Is Saudi Arabia's house price decline about to end?
Maria de Guzman | August 19, 2019
- Prices of residential plots fell by 6.3% (-8.5% inflation-adjusted) during 2018.
- Apartment prices fell by 3.5% (-5.9% inflation-adjusted) during 2018.
- Villa prices dropped by 4.7% (-7% inflation-adjusted) in 2018.
- The real estate index for houses declined by 0.7% (-3.1% inflation) during 2018.
The real estate index indicator released by GAStat was launched in April 2017, based on the available registry data of real estate transactions from the Ministry of Justice.
Apartment prices in Jeddah fell by 7% during 2018, and by 3% during the latest quarter, according to JLL. Sale prices of villas also dropped by 7% y-o-y and by 3% q-o-q in Q4 2018.
However the price decline may be coming to an end. During the latest quarter, apartment prices increased by 0.4% when adjusted for inflation and house prices rose by 1.3%. In Riyadh, the capital city, apartment prices declined b 1% during the year to end-Q4 2018, according to Jones Lang LaSalle (JLL), but remained unchanged from the previous quarter. Sales prices of villas also dropped by around 3% y-o-y in Q4 2018, but unchanged from the previous quarter.
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.
The impact of the oil price declineThe recent fall in property prices have largely been caused by an economic slowdown, reflecting the dramatic decline in the price of oil in 2014. Ironically, it was the Saudis themselves who helped drive oil prices down, battling to keep their share of the oil markets.
One aim was to hurt Iran. Iran's economy needs oil to trade around $135. Saudi Arabia's own breakeven oil price at which the national budget is in balance is around $100 per barrel, according to Crude Oil Peak, an industry analysis site.
Saudi Arabia also has far larger cash reserves and is thus able to withstand a downturn in prices for much longer. Saudi Arabia is the world's largest oil producer and exporter, and also has huge clout as leader of the Organization of the Petroleum Exporting Countries (OPEC). Petroleum accounts for more than 75% of government revenues and 90% of exports.
Saudi Arabia has compensated for its reduced oil revenues by running fiscal deficits. There was a deficit of 14.8% of GDP in 2015, 12.9% of GDP in 2016, and 8.9% of GDP in 2017. This was 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 and after 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 19.1% of GDP in 2018, and is expected to rise to 21.7% of GDP in 2019.
In April 2016 the Saudis launched a deep-seated reform strategy called Vision 2030, reflecting the personal initiative of Crown Prince Mohammad bin Salman Al Saud.
By year 2030 the strategy 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%
In April 2019, Saudi Aramco started issuing bonds in order to finance its acquisition of another major state-controlled company, SABIC. Aramco's first bond issuance has generated a massive amount of interest from the international market, with demand for bonds surging above US$ 100 billion, 10 times worth the US$ 10 billion that the bond issue was expected to raise.
Prior to Aramco's first international bond issue, it was announced that the company signed a purchase agreement worth US$ 69.1 billion, buying a 70% majority stake in SABIC from the country's sovereign wealth fund Public Investment Fund (PIF). The PIF plays a key role in the Vision 2030 as it mainly supports the kingdom's economic diversification by financing the Vision's projects and investing in strategic sectors.
Other government drives include a "National Transformation Program 2020" (June 2016), and a "Fiscal Balance Program 2020" (December 2016).
Though the Saudi government's budget deficit had fallen to only 4.6% of GDP in 2018, the IMF expects a deficit of 7.9% in 2019. "We expect the [Saudi] authorities to continue tapping domestic and foreign debt sources to finance the fiscal deficits," said Institute of International Finance (IIF) chief economist for the Mena region Garbis Iradian.
Nevertheless during the last quarter of 2018, the Saudi economy had its fastest expansion in three years, growing at 3.6% y-o-y, following the 2.4% y-o-y increase in Q3 2018. This was attributed to the strong oil production in Q4 2018, posting an output of 10.75 million barrels per day (mbpd). The robust oil production has propelled the oil sector's growth to around 6% y-o-y, as opposed to the non-oil sector's sluggish growth of 2% y-o-y in Q4 2018.
However the kingdom's economy is expected to slow in 2019 to 1.8% growth, reflecting a round of oil production cuts announced in December 2018, according to the IMF's Gita Gopinath. Also the whole region's growth is slowing due to geopolitical tensions, weak oil output, tightening financial conditions in Pakistan, and US sanctions on Iran. In December 2018, OPEC and its allied oil-producing countries (except Iran, Venezuela, and Libya) decided to do another round of oil production cuts in the beginning of 2019, reducing a total of 1.2 million barrels per day off the market for the first six months of the year. OPEC's supposed mid-year meeting in April 2019, which was meant to review the market conditions and make necessary adjustments, was canceled last March. This means that the production cuts that they agreed upon will continue.
In February 2019, the kingdom's consumer price index declined by 2.2% y-o-y, down from -0.6% y-o-y in the same period last year, according to Saudi's General Authority for Statistics (GAStat). Unemployment stood at 6% in Q4 2018, unchanged from the same quarter last year.
As of August 2, 2019, crude oil traded at US$61.21 per barrel.
Political uncertainty under the new Crown Prince; Vision 2030 under threat after Khashoggi's murder
Saudi Arabia is currently shrouded in political uncertainty. In June 2017, Mohammed bin Salman was appointed as Crown Prince, after the king deposed Muhammad bin Nayef and relieved him of all his positions. The kingdom started a massive corruption crackdown, which led to the arrests of at least 11 princes, four ministers, several ex-ministers and businessmen. Among the arrested were billionaire Prince Al-Waleed Bin Talal bin Abdulaziz Al Saud.
The purge was seen as consolidating the crown prince's power. It was immediately followed by a 1.1% decline in the Saudi Stock Exchange in early trading on Monday, November 6, 2017. The anti-corruption campaign has also weakened investor confidence.
Aside from local political unrest, the crown prince's aggressive stance in foreign policy threatens the region's stability. Crown Prince Mohammed is said to be behind the economic boycott of Qatar since June 2017. The crown prince has also been in a word war with Iran recently after he called Iran's Supreme Leader "the new Hitler of the Middle East", in an interview with the New York Times.
Saudi Arabia also faced a political crisis due to the disappearance and killing of the journalist Jamal Khashoggi, last seen at the Saudi Consulate in Istanbul on October 2, 2018. The news of Khashoggi's murder initially deterred potential investors in doing business in the kingdom. One of the first executives to negatively reacted to the news was British billionaire Richard Branson, who suspended his advisory role for the two Vision 2030 projects in the Red Sea that he's involved with. Branson also suspended talks with the Saudi government regarding a US$ 1 billion investment in Virgin's space companies. "Furthermore, Saudi Arabia’s bungled response has probably intensified the negative sentiment," according to Hani Sabra, Middle East analyst and founder of Alef Advisory.