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The oil dependent economy of Saudi Arabia has announced its first back to back years of budget deficit since 2002. The deficit recorded in 2015 and projected for 2016 is due to the record decline in oil revenues which was not entirely off-set by increasing non-oil revenues.
Although the government previously realized the threat of falling oil prices earlier, attempts to diversify the economy were not enough to off-set the decline in oil revenues seen since mid-2014. The diversification of Saudi's economy away from oil is now being addressed head on by Deputy Crown Prince Mohammed Bin Salman. On Monday 25th April, the Deputy Crown Prince announced the "Saudi Vision 2030"; a plan which aims to liberate the Kingdom from its primary reliance on oil, primarily through the State's Public Investment Fund (PIF).
The PIF currently holds approximately USD 100 billion worth of stakes in local companies, and is to be expanded dramatically, aiming to eventually manage more than USD 2 trillion. The PIF has recently spent USD 1.1 billion on a 38% stake in South Korea's Posco Engineering and signed off a joint investment deal worth USD10 billion with Russia last July. The Deputy Crown Prince stated that the next step in achieving the economic diversification would be an IPO to sell shares (less than 5%) in Saudi Arabian Oil Co. (Aramco) and transfer these funds to the PIF to diversify into non-petroleum assets. The objective is to eventually make investments the primary source of revenue for the government instead of oil.
Impact on the Saudi real estate market
Our quarterly market analysis of the Riyadh and Jeddah real estate markets suggest a general slowdown in Q1 owing to the economic downturn. Real estate transactions across the Kingdom declined during Q1 2016 to their lowest level since 2011, recording a Y-o-Y drop of 7.7% to USD 22.2 billion (SAR 83.3 billion). This is reflective of the Kingdom's short term economic struggles.
Although few specific details have been released yet, the Deputy Crown Prince confirmed that a number of infrastructure projects are still going ahead, including the Makkah Metro as well as the other metro projects in Riyadh and Jeddah. Infrastructure projects have played an important role in fuelling demand for Saudi real estate over the last several years. If projects do continue despite cutbacks, the slowdown in performance witnessed over Q1 should be short lived.
Utilizing empty plots of land was also a topic addressed which ties to the 2.5% tax on white land which was announced at the end of 2015. The objective of this tax is to boost construction activity and raise revenue for the development of more affordable housing projects across the Kingdom. The economic diversification plan addresses both home ownership and affordability and aims to increase the rate of home ownership from its current level of 47%.
Although the April 25th announcement represents positive news for the Saudi real estate sector, the key will be the materialization of infrastructure projects and utilizing white lands to reverse the recent slowdown.
Country Head - KSA
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