Saudi Arabia's housing market remains weak.
Lalaine C. Delmendo | January 20, 2021
Saudi Arabia's real estate index for the residential sector rose by 2.03% during the year to Q3 2020, following y-o-y rises of 1.84% in Q2 2020, 2.06% in Q1 2020, and 0.79% in Q4 2019, according to the Kingdom's General Authority for Statistics (GAStat). However when adjusted for inflation, prices actually fell 3.51% y-o-y in Q3 2020.
Nationwide house prices have fallen by 18.2% from 2014 to 2019 (-20.4% inflation-adjusted), amidst weak economic growth and low oil prices.
Quarter-on-quarter, residential property prices fell by 0.51% in Q3 2020 (-6.09% inflation-adjusted).
By property type:
- Houses: prices declined by 1.26% during the year to Q3 2020 (-6.62% inflation-adjusted)
- Apartments: prices increased 1.45% y-o-y in Q3 2020 (-4.06% inflation-adjusted)
- Villas: prices increased by a meager 0.8% y-o-y in Q3 2020 (-4.68% inflation-adjusted)
- Residential buildings: prices fell by 0.87% (-6.25% inflation-adjusted) over the same period
- Residential lots: prices rose by 2.08% during the year to Q3 2020 but dropped 3.47% when adjusted for inflation
The real estate index indicator released by GAStat was launched in April 2017, based on the available registry data of real estate transactions from the Ministry of Justice.
Demand is falling sharply. In Safar, the second month of the Islamic calendar which runs from September 18, 2020 to October 16, 2020, the total value of real estate transactions in the Kingdom fell 36% y-o-y to SAR 9.7 billion (US$2.6 billion), following a 28% y-o-y fall in the first month, according to the country's Justice Ministry.
Saudi Arabia's economy is projected to contract by 5.4% this year, following expansions of 0.3% in 2019 and 2.4% in 2018 and a decline of 0.7% in 2017, according to the International Monetary Fund (IMF). It would be the Kingdom's worst economic contraction since 1987.
Foreigners are allowed to own real estate, subject to approval of the licensing authority. However, foreign ownership is forbidden in Mecca and Medina, except through inheritance. Non-Saudi Muslims are can obtain leases of up to two years in these cities. Leases are renewable for the same period.
Foreign investors can also purchase private land for construction and investment, but also prior approval is required, and projects (buildings) must be valued more than SAR30 million (US$8 million), including land and construction costs.
Rental yields still high in Saudi Arabia
The rental market in Saudi Arabia is attractive to investors because of high rental yields. Rising demand for rental units and the lack of adequate supply have led to massive rent increases.
- the average monthly rent for villas and duplexes soared by 17% to SAR270 (US$72) in Q4 2011 from the same period last year, according to Colliers International
- the average monthly rent for apartments rose by 14% to SAR222 (US$59) per sq. m.
- the average monthly rent for villas and duplexes rose by 11% to SAR350 (US$93) in Q4 2011 from a year earlier
- for apartments, rents rose by 7% to an average of SAR264 (US$70) per month.
In Q4 2011, the rental yields in Riyadh is high at a range of 7.8% for apartments and 8.6% for villas and duplexes, according to Colliers International.
On the other hand, in Jeddah, yields for villas and duplexes fell to 8.8% in Q4 2011 from 9.1% in the previous year. Likewise, yields for apartments fell to 10.8% in Q4 2011 from 11.5% in the previous year.
Income tax is low in Saudi Arabia
Rental Income: Rental income is taxed at a flat rate of 5%.
Capital Gains: No tax is levied on capital gains realized by individuals from selling property.
Inheritance: There are no inheritance taxes in Saudi Arabia. As in most countries in the Arab world, Shariah law applies to inheritance.
Residents: Individuals are only taxed on their business income in Saudi Arabia. Non-Saudi and non-GCC nationals are liable to income tax. Saudi and GCC national are liable to zakat, which is an Islamic direct tax on property and income.
Total transaction costs in Saudi Arabia
Foreigners are allowed to own real estate, subject to approval of the licensing authority.
Research is ongoing.
The impact of the oil price declineThe recent fall in property prices have largely been caused by an economic slowdown, reflecting the dramatic decline in the price of oil in 2014. Ironically, it was the Saudis themselves who helped drive oil prices down, battling to keep their share of the oil markets.
One 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. However from 2015 to 2019, Brent spot price averaged just US$57.1 per barrel.
Despite this, Saudi Arabia 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.
Saudi Arabia has compensated for its reduced oil revenues by running fiscal deficits. There was a deficit of 15.8% of GDP in 2015, 12.9% in 2016, 9.2% in 2017, 5.9% in 2018 and 4.5% in 2019. This was in sharp contrast with budget surpluses of about 13% of GDP from 2003 to 2013.
The deficit is projected to surge again to 12% this year.
The sharp increase in Saudi Arabia’s budget deficit in 2015 and after 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.
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 22.8% of GDP in 2019, and is expected to rise further to 34.4% of GDP this year.
Unfortunately, the housing market had been one of the worst hit, with the nationwide residential property prices falling by 18.2% from 2014 to 2019 (-20.4% inflation-adjusted), according to GAStat.
Saudi Arabia’s economy is projected to contract by 5.4% this year, following expansions of 0.3% in 2019 and 2.4% in 2018 and a decline of 0.7% in 2017, according to the International Monetary Fund (IMF). It would be the Kingdom’s worst economic contraction since 1987.
Saudi unemployment rate surged to an all-time high of 15.4% in Q2 2020, from 11.8% in the previous quarter and 12.3% a year earlier, according to GAStat. Likewise, the overall unemployment rate for Saudis and non-Saudis also increased to 9% in Q2 2020, up from 5.6% in the previous year.
The Kingdom’s inflation rate stood at 5.7% in September 2020, in sharp contrast to the previous year’s -0.7%.
As of September 2020, crude oil traded at US$40.91 per barrel, sharply down from US$62.83 per barrel in the same month last year.
Crown Prince Mohammed bin Salman is Saudi’s de facto ruler
In June 2017, Mohammed bin Salman was appointed as Crown Prince, after the king deposed Muhammad bin Nayef and relieved him of all his positions. The kingdom started a massive corruption crackdown, which led to the arrests of at least 11 princes, four ministers, several ex-ministers and businessmen. Among the arrested were billionaire Prince Al-Waleed Bin Talal bin Abdulaziz Al Saud.
However the anti-corruption campaign caused local political unrest, and was seen as consolidating the crown prince’s power.
In addition, the crown prince’s aggressive stance in foreign policy threatens the region’s stability. Crown Prince Mohammed is said to be behind the economic boycott of Qatar since June 2017. The crown prince has also been in a word war with Iran after he called Iran’s Supreme Leader "the new Hitler of the Middle East", in an interview with the New York Times. He was also condemned for pursuing a war in neighboring Yemen, which has resulted to a humanitarian catastrophe.
Saudi Arabia also faced a political crisis due to the disappearance and killing of the journalist Jamal Khashoggi, last seen at the Saudi Consulate in Istanbul on October 2, 2018. The news of Khashoggi’s murder initially deterred potential investors in doing business in the kingdom. One of the first executives to negatively reacted to the news was British billionaire Richard Branson, who suspended his advisory role for the two Vision 2030 projects in the Red Sea that he’s involved with. Branson also suspended talks with the Saudi government regarding a US$ 1 billion investment in Virgin’s space companies.
In October 2020, HaticeCengiz, the fiancée of slain Khashoggi formally filed a lawsuit accusing Saudi crown price and more than two dozen other Saudis of murder and dismemberment.
While Crown Prince Mohammed had earlier denied any involvement, the brutal murder of Khashoggi had already badly damaged his international reputation.