Knight Frank: Saudi housing market may have “bottomed out”

Real estate prices in cities flattened after rapid declines in 2017

Research on real estate prices conducted by property consultant Knight Frank suggest that 2018 could see an end to the drop in housing values witnessed in Saudi Arabia’s main cities over the past two years.

According to Knight Frank’s Saudi Arabia Residential Market Review – January 2018 recent quarters  have seen residential real estate prices flattened, which, the report adds: “could be an indication that the market has bottomed out and may be close to stabilising following a year of rapid decline.”

The residential market across the main cities of Saudi Arabia started decelerating in 2016 as transaction volumes and sales prices came under pressure following a period of relative resilience. In 2017, the slowdown in performance continued, the report notes.  

“The trend towards a weaker residential market is mainly due to eroding market liquidity and is exacerbated by a combination of more inherent factors namely the lack of affordability and limited access to financing, supply shortage in the mid-to-lower end of the market and the lack of suitability of existing stock,” commented Raya Majdalani, research manager, Knight Frank.

Looking at the performance of the residential market across the main cities of Saudi Arabia, Knight Frank remarks in the report that transaction volumes and values have softened in 2017 although at a slower pace than in 2016.  A common trend witnessed in sales prices across key cities is that apartment prices have been less impacted than villa prices as a result of a shift in demand from villas to apartments due to affordability constraints.

While Knight Frank says it sees current dynamics prevailing in the short term, it remains broadly positive as a result of government initiatives aimed at addressing key challenges restraining the residential sector.

The report continues: “Recent initiatives include the release of regulations for the introduction of a 2.5% ‘white land’ tax on undeveloped land plots, the approval of regulations for the use and listing of Real Estate Investment Trusts (REITs), the introduction of a new mortgage law to boost Saudi Arabia’s home ownership rate, the development of a home-building programme named Sakani by the Ministry of Housing, the launch of the Wafi online program and the creation of a real estate refinance company by the Public Investment Fund.”

“Despite lacklustre performance throughout 2017, we remain broadly positive when it comes to the medium term outlook, mainly as a result of government initiatives aimed at addressing key challenges restraining the residential market,” said Stefan Burch, partner, Knight Frank Saudi Arabia.

Recently introduced strategic reforms aimed at creating a favourable environment for investment and strengthening the non-oil sector have placed a focus on real estate which is forecast to double its contribution to economic output by 2030. Moreover, the implementation of various urban regeneration initiatives including mixed use communities and investment in infrastructures are expected to act as catalysts for sustainable development and a more active residential market.

“Longer term, demographic factors will continue acting as demand generators for the residential market in Saudi Arabia,” the report states. “This includes a large population which has seen a sustained growth rate over the past decades and a long-term trend towards smaller size households. On a macroeconomic level, the economy is expected to gradually adapt to the new norm in oil prices as it diversifies away from its dependence on the hydrocarbon sector in line with economic reform programs. Therefore GDP growth should regain some momentum in the medium term mainly driven by non-oil GDP, which should provide support to the recovery in the residential market.”

Overall, the drivers for the Saudi Arabian residential market appear to be generally positive for the long term despite some key risks to market performance including: heightened geopolitical risks weighing on consumer sentiment, further volatility in oil prices and increased challenges entailed by the implementation of economic reforms.

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