Saudi property meltdown: affordable housing in demand
Saudi Arabia’s property market faces a “watershed” year, according to JLL. The introduction of the new white land tax and the drive to create more affordable housing will be key drivers for the market.
Craig Plumb, the regional head of research said: “We predict there will be increased activity in the real estate sector through the public investment fund, the listing of further Reits [real estate investment trusts], taxation reforms and a series of public-private partnerships.”
The white land tax is levied on undeveloped land and is being rolled out in three of the kingdom’s biggest cities: Riyadh, Jeddah and Dammam.
Plumb said: “That’s going to have quite a major impact on the market. Some owners are going to seek to redevelop their land to avoid paying tax on it. What that is going to do is encourage the supply of new properties. This policy is being aimed largely at increasing the supply of affordable housing.”
Speaking on a conference call to investors in March, Fawwaz Al Khodari, the head of Dammam-based contracting company Al Khodari & Sons, said that the white land tax has “triggered development on a lot of plots that would have otherwise been sitting there for decades doing nothing”.
“This naturally is beginning to create activity, which obviously is positive for a contracting company like ours,” he said.
National Transformation Plan
Under Saudi Arabia’s National Transformation Plan, the kingdom is looking to double the contribution that property makes to its GDP to 10 per cent by 2020. It is also seeking to treble the percentage of residential units developed by approved real estate developers to 30 per cent.
Plumb said: “Perhaps the biggest opportunity in the Saudi market is in respect of affordable housing. The government is recognising that, it is trying to encourage more development of affordable housing across all parts of Saudi. That’s going to have major implications for developers, investors and operators.”
Moreover, Saudi Vision 2030 introduced the concept of the feminization of the retail sector by increasing the workforce of women by 22 per cent to 30 per cent.
With some private companies expected to downsize further, and the public sector shrinking its headcount (in line with the 20 per cent reduction required in the 2030 vision), vacancies are expected to increase and rents to decline further over the remainder of 2017.
In its Jeddah Real Estate Market Overview, JLL found that the general weakness in the Saudi economy, because of government cutbacks following the declining oil price, is also affecting all aspects of the city’s property market.
Housing rents fell by 9 per cent quarter-on-quarter and 8.5 per cent year-on-year. In the commercial sector, 23,000 sqm of new space came on to the market, contributing to growing vacancy rates because of weak demand.
Real estate market in Riyadh moderated as economic reforms make headway, JLL, said on Wednesday in its ‘Q1 2017 Riyadh Real Estate Market Overview’.
The latest Q1 market summary report discusses the office sector aligning with the National Transformation Program and the office market softening as a result. Traditionally, most government tenants occupy their own buildings and have taken less space in private sector buildings in Riyadh.
However, there is now a change in the market as government agencies are now considering leasing space in private sector buildings, which could be a positive trend for the market in the future.
In the office sector, there were no major completions in Q1, although a number of small scale mixed-use buildings added around 15,000 sqm in aggregate to the total stock.
Almost 122,000 sqm of Gross Leasable Area (GLA) is expected to complete by the end of the year, with potential completions including Al Rajhi Tower (30,000 sqm), CMC Tower (12,000 sqm), Elegance Tower (24,000 sqm), and the Administrative Palaces Project by Ajlan (30,000 sqm).
If construction were to recommence at King Abdullah Financial District (KAFD) within the next quarter, the phase of this project could be completed within an estimated period of 12 months.
In the residential sector, as of Q1 2017, the total stock of residential units in Riyadh stands at around 1.17 million units. Notable completions in Q1 include Marvella apartments, a project by Rafal situated in eastern Riyadh with almost 600 units.
Approximately 24,000 additional units could potentially materialise by the end of the year.
This total is likely to include more affordable projects developed under PPP agreements between the Ministry of Housing and private developers. These agreements are considered a positive in terms of increasing future supply in line with customer preferences and pricing.
The performance of the residential sector softened marginally over the quarter. Sale prices of apartments decreased by 2 per cent Quarter-on-Quarter and sale prices of villas decreased by 1 per cent. Rentals have followed a similar trend, falling by 1 per cent Q-o-Q for both villas and apartments.
In terms of sale volume, the first quarter of 2017 witnessed a 1 per cent decrease Y-o-Y and a 25 per cent decrease Q-o-Q. Moreover, the number of transacted villas in Q1 2017 fell by almost 40 per cent compared to the same period last year and a 2 per cent increase relative to last quarter.
In the housing sector, public private partnerships (PPP) are being widely used to tackle the shortage of affordable housing in Riyadh with the recent signing of MoUs between the Ministry of Housing and the private sector.
Jamil Ghaznawi, National Director and Country Head, JLL, KSA said: “This signing indicates that both the public and the private sector in Riyadh are expected to streamline the development processes of housing schemes and in turn reduce both timeframe and construction costs.
He added: “The launch of East Gate, a large-scale residential project consisting of 7,000 units in Eastern Riyadh, marks the first public private partnership (PPP) executed by the Ministry of Housing. With this momentous signing, additional similar partnerships are expected to enter over the course of the next year.”
In March 2017, King Khalid International Airport received a surge of 38,000 passengers per day on domestic flights. Domestic tourism in the Kingdom is expected to grow significantly over the next decade as a result of increased government spending in the tourism industry under the Vision 2030.
A number of initiatives have been launched to promote the cultural heritage of the Kingdom with the Saudi Commission for Tourism and National Heritage (SCTH) allocating around SAR400 million to a tourism related lending program that was launched at the Saudi Travel & Tourism Investment Market (STTIM) in Riyadh in Q1.
In the retail sector, the total supply of retail space in Riyadh stands at around 1.52 million sqm as of Q1 2017. While there were no major completions, one small project Al Ghadeer Square (around 7,000 sqm of GLA) was completed in Q1 2017. In addition, some small-scale retailers, like Al Jazeera Markets are expanding their business and leasing new space.
Al Jazeera Markets opened its fourth branch in Riyadh this quarter, adding almost 3,000 sqm of GLA and are expected to open three more small branches over the year, adding a further 3,000 sqm of GLA in aggregate.
Additional small-scale completions expected during 2017 include Elite (11,000 sqm on Dhabbab Road) and Levels (7,500 sqm on the Northern Ring Road).
The most notable completion expected this year is Riyadh Park, a super-regional mall situated on the Northern Ring Road, which is expected to add around 92,000 sqm of GLA to the total retail supply in Q4.
Rents for super-regional centers have fallen by more than other malls, declining by 10 per cent over the past year.
Rents for regional malls have decreased by 5 per cent and rents for community malls have fallen 3 per cent year-on-year. Market wide vacancies have increased marginally to reach 8 per cent and occupancies are expected to soften further over the remainder of 2017 due to increased stock and more selective consumer behavior.
In the hotel sector, the first quarter of 2017 saw the opening of the Hyatt Regency hotel and the Best Western Plus Fursan.
The Hyatt Regency, a 5 star hotel situated in Al Olaya district, marks the first property of the Hyatt Hotels Corporation in Riyadh. It added 261 rooms to the total stock, currently standing at around 11,900 keys. The Best Western Plus added 66 keys of 4 star quality on the Eastern Ring Road.
A further 2,500 keys are currently scheduled for delivery in 2017, which should add downward pressure on ADRs. The pipeline for 2017 includes but is not limited to Crowne Plaza ITCC (386 keys), Fairmont Riyadh Business Gate (287 keys), Hilton Riyadh King Saud University (241 keys), Hilton Riyadh Hotel & Residences GOSI (645 keys and 221 serviced apartments), Nobu Hotel (134 keys), and Swiss-Belhotel Riyadh (126 keys).
However, some of the scheduled supply may be delayed to 2018 and beyond, given the historical trend of delays and the softening performance of this sector.
Low oil prices have reduced the travel and entertainment budgets of both the public and private sectors. As the Riyadh hospitality market relies heavily upon corporate and government related travel, it has witnessed a continued softening in performance.
Occupancy rates have decreased from 60 per cent to 57 per cent YT Feb, while ADR compressed to $193 (a 15 per cent decrease compared to YT Feb 2016) and RevPAR fell by 18 per cent to $109.