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The Impact of Economic Policies on Saudi Arabias Property Market Trends

Understanding Economic Policies and Property Market Trends in Saudi Arabia

Saudi Arabia’s economic policies, particularly Vision 2030 and the National Transformation programme, have been instrumental in shaping the nation’s property market trends1. These policies, aimed at diversifying the economy away from oil and fostering private sector growth, have notably driven homeownership among Saudi nationals from 47% in 2016 to a projected 70% by 2030. This is largely due to the “Sakani” programme, which offers affordable housing options and subsidised loans, leading to a 2.1% surge in residential property sales in Q1 2021 compared to Q4 2020.

The government’s focus on tourism and entertainment sectors has spurred demand for commercial properties, with mega-projects like the Red Sea Project and Qiddiya Entertainment City attracting both domestic and foreign investors. However, the introduction of a 15% Value Added Tax (VAT) in July 2020 caused a temporary slowdown in property transactions2. Despite this, the property market remains resilient, with trends shifting towards affordable housing and flexible workspaces, and growth expected in the hospitality sector, driven by Vision 2030’s tourism initiatives.

The Role of Government in Shaping the Property Market

The government plays a pivotal role in the property market, shaping its dynamics through policies and regulations that directly influence property prices, availability, and affordability. Zoning laws, for instance, determine land use, impacting property values and development potential. Tax incentives stimulate property investment, while housing programmes increase the supply of affordable homes. A study by Gyourko and Molloy (2015) revealed that stringent land use regulations have significantly escalated housing prices in major U.S. cities over the past decades3.

The concept of new public governance (NPG) offers a fresh perspective on the government’s role in the property market. NPG emphasises collaboration, transparency, and citizen participation in decision-making processes. In the property market, this could involve local communities in urban planning decisions or partnering with private developers to create affordable housing. However, government interventions can have both positive and negative effects, necessitating careful consideration to achieve a balanced and equitable property market4.

The Impact of Investment and Tax Regulations on the Property Market

Investment and tax regulations in Saudi Arabia, primarily under the government’s Vision 2030 initiative, have significantly influenced the property market5. These regulations aim to stimulate investment, increase transparency, and address housing shortages. The introduction of Real Estate Investment Traded Funds (REITs) by the Capital Market Authority (CMA) has democratised property investment, allowing both local and foreign investors to participate, thereby driving up demand and property prices.

The government also implemented the “white land tax” to encourage development of vacant urban land, increasing property supply and affordability. However, the 15% Value Added Tax (VAT) on property transactions has cooled the market, increasing transaction costs and slowing sales. Despite this, the VAT’s introduction has brought greater transparency, boosting long-term investor confidence. The exemption of residential real estate from VAT has maintained affordability in the residential property market6.

These regulations have attracted investment, stimulated demand, and increased transparency, demonstrating the government’s proactive role in shaping the property market.

The Influence of Economic Diversification on the Property Market

Economic diversification in Saudi Arabia, a strategic shift under the Vision 2030 initiative7, aims to reduce the nation’s oil dependency and stimulate non-oil sectors. This diversification has a profound impact on the property market, creating new opportunities and challenges. Growth in sectors like tourism, entertainment, and technology has increased demand for both commercial and residential properties.

Foreign investment, a crucial component of this diversification, has been encouraged by government reforms, such as allowing full foreign ownership of real estate in certain sectors. This has resulted in an influx of foreign capital, boosting the property market and introducing new expertise and innovation8.

Tax regulations, including the introduction of the white land tax, have also shaped the property market. This tax encourages the development of vacant land, increasing property supply and making housing more affordable. However, careful management is necessary to ensure stability during this transition and to balance the interests of both local and foreign investors.

The Decline of FDI and its Effect on the Property Market

The current state of Foreign Direct Investment (FDI) in Saudi Arabia is marked by a significant decline, primarily attributed to geopolitical tensions, economic uncertainties, and the impact of the COVID-19 pandemic9. This downturn has had a direct impact on the property market, a sector heavily reliant on FDI for capital. The decline has resulted in a slowdown in construction and a decrease in property prices.

Simultaneously, Saudi Arabia’s economic diversification efforts under Vision 2030 have influenced the property market. The initiative, aimed at reducing dependence on oil revenues, has led to changes in investment policies and regulations, making the investment environment more complex. Dr. Ahmed Al-Sulami, an economic expert, explains, “The shift in investment focus from traditional sectors like oil to emerging sectors has made the investment environment less attractive for some foreign investors.“10 This shift has led to a decrease in demand for oil-related properties, further impacting the property market.

The Role of FDI Investors in the Property Market

Foreign Direct Investment (FDI) plays a pivotal role in the Saudi Arabian property market11. The primary investors hail from the United States, United Arab Emirates, and China. These investments significantly stimulate the growth and development of the property sector, fostering economic activity and creating job opportunities.

However, a recent decline in FDI, attributed to geopolitical tensions, economic instability, and regulatory changes, has posed challenges. This reduction has led to a slowdown in construction activities, with fewer new projects being launched and existing ones experiencing delays or cancellations. The decline in FDI has also affected property prices, with a decrease in value due to reduced demand from foreign investors12.

Moreover, the availability of high-quality commercial and residential properties has been limited, potentially deterring foreign investors and expatriates from investing in the market. This decline in FDI has broader implications, as the property market is closely linked to other sectors such as construction, real estate services, and building materials. A slowdown in the property market can lead to job losses and reduced economic activity in these related sectors.

Traditional Malls vs. Lifestyle Retail centres

Traditional malls and lifestyle retail centres represent two distinct retail models. Traditional malls, characterised by enclosed spaces focusing primarily on retail, have been challenged by the rise of lifestyle retail centres13. These open-air, mixed-use developments combine retail with dining, entertainment, and other amenities, aligning with changing consumer preferences for experiential shopping and convenience.

The shift towards lifestyle retail centres is driven by factors such as the rise of e-commerce and the demand for unique, personalised experiences. These centres, often located in or near residential areas, offer services and experiences that cannot be replicated online, making them more resilient to the e-commerce trend.

This shift has significant implications for Foreign Direct Investment (FDI) investors in the property market. Lifestyle centres, with their higher footfall and diverse tenant mix, present attractive investment opportunities. However, they require significant investment in infrastructure and amenities, and their success is closely tied to the economic health of the surrounding area14. Therefore, FDI investors must carefully consider factors such as location, tenant mix, and local economic conditions when investing in lifestyle retail centres.

The Rise of Domestic Tourism and its Impact on the Property Market

The rise of domestic tourism in Saudi Arabia, driven by the government’s Vision 2030 initiative, has significantly impacted the property market15. Popular destinations such as Riyadh, known for its modern architecture, Jeddah, a cultural hub, and Abha and Taif, celebrated for their natural beauty, have experienced a surge in real estate demand. This has led to a boom in hotel and residential property developments, resulting in higher property prices and rental yields.

According to property market analyst, Mohammed Alkhateeb, “The rise in domestic tourism has created a new demand in the property market, leading to increased investment in hospitality and retail sectors.”16 This growth in tourism has also influenced a shift in consumer preferences, with traditional malls being replaced by lifestyle retail centres that offer a mix of shopping, dining, and entertainment options. These centres, often located in or near tourist hotspots, enhance the overall tourist experience, further driving the evolution of the property market.

The Emergence of Experiential Retail and its Influence on the Property Market

Experiential retail, a transformative trend, is reshaping the traditional retail model by focusing on creating immersive and engaging shopping experiences17. Unlike traditional retail, which primarily involves the transaction of goods, experiential retail transforms retail spaces into destinations, offering customers interactive experiences that engage them on a deeper level.

This shift has significant implications for the property market. Retailers now seek versatile, open-plan spaces that can host events, workshops, and other interactive experiences, driving up rental prices and property values in prime retail locations18. Property developers and landlords are adapting to this trend, investing in renovations and new constructions to meet these demands.

The rise of experiential retail is closely tied to the growth of domestic tourism. As consumers seek unique, local experiences, retailers are capitalising on this trend, leading to increased demand for retail spaces in popular tourist destinations. For instance, the Shinsegae Department Store in Seoul, South Korea, offers visitors a multi-dimensional experience, reflecting local culture and lifestyle, thereby boosting property values and rental rates.

The Impact of International Brand Loyalty on the Property Market

In Saudi Arabia, international hotel brands such as Marriott, Hilton, Accor, and InterContinental have a strong presence, attracting a loyal customer base and influencing the property market19. Brand loyalty drives demand for properties associated with these brands, leading to increased property values and rental yields. According to STR Global, Saudi Arabia has the largest hotel pipeline in the Middle East, with a significant portion being international brands20.

The rise of experiential retail further amplifies this influence. Hotels, no longer just places to stay, have become destinations offering unique experiences. Brands delivering these experiences effectively attract loyal customers, driving demand for properties in their vicinity. This trend is also shaping the development of mixed-use properties, which often include branded hotels and retail outlets.

The combination of international brand loyalty and experiential retail has also fueled demand for branded residences. Luxury homes associated with international hotel brands attract affluent buyers and investors. According to Savills, branded residences command a price premium of up to 31%, further driving up property values.

The Effect of Taxation and Interest Rates on the Property Market

In Saudi Arabia, the government has implemented a 15% Value Added Tax (VAT) on real estate transactions, making property purchases more costly21. This taxation policy could potentially deter buyers, slowing down the market. Simultaneously, the Saudi Arabian Monetary Authority (SAMA) has maintained low interest rates to stimulate economic growth. Lower interest rates make borrowing cheaper, encouraging property investment. As per SAMA, mortgage loans increased by 33% in 2020, indicating a robust demand for property22.

The impact of these policies intertwines with the influence of international brand loyalty. Renowned global real estate brands, such as Emaar and Damac, contribute to the market dynamics. Their reputation for quality and reliability can sway buyer decisions, potentially driving property demand and prices. As per a YouGov survey, 60% of Saudi consumers prefer international brands, underscoring the significance of brand loyalty in the property market.

Dr. Fahad Alshathri, Deputy Governor for Supervision at SAMA, emphasises the need for balance, stating, “While taxation and interest rates directly affect property prices and demand, international brand loyalty can moderate these effects.”

The Interplay of Economic Policies and Property Market Trends in Saudi Arabia

Saudi Arabia’s property market is significantly influenced by the interplay of economic policies, taxation, and interest rates23. The government’s Vision 2030 initiative, aimed at diversifying the economy away from oil, has stimulated investment in real estate, leading to increased demand for both residential and commercial properties. This diversification is expected to foster a more stable property market, less susceptible to oil price fluctuations.

Taxation policies, particularly the introduction of a 5% Value Added Tax (VAT) on real estate transactions, initially caused a market slowdown. However, it is anticipated to promote greater transparency and formalisation of the sector in the long run.

Interest rates further shape the property market. Low rates make borrowing cheaper, stimulating property demand and driving up prices. Conversely, a significant increase could dampen demand, slowing the market.

The government’s focus on increasing homeownership among Saudis, coupled with the introduction of the ‘White Land Tax’, is expected to sustain property demand and spur development, respectively24.

Thus, a balanced approach to economic policies, taxation, and interest rates is crucial for maintaining a healthy property market in Saudi Arabia.

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