KEYS TO SUCCESS

n our last edition we shed light on housing schemes and the refinancing sector, and this year we decided the bring our focus back to the construction industry, the next most important engine of economic growth in Saudi Arabia after the oil and gas industry.

Following the events of 2017, some projects were canceled by the authorities, leading to a gap between supply and demand in the market. Construction firms have focused on breaking even or curbing losses in the past two years, while still planning for the next economic cycle. An already price-sensitive market became an extremely price-sensitive market, with players pushing down prices to remain competitive.

Today, announcements of the new megaprojects and the launch of new infrastructure developments are welcome news for a sector in transition. The real estate segment saw growth in 1Q2019, while contractors have yet to reap the concrete benefits of the new announcements. Nevertheless, they retain an optimistic outlook.

Indicators suggest an improving position for the real estate market in 2019. Aside from the macroeconomic factors we analyze across this publication, a number of sector-related trends have contributed to improving the outlook for the real estate industry. These include new funding for public transport, shifts from villas to apartments, goals to increase Umrah & Hajj pilgrims, government programs aimed to increase transparency, public and private financing schemes, new taxes on unused “white land,” off-plan sales, and retail spaces turned into entertainment spots.

The sector has witnessed a record-number of new regulations aimed at stabilizing the industry and restarting its development potential. Interviewees lauded land reforms in particular. At the end of 2018, land value accounted for average of 18% of development costs, down from 46% in 2016. This decrease in land prices was due, aside

Ifrom the white land tax implemented last year, to the Ministry of Housing giving land away for free or at marginal costs to the private sector. This led to a higher floor-area ratio, a subsequent increase in density, and a reduction in land costs.

For our 2019 edition, we decided to divide the Saudi market into three smaller segments—Riyadh, Jeddah, and Mecca—as each geographical division features unique aspects.

In Riyadh, we noticed greater demand for office space catering to SMEs and start-ups, in line with initiatives to stimulate private-sector growth. Residential housing supply stood at 1,252,000 units in 2018, with an expected delivery of a further 130,000 units by 2022. In the retail segment, oversupply is a challenge, but the growing entertainment sector presents promising opportunities for diversification. Hotel occupancy was up 3% YoY.

In Jeddah, we noticed a focus on the addition of F&B outlets and retail space within office projects to support demand from corporate clients. Residential supply stood at 980,000 units in 2018, with an additional 45,000 units expected to enter the market by 2022. Average daily rates for hotels are up almost 10% YoY, while the growing entertainment sector continues to drive diversification of retail portfolios, much like in Riyadh.

In Mecca, mega-infrastructure projects coming online will meet growing demand, set to reach 30 million pilgrims per year by 2030. Change in leadership at Jabal Omar Development Company and AlBalad Alameen, as well as the creation of the Royal Commission of Makkah, heralds a new strategic pathway for the development of the city. Moreover, we witnessed a decline in office rents and an increase in development opportunities for historic sites in Al Noor and Thur Mountains. Meanwhile, the Rou’a Al Haram Al Makki development will add 9,000 residential units after 2024. On the retail side, F&B offerings are growing as well. ✖