_Is "Saudi Residential Sector" close to stabilizing following two years of decelerating performance?

Following a period of relative resilience, the residential market started decelerating in 2016 as transaction volumes and sales prices came under pressure due to economic slowdown. In 2017, the slowdown in the residential market continued, albeit at a softer pace. More recently, we started seeing signs that the market has bottomed out and may be close to stabilising following two years of decline. 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 market.

Raya Majdalani February 15, 2018

Despite maintaining healthy GDP growth levels in 2015 ( 4.1% as per the IMF), the impact of the challenging macroeconomic backdrop, triggered by lower oil prices, started to trickle into 2016, with Saudi Arabia’s GDP growth rate moderating to 1.7% and expected to have further declined to near zero in 2017 according to the IMF estimates. On the back of decelerating economic growth and tightening liquidity, the residential sector saw a slowdown in performance in 2016 which has continued throughout 2017, albeit at a softer pace.

Tightening liquidity and fiscal consolidation measures have altered consumer confidence and eroded spending which has, in turn, undermined real estate transaction volumes. As a result, the residential sector experienced a decline in sales prices due to the lower level of activity. In recent quarters, however, we have seen that residential real estate prices have flattened, which could be an indication that the market has bottomed out and may be close to stabilising following a year of rapid decline.

While we see this current situation prevailing in the short term, we remain broadly positive as a result of government initiatives looking to address key challenges restraining the residential sector in Saudi Arabia including high land prices, supply/demand imbalances and affordability among others. Regulatory efforts such as the white land tax, the large housing schemes and the mortgage law, display clear intent from the government to engage with the issues facing the residential market in the kingdom. While efforts are slowly filtering through, we see these initiatives as a step in the right direction for a more active real estate market over the coming years.

Longer term, demographic factors will continue acting as demand generators for the residential market in Saudi Arabia. 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.

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 throughout the period to 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.

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.

To read the full report Click here

For further information regarding this report or any inquiries you may have, please contact Raya Majdalani, Research Manager at Knight Frank Middle East.