Saudi housing market may see higher demand for rental units: JLL

Saudi Arabia’s residential property market is expected to see increased demand for rental dwellings in the short to mid-term, despite remaining soft in the second quarter of 2020, consultancy firm JLL said in its recent “2020 mid-year review” report.

Construction activity in the residential market remained “somewhat active”, as various projects were delivered across the main cities. However, short to mid-term delays are likely in the handover of under-construction projects.

“A reprioritization of household spending will continue, and we expect to see a shift towards the rental market as it becomes comparatively more attractive and cost-competitive. This could see performance trends reverse, whereby sale prices begin to slow down, and rental rates will pick up in the longer-term,” said Dana Salbak, Head of Research for JLL MENA.

The higher value-added tax (VAT) imposed from July 1, 2020, could increase the cost of residential developments and sale prices, the report said, adding the Minister of Housing had agreed to absorb the increased VAT for first time buyers on units worth SAR 850,000 or less, to stimulate demand for the affordable housing segment in the Kingdom.

In addition, the higher tax could potentially drive land prices down from their current inflated levels.

“The increased tax could therefore actually benefit developers by reducing their overall cost of development,” Salbak noted.

Office

Meanwhile, the Kingdom’s office sector witnessed downward pressure on rentals, with Riyadh continuing to perform better than other cities.

Going forward, many corporates will be focusing on alternative ways to optimize and streamline workspaces to include a shift into smaller, fitted-out units, allowing for a reduction in capital expenditure.

New market entrants who offer co-working spaces, virtual offices and meeting room rentals are likely to benefit, Salbak stated.

Retail

The retail market across the Kingdom is expected to remain in the downward cycle due to the VAT increase and the suspension of public sector allowances.

However, the entertainment market is still growing, with demand exceeding the available supply, which is likely to minimize the impact of additional costs due to the VAT over the short to medium term.

Hospitality

Stringent precautionary measures and the ongoing suspension of international air travel continued to impact the hotel sector in the second quarter.

Nevertheless, the Ministry of Tourism launched a $4 billion (SAR 15 billion) tourism development fund aimed at supporting the development of various mega-projects and finance for investors.

The move is likely to drive the construction sector and ensure the delivery and development of hotels in the Kingdom in the long-run, JLL noted.