_The latest developments within the KSA and UAE valuation markets
REITS have featured most prominently in the recently published Knight Frank KSA Q3 Valuations Newsletter - can you tell us more about how REITS are driving valuation instructions in Saudi and what effect it will have on the country's macroeconomic strategy?
REITS are driving valuation instructions, as the Saudi Capital Markets Authority (CMA) requires two separate independent valuations to be conducted on any new REIT. The fact that Knight Frank has a dedicated KSA valuations team which includes KSA nationals and Taqeem certified valuers means that we are well placed to provide a high standard of professional valuation advice which can be relied upon by the REIT manager, the regulator and investors.
In an effort to adapt the economy to the new norm in oil prices, the government is targeting a diversification away from oil revenues while encouraging private sector participation. The policies that will help achieve the goals of the Vision 2030 were detailed in the National Transformation Program (NTP).
We note that housing is the biggest area of government expenditure under the NTP with an allocated budget of SAR59 billion, an encouraging step for the sector. More generally, the real estate sector gets a particular focus in both the Vision 2030 and the NTP, whereas both the public and the private sector are encouraged to take a role in ensuring the growth of the property market.
The approval of a law for the use and listing of REITS in Saudi Arabia is therefore a step that falls in line with a series of other initiatives to stimulate the real estate sector. REITS traditionally appeal to investors looking for a liquid investment to diversify their portfolios, while harnessing the benefits of a regular dividend income and a potential appreciation of the market price.
GCC countries are moving forward with the establishment of a regulatory framework for the use and listing of REITS, which have subsequently intensified in recent months. Five REITS are listed on the Tadawul to date.
Which asset class showed the strongest performance in H2 2017?
The general real estate market across KSA has remained subdued on the back of declining oil revenues and a slowdown in the overall economic growth in the Kingdom. Generally most asset classes have witnessed slow increases in vacancies and a gradual softening of rents across the country, but with some markets performing better than others. Activity levels in terms of lettings and sales have diminished, and sales volumes are generally negatively impacted.
The hospitality sector is under supplied with a lack of modern, good quality hotels in many cities, however this provides an excellent opportunity for the right product in the right location, typically business hotels in accessible central locations. In addition, the recent announcements of major new “cities” in KSA, namely an entertainment city some 40 km to the south east of Riyadh (The Edge) which will contain a Six Flags Entertainment Park and comprise a large leisure and hospitality led development phased over a number of years, as well as another major tourism destination; the Red Sea Project (Umluj). These master planned developments are aimed to increase tourism and leisure options for Saudis and non-Saudis alike and will ultimately see the development of substantial new hotels.
King Salman has made his position clear on reforming the national economy away from its reliance on oil. With various mega-projects in the pipeline across the country ranging from retail to entertainment, which sectors do you believe will see the most investment in the next five years?
The recent announcements of The Edge and The Red Sea Project will undoubtedly attract substantial private sector investment in the hospitality and leisure sectors, which will immediately support the main thrust of the these tourism / leisure driven projects. Longer term, we’ll see residential and retail developments being developed around these hubs as the projects become established.
In the retail sector, Knight Frank recently advised lenders on a huge new super regional mall-led development, which will also incorporate hotels in Riyadh. Upon completion this will become the largest in the region with the developer and its financiers showing long-term confidence and belief in the retail and hospitality sectors, mainly due to the lack of quality in the current stock and the opportunities for best-in-class new developments to take market share.
We also see a need for good quality housing in the Kingdom to meet the growing population and we expect a substantial continuation of investment in this sector in the short term.
Since its launch earlier this year, can you tell us more about Knight Frank's Construction Project Monitoring Service, and how it has become a crucial offering in protecting a client's interest in the development process?
Knight Frank started offering Construction Project Monitoring services to clients in 2015, however the introduction of new laws and greater regulation has led to an increase in demand for these services in the last 12-18 months.
Construction Project Monitoring identifies risks in the construction process to protect a client’s interests and provides independent, third party verification of progress for financiers, regulatory authorities and end users.
Knight Frank provides independent Construction Project Monitoring Services to cover all aspects of the construction process including verification of interim payment certificates, reviewing compliances, consultancy payments, contracts and programme review.
The monitoring service can be designed to meet each individual client’s needs with the report types ranging from Initial Audit Reports, through to monthly or bi-monthly Construction Progress Reports, and Practical Completion Reports.
Dubai is seeing a bullish level of growth in its retail sector, with the GLA expected to rise significantly in line with the delivery of Nakheel Mall, The Pointe on the Palm Jumeirah, Deira Mall and Meydan One. How sustainable is this ongoing investment in retail?
Dubai is without doubt the leading retail location in the Middle East with some 3.4 million m2 of retail space, which hugely outweighs the other large key cities of Abu Dhabi, Riyadh and Jeddah; though it must be noted that a large portion of its shoppers are regional and international tourists, therefore the spend per capita and overall market performance of the super regional malls will depend to a certain degree on tourism numbers.
The retail market is currently soft, and retailers are suffering on the back of a strong US Dollar and a fast pace of change driven by technological advancements in the sector, with retail brands and retail malls merging online platforms and pushing e-commerce to the fore. In support of this trend, we have seen Amazon acquire souq.com, and Noon.com launched recently to aggressively target the online retail sector.
We see a large supply pipeline of super regional space coming online through 2019 which I suspect will lead to increasing vacancies in the older, less attractive malls initially as the brands trade up to the new malls to retain competitive and locational advantage. At the same time we are seeing a lot of demand for community retail centres, which have a lot lower development costs and are less impacted by tourist spend as they cater to day-to-day needs rather than luxury goods and expensive F&B.
For further information please contact Stephen Flanagan.