Property prices are falling in Saudi Arabia
January 22, 2018
During the third quarter of 2017, Saudi Arabia's real estate index for the residential sector went down by 5.4% (-5.2% inflation-adjusted) over the previous year. On a quarterly basis, the index barely rose by 0.4% (-0.1% inflation-adjusted), based on the figures from Saudi's General Authority for Statistics (GAStat).
- The real estate index for residential plots fell by 5.4% (-5.2% inflation-adjusted) during the year to Q3 2017. Prices of plots had a meagre increase of 0.5% (-0.1% inflation-adjusted) from the previous quarter.
- Apartment prices sharply fell by 7.4% y-o-y (-7.2% inflation-adjusted) in Q3 2017. On a quarterly basis, the price index of apartments fell by 0.2% (-0.8% inflation-adjusted).
- Prices of villas declined by 0.4% y-o-y (-0.3% inflation-adjusted) in Q3 2017. Villa prices dropped by 0.1 (-0.7%inflation-adjusted) from the previous quarter.
- The real estate index for houses declined by 1.8% y-o-y (1.7% inflation-adjusted) in Q3 2017. The price index also fell by 0.2% q-o-q (-0.8% inflation-adjusted) in Q3 2017.
The real estate index indicator released by GAStat was launched this year, in April 2017, based on the available registry data of real estate transactions from the Ministry of Justice.
Out of 56 markets analyzed in Q3 2017, Saudi Arabia was ranked second to the bottom, making the country as one of the worst performers in the world, based on Knight Frank's Q3 2017 Global House Price Index. However, the index also showed improvement in prices, as prices went up by 0.7% and 0.5% over the past six and three months, respectively.
"The oil-dependent Saudi economy is struggling to gain traction, which along with the recent introduction of a levy on expatriate workers is stifling housing demand," according to Kate Everett-Allen of Knight Frank's International Residential Research.
In Riyadh, the capital city, apartment prices dropped by 4% during the year to end-Q3 2017, according to Jones Lang LaSalle (JLL), but remained unchanged from the previous quarter. Sale prices of villas also fell by 5% y-o-y in Q3 2017, and by 2% on a quarterly basis.
Apartment prices in Jeddah also fell by 9.7% during the year to Q3 2017, and by 2% from the previous quarter, according to JLL. Sale prices of villas slightly fell by 0.5% y-o-y in Q3 2017, however, prices were up from the previous quarter by 1.3%.
A 2000 Real Estate Law allowed legally-resident non-Saudis to own real estate for their private residence, provided they get a license from the Ministry of Interior. The law also allows real estate ownership by foreign investors in order to conduct their business activities, and for the accommodation of their employees, with permission from the Ministry of Interior. To prevent speculation, five years must elapse before property can be sold.
However, real property ownership by foreigners is forbidden in the holy cities of Mecca and Medina. Non-Saudi Muslims can only obtain leases of up to two years in these cities. Leases are renewable for the same period.
Rental yields still high in Saudi Arabia
The rental market in Saudi Arabia is attractive to investors because of high rental yields. Rising demand for rental units and the lack of adequate supply have led to massive rent increases.
- the average monthly rent for villas and duplexes soared by 17% to SAR270 (US$72) in Q4 2011 from the same period last year, according to Colliers International
- the average monthly rent for apartments rose by 14% to SAR222 (US$59) per sq. m.
- the average monthly rent for villas and duplexes rose by 11% to SAR350 (US$93) in Q4 2011 from a year earlier
- for apartments, rents rose by 7% to an average of SAR264 (US$70) per month.
In Q4 2011, the rental yields in Riyadh is high at a range of 7.8% for apartments and 8.6% for villas and duplexes, according to Colliers International.
On the other hand, in Jeddah, yields for villas and duplexes fell to 8.8% in Q4 2011 from 9.1% in the previous year. Likewise, yields for apartments fell to 10.8% in Q4 2011 from 11.5% in the previous year.
Income tax is low in Saudi Arabia
Rental Income: Rental income is taxed at a flat rate of 5%.
Capital Gains: No tax is levied on capital gains realized by individuals from selling property.
Inheritance: There are no inheritance taxes in Saudi Arabia. As in most countries in the Arab world, Shariah law applies to inheritance.
Residents: Individuals are only taxed on their business income in Saudi Arabia. Non-Saudi and non-GCC nationals are liable to income tax. Saudi and GCC national are liable to zakat, which is an Islamic direct tax on property and income.
Total transaction costs in Saudi Arabia
Foreigners are allowed to own real estate, subject to approval of the licensing authority.
Research is ongoing.
Dismal economic performance in 2017With crude prices still relatively low, Saudi Arabia's economy expanded by 1.7% in 2016, according to the International Monetary Fund (IMF), its weakest growth since 2009. The slowdown followed robust GDP growth of 4.1% in 2015, 3.7% in 2014, 2.7% in 2013, 5.4% in 2012, 10.3% in 2011, and 4.8% in 2010.
The country's GDP contracted by 0.5% y-o-y in Q1 2017. This was mainly attributed to the 2.3% contraction of the oil sector, the worst since 2013, as Saudi Arabia reduced its crude output following the November 2016 Organization of the Petroleum Exporting Countries (OPEC) agreement to collectively cut oil production.
In Q2 2017, the economy entered a recession as GDP shrank further by around 1% y-o-y, the result of low crude oil output and prices, combined with the government's tight fiscal policy, economic reforms, and a weak non-oil economy.
The IMF predicts a near zero GDP growth for 2017. The country is expected to bounce back in 2018 with 1.1% growth.
In October 2017, the country's consumer price index fell by 0.2% y-o-y, its tenth consecutive month of price decline, according to Saudi's General Authority for Statistics (GAStat). Consumer prices in the country are expected to decline by around 0.2% in 2017, following inflation rates of 3.5% in 2016 and 2.2% in 2015, according to the IMF. Unemployment stood at 6% in Q2 2017, up from 5.8% the previous quarter and from 5.6% in 2016.
Saudi Arabia’s fiscal balance has deteriorated rapidly. From a deficit of 15% of GDP in 2015, the country's budget deficit increased to 17.3% of GDP in 2016, in sharp contrast with budget surpluses of about 13% of GDP from 2003 to 2013.
The sharp increase in Saudi Arabia’s budget deficit in 2015 can be attributed to the following:
- Sharp decline of crude oil prices,
- Following King Salman’s recent accession to the throne in January 2015, he immediately spent a substantial amount of money on subsidies and public job bonuses, including extra months of additional salary to all government employees, in an effort to increase his popularity.
- Significant military expenditures directed on the conflicts in Yemen, Syria, and Egypt.
From having the lowest share of public debt in the world at less than 2% of GDP in 2014, the kingdom's public debt ballooned to around 13% of GDP in 2016. Public debt is expected to rise to about 33% of GDP by 2020.
Worried by a huge budget deficit of almost US$100 billion in 2015, the government launched an austerity drive in the first quarter of 2016.
Ministries were ordered to reduce spending on contracts by at least 5%. In December 2015, the government cut power and water subsidies. In September 2016, it was announced that salaries of ministers would be reduced by 20%, while overtime bonuses will be reduced between 25% to 50% of basic salaries.
In Q3 2017, the deficit fell by 9.4% to SAR 48.7 billion (US$ 12.99 billion) from the previous year. "We continue to move towards our ambitious economic reform objectives for the long term, including the delivery of a balanced budget," said Saudi finance minister Mohammed Al Jadaan.
"Whilst economic challenges remain, the economic reforms and measures that are set in the Fiscal Balance Program within Saudi Vision 2030 have proved effective," said the finance minister.
However in March 2017 ratings agency Fitch downgraded Saudi Arabia's credit rating from AA- to A+.
In April 2016, a reform strategy called Vision 2030 was announced by Crown Prince Mohammad bin Salman Al Saud. By year 2030 it aims to:
- Increase non-oil exports as a proportion of non-oil GDP from 16% to 50%
- Cut unemployment from 11.6%, to 7%
- Raise women's participation in the workforce to rise from 22%, to 30%
- Raise the private sector's contribution to GDP from 40%, to 65%
Other government drives include a "National Transformation Program 2020" (June 2016), and a "Fiscal Balance Program 2020" (December 2016).