry of Interior permission.  To prevent speculation, five years must elapse before property can be sold.

However, real property ownership by foreigners is forbidden in the holy cities of Mecca and Medina. Non-Saudi Muslims can only obtain leases of up to two years in these cities. Leases are renewable for the same period.

Dismal economic performance in 2017

With crude prices still relatively low, Saudi Arabia's economy expanded by 1.7% in 2016, according to the International Monetary Fund (IMF), its weakest growth since 2009. The slowdown followed robust GDP growth of 4.1% in 2015, 3.7% in 2014, 2.7% in 2013, 5.4% in 2012, 10.3% in 2011, and 4.8% in 2010.

The country's GDP contracted by 0.5% y-o-y in Q1 2017. This was mainly attributed to the 2.3% contraction of the oil sector, the worst since 2013, as Saudi Arabia reduced its crude output following the November 2016 Organization of the Petroleum Exporting Countries (OPEC) agreement to collectively cut oil production.

In Q2 2017, the economy entered a recession as GDP shrank further by around 1% y-o-y, the result of low crude oil output and prices, combined with the government's tight fiscal policy, economic reforms, and a weak non-oil economy.   

The IMF predicts a near zero GDP growth for 2017. The country is expected to bounce back in 2018 with 1.1% growth.

In October 2017, the country's consumer price index fell by 0.2% y-o-y, its tenth consecutive month of price decline, according to Saudi's General Authority for Statistics (GAStat). Consumer prices in the country are expected to decline by around 0.2% in 2017, following inflation rates of 3.5% in 2016 and 2.2% in 2015, according to the IMF. Unemployment stood at 6% in Q2 2017, up from 5.8% the previous quarter and from 5.6% in 2016.

Saudi Arabia’s fiscal balance has deteriorated rapidly. From a deficit of 15% of GDP in 2015, the country's budget deficit increased to 17.3% of GDP in 2016, in sharp contrast with budget surpluses of about 13% of GDP from 2003 to 2013.  

The sharp increase in Saudi Arabia’s budget deficit in 2015 can be attributed to the following:

  • Sharp decline of crude oil prices,
  • Following King Salman’s recent accession to the throne in January 2015, he immediately spent a substantial amount of money on subsidies and public job bonuses, including extra months of additional salary to all government employees, in an effort to increase his popularity.
  • Significant military expenditures directed on the conflicts in Yemen, Syria, and Egypt.

Saudi Arabia gdp inflation

From having the lowest share of public debt in the world at less than 2% of GDP in 2014, the kingdom's public debt ballooned to around 13% of GDP in 2016. Public debt is expected to rise to about 33% of GDP by 2020.

Worried by a huge budget deficit of almost US$100 billion in 2015, the government launched an austerity drive in the first quarter of 2016.

Ministries were ordered to reduce spending on contracts by at least 5%. In December 2015, the government cut power and water subsidies.  In September 2016, it was announced that salaries of ministers would be reduced by 20%, while overtime bonuses will be reduced between 25% to 50% of basic salaries.

In Q3 2017, the deficit fell by 9.4% to SAR 48.7 billion (US$ 12.99 billion) from the previous year. "We continue to move towards our ambitious economic reform objectives for the long term, including the delivery of a balanced budget," said Saudi finance minister Mohammed Al Jadaan.

"Whilst economic challenges remain, the economic reforms and measures that are set in the Fiscal Balance Program within Saudi Vision 2030 have proved effective," said the finance minister.

However in March 2017 ratings agency Fitch downgraded Saudi Arabia's credit rating from AA- to A+.

In April 2016, a reform strategy called Vision 2030 was announced by Crown Prince Mohammad bin Salman Al Saud. By year 2030 it aims to:

  • Increase non-oil exports as a proportion of non-oil GDP from 16% to 50%
  • Cut unemployment from 11.6%, to 7%
  • Raise women's participation in the workforce to rise from 22%, to 30%
  • Raise the private sector's contribution to GDP from 40%, to 65%

Other government drives include a "National Transformation Program 2020" (June 2016), and a "Fiscal Balance Program 2020" (December 2016). 

The Saudis themselves helped drive oil prices down

Saudi Arabia crude oil prices

Ironically, it was the Saudis themselves who helped drive oil prices down, battling to keep their share of the oil markets.

Another aim was to hurt Iran.  Iran´s economy needs oil to trade around $135. Saudi Arabia´s own breakeven oil price at which the national budget is in balance is around $100 per barrel, according to Crude Oil Peak, an industry analysis site. 

Saudi Arabia also has far larger cash reserves and is thus able to withstand a downturn in prices for much longer. Saudi Arabia is the world’s largest oil producer and exporter, and also has huge clout as leader of the Organization of the Petroleum Exporting Countries (OPEC). Petroleum accounts for more than 75% of government revenues and 90% of exports.

During the November 2017 OPEC meeting oil-producing countries agreed to extend the oil production cap until 2018.  As of December 11, 2017, crude oil traded at US$57.15 per barrel.

Declining rental demand 

Rental yields are high in Saudi Arabia. In Riyadh, the average gross rental yield is 9.02%, while it was around 8.03% in Jeddah, based on the 2017 STC Real Estate Index published by Stephane Tajick Consulting.

However, Saudi Arabia's rental market has been trending down.  At the lower end, some expatriate families have left the country due to the implementation of the expat dependent tax in July 2017. The tax, currently SAR 100 (US$ 26.67) per month, has to be paid by an expat worker for every dependent (including spouse, children, parents, etc.). The monthly fee will increase to SAR 200 (US$ 53.33) in 2018, SAR 300 (US$ 80.00) in 2019, and SAR 400 (US$ 106.67) in 2020.   

In Riyadh:

  • Apartment rents fell by 6% y-o-y and by 2% q-o-q in Q3 2017, according to JLL.
  • Villa rents fell by 4% y-o-y and by 1% q-o-q in Q3 2017.

In Jeddah:

  • Apartment rents fell by 9% y-o-y and by 0.5% q-o-q in Q3 2017.
  • Villa rents fell by 4.2% y-o-y and by 0.3% q-o-q in Q3 2017.

"The new regulations on expats are affecting the outflow of foreigners, which means population will decline, affecting demand," said Al Rajhi Capital's head of research Mazen al-Sudairi. Around 2.5 million expatriates are expected to leave the country by end of 2018, according to Saudi Gazette columnist Tariq Al-Maeena.

Gulf News recently reported that owners of some residential buildings in Jeddah "have voluntarily asked" real estate agents to cut their apartment rents by about 5% to 8% for existing and potential tenants.

There has been a rise in vacancies. "These days landlords are approaching us to rent their vacant buildings. In the past this had never happened," said real estate agency owner Thamir Al-Qurashi. "The investors who used to rent the buildings at such high prices are not sure now that they will be able to rent the entire building and make profit out of this business," Qurashi said.

In Jeddah, a four-room apartment can now be rented at SAR 22,000 (US$ 5,867) or less a year, down from last year's rent of SAR 24,000 (US$ 6,400) a year, according to Qurashi. Annual rents for housing complexes also went down from SAR 80,000 (US$ 21,333) in the previous year to SAR 60,000 (US$ 16,000) or less in 2017.

In Riyadh the average annual rental rate for apartments in Q2 2016 was SAR 26,935 (US$ 7,182), according to property consultancy Chestertons in its Riyadh Real Estate Market Overview for Q2 2016. Villas in Riyadh have an average annual rental rate of around SAR 118,668 (US$ 31,645) during the same period.

The downward pressure on rents is expected to continue for the rest of the year.

Housing supply continues to rise; 'White land tax" to counter housing shortage 

Saudi Arabia residential supply

Housing supply continues to rise in Riyadh and Jeddah, according to Jones Lang LaSalle (JLL).

In Q3 2017:

  • In Riyadh, total housing supply was around 1.17 million units in Q3 2017, slightly up from1.15 million units recorded at the end of 2016, according to JLL.
  • In Jeddah, total housing supply was around 812,000 units, also an increase from 803,000 units at end of 2016.

The capital city's housing supply is predicted to rise by around 25,000 units in 2018, and by 21,000 units in 2019. In Jeddah, housing supply is projected to rise by around 12,000 units both in 2018 and in 2019.

Key Residential Projects in Riyadh

Project Name Units Expected Timelines
Masharif Hills (Ph-I) 169 2016-17
Manazel Qurtoba (Ph-II) 1,000 2016-17
Rafal Residence 172 2016
Bayt Al Hurr 216 2016
Manazel Qurtoba II 558 2016-17
Damac Esclusiva 216 2017
Al Jawan 300 2017-18
ITCC Complex 2,226 2016-17
Marvela Community 594 2016-17
Source: KPMG

Despite rising housing supply, Saudi Arabia still faces a housing shortage of around 1.5 million units, according to the Ministry of Housing. In an effort to tackle this dilemma, Saudi Arabia's cabinet approved a 2.5% tax on undeveloped and idle urban land plots or "white lands" in June 2016. The new tax will be implemented in four stages and will be applicable to landowners of plots exceeding 5,000 square metres.

Boosting home construction and ownership

The Kingdom’s population of 32 million is growing by more than 2% annually. It is dominated by young middle-class Saudis who are first time homebuyers, as 45% of the country’s population are below 20 years old.  Demand from expatriates exacerbated the housing shortage, with about 5.5 million expat workers in the country. Low and middle-income households make up about 80% of the unmet demand.

In order to boost affordable housing and the property market in general, the government has been devising some measures since last year, including the 'white land tax'. Several recently revealed new programs are meant to make mortgage financing more accessible for Saudis:

  • The Saudi Arabian Monetary Authority (SAMA), the country's central bank, recently removed administrative fees for mortgage holders wishing to switch between fixed and floating rate loans. Mortgage holders can now also move to a new lender without extra costs.
  • In January 2017, SAMA allowed banks to supply a higher share of funding for home purchases by raising the banks' loan-to-value ratio to 85%, from 70%, applicable to first home purchases of Saudis.
  • Last October, the Real Estate Development Fund (REDF) approved a mortgage guarantee programme, which makes it easier for a relative to be nominated as guarantor for mortgage loan financing.
  • Saudi Arabia's Public Investment Fund is setting up a mortgage refinancing company, called the Saudi Real Estate Refinance.  The intention is that within 5 years it will refinance mortgages worth SAR 75 billion (US$ 20 billion). "The new company is designed to stimulate housing sector development in the kingdom by injecting liquidity in the real estate market," said a statement.

These measures are part of Saudi Arabia's National Transformation Program 2020, which aims to increase the percentage of homeowners from 47% to 52% of households by 2020. The program intends to raise the percentage of real estate financing to non-oil GDP from 8% to 15%, and to increase the share of residential units developed by approved property developers to around 30% by 2020. This year (2017), the government is expected to handover around 120,000 housing units.

Earlier, the Ministry of Housing launched the ESKAN (the Arabic word for housing) housing scheme in March 2014 to assist Saudi families buy a house through state-subsidized home loans or subsidized sales of land or housing units. The government allocated about SAR250 billion (US$66.7 billion) for the construction of 500,000 new dwellings in coming years.

ESKAN will "help initiate a housing market take-off to tackle the needs of the middle class, where most of the demand lies," said John Sfakianakis of Saudi investment firm MASIC.  "Once people see the supply being addressed, there will be fewer concerns about systemic risks and housing market imbalance."

Lower interest rates

Interest rates have been progressively cut. The kingdom’s central bank, the Saudi Arabian Monetary Agency (SAMA), has pushed the reverse repo rate down to 2% since January 2009.  This is unavoidable, as the Saudi riyal is pegged to the US dollar (at 1US$=SAR3.75).

Yet low interest rates haven´t helped much, because less than 1% of all home purchases are financed by mortgage loans, according to CB Richard Ellis.

To encourage private banks to be more aggressive, in March 2011 the Saudi Arabian Shura Council passed a long-awaited mortgage law to widen funding options. The Real Estate Development Fund (REDF), a state-funded entity, currently dominates the home financing market.

Major real estate developments

The Saudi government has launched four integrated economic cities in recent years. These cities will create over 1.3 million jobs and house more than 4.5 million residents, contributing SAR563 (US$150) billion to GDP and increase Saudi Arabia’s per capita GDP to SAR125,625 (US$33,500) by the year 2020, according to the Saudi Arabian General Investment Authority (SAGIA).

Project
Location Total Area Date Launched Value(SAR) Residential Area
King Abdullah Economic City (KAEC) Rabigh, north of Jeddah 168 million sq. m. Q4 2005 100 Billion Includes 260,000 apartments and 56,000 villas
Prince Abdulaziz bin Mousaed Economic City (PABMEC) Hail, north of Riyadh 156 million sq. m. Q2 2006 30 Billion Develop 30,000 housing units
Knowledge Economic City (KEC) Holy city of Medina 4.8 million sq. m. Q2 2006 25 Billion Develop 30,000 residential units
Jazan Economic City (JEC) Jizan, 725 kms south of Jeddah 100 million sq. m. Q4 2006 102 Billion Include residential areas with complete amenities
Source: Ministry of Economy and Planning

Political uncertainty under the new Crown Prince

Saudi Arabia is currently shrouded in political uncertainty.  In June 2017, Mohammed bin Salman was appointed as Crown Prince, after the king deposed Muhammad bin Nayef and relieved him of all his positions.  The kingdom started a massive corruption crackdown, which led to the arrests of at least 11 princes, four ministers, several ex-ministers and businessmen. Among the arrested were billionaire Prince Al-Waleed Bin Talal bin Abdulaziz Al Saud.

Crown Prince Mohammed's ongoing efforts to modernize the country through social and economic reform can be seen in Saudi's Vision 2030.

The purge was seen as consolidating the crown prince's power.  It was immediately followed by a 1.1% decline in the Saudi Stock Exchange in early trading on Monday, November 6, 2017. The anti-corruption campaign has also weakened investor confidence.

Aside from local political unrest, the crown prince's aggressive stance in foreign policy threatens the region's stability. Crown Prince Mohammed is said to be behind the economic boycott of Qatar since June 2017. The crown prince has also been in a word war with Iran recently after he called Iran's Supreme Leader "the new Hitler of the Middle East”, in an interview with the New York Times.






Comments


Be the first to comment on this article!



Login or Register to submit a comment!

In order to promote open and spam-free conversations, Global Property Guide moderates commetns on all articles. You can expect that your comment will be published within 24 hours.



News & Discussion
Compare Countries



Free Newsletter

Fortnightly updates from the global property arena directly to your inbox.


Email Address:





Connect to professional advice in Saudi Arabia





PROPERTY RECOMMENDATIONS

 
Download free property reports from international research houses

Our Newsletter

 
Fortnightly updates from the global property arena directly to your inbox.

Manage subscriptions