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Despite Mounting Economic Pressures, Saudi Realty Market Remains on Track

The Gulf realty sector has been experiencing a wave of fluctuations over the past economic period. Unsteady prices of housing units and projects, low cash flows and mounting pressures exercised by state departments on real estate companies and investors are cited by Al Mazaya Holding to be the main reason behind new challenges. A report released recently by the company said that Gulf countries and investors now need to adopt structured measures robust enough to bolster the Gulf property sector. They need to steer clear from being selective in their long and mid-term investment plans – rather, they should focus on monetisation policies to avoid losses and mitigate potential risks.

The report, which was mainly focused on the Saudi realty sector, said the Saudi government’s plans and investments adopted hitherto have not yet fructified, nor have they managed to bridge the yawning gap between supply and demand due to the vast extent and magnitude of the Saudi market where demand for housing units and villas is on a spiraling rise, significantly outstripping supply.

The report said the change in Saudi government’s expenditure priorities in light of the Saudi Vision 2030 is likely to trigger a state of uncertainty that would lead investors to shy away from the real estate business due to the challenges they encounter, particularly falling land prices and reducing liquidity at a sector that used to boast 45% of the total liquidity available for all investment platforms in the Kingdom.

Al Mazaya Holding’s report indicated that the Saudi real estate market showed signs of weakness due to the sharp drop in the value of real estate transactions over the past period of the current year. The total value of real estate transactions plummeted by 23% over the past 10 months to as low as SR 246 billion compared to SR 319 billion at the same period last year. Residential property transactions fell by 20% while commercial property rose by 6% at the same period, with land transactions leading the sector with 83% of the total value of all real estate sector transactions.

Though land sales accounted for the lion’s share of real estate transactions, residential land prices fell by 19% against 2015’s and by 32% against 2014’s. The report added that the market would witness more developments and cycles in terms of liquidity, sales and prices over the coming period, should supply, demand and sales of lands and real estate property continue to grow.

The report referred to the discrepancy in liquidity levels in the Saudi realty market, where land sales are on the rise, while villas’ prices fell by 30%, attributing this decline to the fact that property services differ from one location to another. This decline triggered pressures on real estate activities, leading property purchases to fall to an all-time low as buyers could get lower prices with higher advantages and, at the same time, owners tend to sell to avoid potential losses.

Laws relevant to levying charges on land sales have not changed radically until now, said the report, adding that more control is needed to curb unjustifiable price rises that are at an all time high as a natural result of owners taking advantage of the high demand on the types of lands set for residential and investment purposes.

The Saudi market is anticipating major decisions that lead to a fundamental change in the trend of buying lands only for the purpose of keeping them until their prices rise rather than buying for construction and development purposes, according to the report. The report also indicates that determining the type of contractors, including their areas of expertise, so that investors can choose the best that meets their needs, is a crucial step.

Nevertheless, the Saudi realty market is considered one of the region’s largest, generating high demand and recovery levels, including a sustained launch of governmental enterprises. The sector is of vital importance to the Saudi national economy, due to its impact on growth and prosperity levels as well as on local and overseas investments. Furthermore, the sector creates growing job opportunities and has its ultimate impact on other economic platforms.

The report highlighted the myriad challenges besetting the Saudi real estate market, including the growing gap between supply and demand with regards to property in general and residential units in particular. The ongoing projects as well as those executed in the past failed to overcome the commercial property shortage, noted the report, highlighting that the sector needs a momentum to draw different types of investments in the building and construction industry, whose regional value is estimated at more than $300 billion. Thus, the sector can turn to a think tank to adopt and produce state-of-the-art technology.

The report added that the government’s support will play a major role in helping the Saudi real sector gain the right momentum and survive the challenges of the past and present so that it can regain its attractiveness and favoured status in drawing real estate projects. This support is needed to reduce burden on individuals and encourage investors through stimulus packages and official incentives.

In conclusion, the report underscored the importance of the real estate market in adopting the Saudi Vision 2030 that aims to increase returns to $160 billion by 2020. The report called for maintaining the construction sector’s fundamentals, and augmenting the construction sector’s yields to the maximum level. In this regard, it referenced the positive impact that the Saudi Vision 2030 will have on the buoyancy of the sector, the local economy and the gross domestic product in general by attracting more investments while restructuring other sectors. Furthermore, the report indicates that expected government expenditure allocated to Saudi Vision 2030 will reach more than SR 60 billion by the next year.