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JLL, the world's leading real estate investment and advisory firm, has today released its inaugural '2016 Top Trends for KSA Real Estate'. Modelled on similar JLL reports in other markets, the KSA Top Trends will be an annual report which will assess and forecast the major trends which are likely to impact and shape the KSA real estate sector in 2016 and beyond.
Commenting on the report, Mr Jamil Ghaznawi, National Director and Country Head of JLL KSA, said:
"We are delighted to launch the first Top Trends report for the benefit of various stakeholders across the KSA real estate market. As in other markets, we hope this study will establish itself as an industry benchmark and be seen as the de facto authority on real estate issues in The Kingdom. In this inaugural report, we have a number of interesting observations which are expected to influence the Saudi property market. Of these, several are consistent with our observations in other markets, however Saudi's real estate sector remains unique and numerous factors apply to it and it alone.
In 2016, a challenging macroeconomic environment (low oil prices & a stronger US dollar) will continue to impact the KSA real estate market, along with a slowdown in GDP, government spending and overall liquidity. But the government's vision is hugely encouraging as it is taking serious steps to adjust, diversify and prepare the Saudi economy for a continuing low oil price scenario. Such an environment is also an opportunity for the government to make structural changes and embark upon a rapid diversification drive which would ultimately have a positive long-term impact on real estate and the wider economy. We have already seen signs of economic reforms such as the opening up of the Tadawul to QFIs, 100% FDI in retail/wholesale sectors, expansion of religious tourism, and so on. Additionally, the 2016 Saudi budget will have implications for the real estate market, and there will be particular opportunities for certain market segments such as affordable housing."
JLL outlines seven key trends that will impact the KSA real estate market this year:
Impact of White Land Tax: Multi-faceted benefits are expected after the implementation of this new tax – it will reduce pressure for further increase in land values, and ultimately increase real estate development activity. The government could allocate the additional revenue towards the development of affordable housing in peripheral locations. Once it takes effect, developers and land owners will start considering different partnering options in order to develop their land holdings. The law will also stimulate further development to address the severe shortage of middle income housing across the Kingdom.
Reform of Home Financing: Any significant reform in reducing the cost of home finance will positively impact the real estate market. There is a pressure to revise the down payment requirement from 30% to 15% as housing is becoming increasingly unaffordable for a majority of the population. Change in the mortgage law will also give impetus to a market witnessing continued decline in sales activity. Under the current circumstances, demand has shifted towards the rental market which is witnessing high rents – housing finance reforms could alter this scenario. In Q4 2015, it was announced that the state owned Saudi Real Estate Development Fund (REDF) will be turned into a bank – such developments will address some of the issues related to home financing in the Saudi market.
Reduced spending on transport infrastructure: With the restructuring of government spending, there will be greater focus on urgent infrastructure projects and other national priorities. As a result, the market is expected to witness reduced spending on transport infrastructure as no new projects are expected to be announced and there could be possible spending cuts on existing projects. The government has clearly indicated that greater emphasis should be given to projects which are financed and developed through the Public Private Partnership (PPP) route.
Project delays reduce risk of oversupply: Project delays are a by-product of the slowing market conditions in 2016, and will eventually reduce risk of oversupply. This will represent something of a 'blessing in disguise' and will help stabilise the market with favourable demand-supply dynamics. Project delays will be attributed to a number of reasons, including low materialisation rate, financing constraints, cash flow problems, contractual disputes, labour shortages and developers holding back projects.
More action on affordable housing: With over 60% of all KSA households in the middle income segment, there is obviously a huge demand for affordable housing across the Kingdom. The current shortfall has both social and economic costs, and it will require a collaborative effort from both the government and private developers in addressing this shortage. In 2016, more efforts may be seen towards empowering low and middle income families and addressing their basic needs such as affordable housing. The government is taking significant steps in addressing the shortage of affordable housing – revenues from the While Land Tax will also contribute towards the funding of affordable housing projects. Similarly, the Ministry of Housing's 'ESKAN' project should add 500,000 units to the total stock of KSA's affordable housing.
Challenging hotel landscape: The KSA hotel landscape is expected to be challenging in 2016 as overall demand softens. The market will be principally affected by tightening market conditions and further consolidation among hotel operators. Nevertheless, religious tourism will remain a key demand driver and will get a further boost if the number of foreign pilgrims increases. Interestingly, the Saudi Commission for Tourism & National Heritage is looking at a broader non-religious tourism offering which could be an additional revenue stream in the future.
Less capital outflow: Traditionally, private investors and family offices accounted for most of the capital outflow from KSA into rest of the world. In 2015, Middle East investors purchased more than US$11 billion of overseas real estate assets – this capital outflow is expected to decline in 2016, but will still remain significant as Middle East private investors will continue to diversify their assets. In 2016, there will also be increased selling activity from Middle East investors, as they book profits and reallocate their funds – as a result, there will be increased transactional activity amongst Middle East investors.
Craig Plumb, Head of Research, JLL MENA concluded:
"Saudi Arabia faces a challenging macroeconomic situation and the government is currently taking proactive measures to readjust the economy to a new normal of lower oil prices and a stronger dollar. Various real estate stakeholders will need to take a pragmatic approach and work together towards realigning themselves and filling critical gaps in the market. In the longer term, any structural change the government is embarking upon will contribute positively towards the real estate market. Overall, the Kingdom remains the GCC region's largest economy and there is immense potential for the development of the real estate market despite short term challenges."
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