6 Important Real Estate Trends to Watch in Saudi

ArabiaEhsan Bayat

In December, King Salman of the Kingdom of Saudi Arabia (KSA) released the government’s 2016 annual budget, and based on these projections, real estate investors are looking forward to growth in the sector. The real estate industry is one of the most valuable economic sectors in Saudi Arabia, with steady returns, low-risk investment opportunities, and strong demand.

In a recent article in The Saudi Gazette, RAFAL Real Estate Development director of marketing and strategy Essam Al-Ghamdi noted his approval of the new legislation. He predicted that the plans for action set forth by the government, including domestic development initiatives, will revitalize the Saudi economy.

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A leading investment and advisory firm in the region also responded by publishing the 2016 Top Trends for KSA Real Estate report. JLL Saudi Arabia national director Jamil Ghaznawi presented high hopes for the inaugural installment of the report, which was created with the intention of becoming the go-to annual market assessment for regional stakeholders.

In 2016 Top Trends for KSA Real Estate, the company outlined several trends expected to shape the Saudi real estate industry this year. Here is a brief overview of each point:

Taxes on undeveloped urban landTaxes placed on undeveloped plots within city limits, referred to as “white land,” are expected to generate as much as 75 billion Saudi riyal, while simultaneously reducing surrounding real estate prices and helping to address the estimated 1.5 million housing unit shortage. The imposed taxes will eliminate any benefits of retaining undeveloped land, and it will compel owners to sell their land for development. This will help balance supply and demand in the country’s housing stock, and provide more affordable, urban housing options, rather than encouraging developers to build out into the desert.

Reduced home financing provisionsIn addition to tax reforms, the Saudi government is currently weighing a decision to decrease down payment requirements by 15 percent. Pressure for the change has mounted as a result of the growing percentage of the population that is unable to afford the current standard of 30 percent. Rental costs have increased as well, and home financing reform could help stabilize these prices as well. In addition, plans are in place to transform the state-owned Saudi Real Estate Development Fund (REDF) into a bank to help with funding issues.

Shift in government spending prioritiesSaudi government officials have indicated their commitment to funding infrastructure projects and other construction deemed vital. However, the new spending model may put a hold on future projects, as authorities focus instead on finishing those projects that are already approved or underway. In addition, the directive calls for reduced spending on less urgent transport infrastructure projects, even if in progress, and to direct those funds to projects financed by Public Private Partnerships (PPP).

One purpose of delaying these projects is to target the risk of oversupply. By steadily slowing some initiatives and bringing others to a complete halt, the government aims to balance market dynamics and foster a strong environment for economic and real estate growth.

More affordable housing developmentsThe socioeconomic layout of Saudi Arabia includes a middle income segment that accounts for more than 60 percent of households, and that statistic alone points to the demand for more affordable real estate. In 2016, government and private contractors are expected to join forces to help remedy the current shortage. Besides imposing taxes on undeveloped urban plots and reducing down payment requirements, a series of development projects may provide the necessary supply of middle-income housing.

One such development is the ESKAN project guided by the KSA Ministry of Housing. Upon completion, ESKAN will add more than 500,000 units of affordable housing for Saudi citizens.

Hospitality industry to fluctuateDemand in the Saudi hospitality industry is anticipated to wane in 2016 as a result of more hotel owners and operators consolidating business in the region, as well as constraints from the overall market. Tourists and pilgrims traveling to Makkah and other holy sites in the country could provide the needed boost in revenue, however. Recently, Prince Sultan bin Salman, president of the Saudi Commission for Tourism and National Heritage, hosted a workshop that provided an overview of the Moroccan desert tourism industry and explored the ways Saudi Arabia could emulate it. The workshop was part of a larger strategy to preserve Saudi Arabia’s natural heritage and use its vast desert landscapes to create a secondary tourism industry not based on religious travel.

Increase in transactions among Middle East investorsOne of the final trends observed by the 2016 Top Trends for KSA Real Estate report is the projected increase in investors seeking to diversify their portfolios. Many will attempt this by selling assets, which is significant because Middle East investors purchased more than $11 billion in oversea real estate acquisitions in 2015. Thus, analysts assume that an increase in real estate transactions will take place this year.