Saudi real estate index shows market is performing badly

31 January 2017

The establishment of the price index is an effort by the authorities to improve transparency and encourage investment

Saudi Arabia’s real estate market has continued to perform badly with the latest figures from the General Authority for Statistics indicating a 3.5 per cent quarter-on-quarter decline in Saudi Arabia’s real estate price index.

The GAS recently produced its first real estate price index in a bid to measure the kingdom’s real estate market, which it says has been contracting for the past eight quarters. The latest data also showed an 8.7 per cent year-on-year decline.

The authority has attributed these figures to a badly performing residential market, which it says makes up 65 per cent of the market and has dropped 3.5 per cent quarter-on-quarter. The residential market also witnessed a 7.3 per cent contraction year-on-year.

Commercial real estate prices on the other hand fell by up to four per cent, according to the index, which says that Riyadh witnessed the sharpest decline, falling by 23 per cent since 2014.

Real estate has been identified as one of the key sectors in the Kingdom’s Vision 2030 and National Transformation Plan (NTP). The government is hoping to increase the sector’s contribution to GDP to 10 per cent by 2020. The establishment of the price index, which collects its data from the Ministry of Justice, is an effort by the authorities to improve transparency and encourage investment.

The government has pledged to put in place a number of key reforms to help it achieve its target. For example, it recently reduced the average time taken to approve and license new residential developments from 730 day to 60 days. In addition to this, the white land tax, which aims to tax undeveloped land in the Kingdom’s urban areas, is also seen as a positive step to help boost the countries real estate sector.

Riyadh has said it is looking to boost investments from the private sector. In November last year MEED reported that Saudi Arabia’s Riyad Capital, a subsidiary of Riyad Bank, successfully listed the kingdom’s first real estate investment trust (REIT).

The Capital Market Authority approved the REIT regulations in October 2016. The REITs should have a minimum size of SR100m ($27m), of which 75 per cent should be invested in Saudi Arabia. The funds cannot invest in vacant land and no more than 25 per cent of their capital can be invested in development projects.

Foreign investment of up to 49 per cent and improved capital market regulations could stimulate a flood of listed REITs in Saudi Arabia.

Other reforms include the government’s decision to allow 100 per cent foreign ownership in the retail sector. The move allows foreign companies to directly set up retail businesses without a local partner.

The Saudi Arabian Monetary Agency (SAMA) also recently increased the maximum loan-to-value ratio (LTV) from 70 per cent to 85 per cent in March 2016 for residential real estate finance to help protect the market. 

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