SAUDI ARABIA RESEARCH 2019 - MARKET REVIEW & FORECAST - Knight Frank
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RESEARCH
SAUDI ARABIA
MARKET REVIEW & FORECAST
2019
THE ANNUAL REVIEW AND FORECAST OF THE SAUDI ARABIAN REAL ESTATE MARKETRESEARCH
SAUDI ARABIA MARKET
REVIEW & FORECAST 2019
Key findings Looking at the real estate market performance in 2018, the general
trend for Saudi Arabia is that most sectors have remained subdued
GDP growth is set to remain on a
positive trajectory averaging 2.2% over as highlighted by lower activity levels, while occupancy rates have
the next five years according to the IMF been under pressure across most asset classes leading to a gradual
latest estimates. softening of rental and sale prices.
The REIT market continued expanding
in 2018 and now exceeds USD 3 billion
While we see this current situation
prevailing in the short term, we remain Macroeconomic
in market capitalization. The pace of
listings is set to moderate in 2019 as
optimistic for the longer term due to the Overview
various government initiatives aimed at
indicated by the current pipeline.
stimulating the real estate market whilst 2018 overview
encouraging the private sector to take
Key prime office schemes continued Following a deceleration in 2017,
a key role in this process, as part of the
to outperform the market average in Saudi Arabia’s GDP growth began to
recently introduced strategic reforms.
2018 as a result of a lack of high quality recover in the first quarter of 2018. It is
stock. As new schemes are released The approval of regulations for the use estimated to have reached 2.2% in 2018
into the market this trend is unlikely to and listing of REITs in Saudi Arabia is a according to the IMF latest estimates
persist over the long term. case in point, as it signals an important and is set to further accelerate, reaching
step in the government’s drive to boost 2.3% in 2019. The return to growth has
Downward pressures have continued to private sector participation in the sector been underpinned by a combination of
weigh on the residential market in 2018, and increase transparency in real estate favourable factors including a rebound in
impacting activity levels and prices. markets where visibility around asset oil prices, a gradual acceleration in the
Government initiatives are a step in the performance, ownership and legislation growth of the non-oil economy and the
right direction for a more active market are key to attracting capital to the sector. government’s shift away from a tight fiscal
over the coming years. policy as announced in the 2018 and
Moreover, the implementation of various
2019 budgets. The Purchasing Manager
Despite pressures on the performance urban regeneration initiatives including
Index (PMI), a non-oil economy tracker,
of many hospitality markets within the mixed-use communities and large-
stood at 55.2 in November 2018, which is
Kingdom in recent years, we expect scale infrastructure projects is expected
well above the neutral 50 level indicating
to see a recovery in the short to to act as a catalyst for the real estate
an expansion in the non-oil sector and a
medium term, as diversification efforts, market. The Riyadh Metro is one of
significant recovery of the index from its
infrastructure projects and tourism the key infrastructure projects that is
lowest level on record registered in April
initiatives come online. being implemented and which is set to
2018 (51.4). Nevertheless, the indicator
dramatically alter the dynamics of both
remains low by historical standards
residential and commercial real estate
despite the rebound in oil prices this year.
markets when delivered.
FIGURE 1
Key macroeconomic indicators
4% 120
3%
100
RAYA MAJDALANI 2%
80
Research Manager 1%
0% 60
“Despite the ongoing slowdown -1%
40
in the real estate market, -2%
we remain optimistic for the -3%
20
longer term due to the various -4% 0
government initiatives aimed at
2017
2018 (F)
2019 (F)
2017
2018 (F)
2019 (F)
2018
2019 (F)
2020 (F)
11/2014
11/2015
11/2016
11/2017
11/2018
6/2018
7/2018
8/2018
9/2018
10/2018
11/2018
stimulating the market.”
GDP NON-OIL GDP EMPLOYMENT OIL PRICES, KSA PURCHASING
Y-o-Y % Y-o-Y % Y-o-Y % IN USD MANAGER’S INDEX
CHANGE CHANGE CHANGE (RHS) (RHS)
Please refer to the important notice
at the end of this report. Source: Knight Frank Research, IMF, Macrobond, Oxford EconomicsSAUDI ARABIA MARKET REVIEW & FORECAST 2019
Outlook Looking at the asset allocation of existing FIGURE 2
REITs, the vast majority of REITS have Saudi REITs classified by investment
GDP growth is expected to remain on their investments spread across multiple approach, Q4 2018
a positive trajectory over the coming real estate asset classes, which is in part
years, averaging 2.2% over the next five due to a lack of maturity in the market
years according to the IMF estimates. and a constrained pipeline of institutional Diversified Thematic
Generally, the outlook and sentiment for grade assets. Looking at market
Saudi Arabia’s economy remain cautiously performance, we noted in our previous
positive and the recovery in economic Q1 18 review the fact that most REITs
growth that occurred in 2018 is yet to had already pared back early gains and
81% 19%
translate into a substantial improvement in were trading below listing price. During
economic conditions. 2018*, price moderation continued as
Employment growth is forecast to remain highlighted by the REIT index dropping Source: Knight Frank Research, Tadawul
supported by the various initiatives aimed by approximately 30% in the context
at boosting youth, women and Saudi of a weakening real estate backdrop
nationals’ participation in the workforce. translating into a drop in the real estate
FIGURE 3
In the short term, this will be balanced index on the Tadawul by just over 20%.
2018 yearly performance:
by rising pressures on the expat labour On a positive note, the Tadawul all share
REITs index vs. real estate index vs.
market resulting from the impact of index was up by almost 10% pointing
Tadawul all share index*
government fees and Saudization plans to healthy gains for the full year 2018,
on non-Saudi employment figures. supported by a buoy investor sentiment
driven by the expected inclusion in the
Tadawul
In line with the Vision 2030 and the MSCI and FTSE Russel EM indices
National Transformation Plan (NTP), and by the overall improvement in
the restructuring of the economy to macroeconomic conditions in 2018. Real estate index
decrease the Kingdom’s reliance on
the hydrocarbon sector and to support
stronger non-oil growth looks set to Outlook REITs index
remain a central element of economic
In 2019, we expect the pace of REITs
policy over the coming years, yet this
listings to moderate as indicated by
is likely to be a gradual process, which
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
fewer numbers of approved REITs in
requires some time to come into effect.
the pipeline. Going forward, the greater
*Note: 2018 variation calculated as at 09/12/2018
choice of available REITs is likely to drive Source: Knight Frank Research, Tadawul
REITs in Focus prices towards fundamental valuations,
as investors increase their focus on
2018 overview fundamentals including income generation
Since our last review in May 2018, and dividend yields as more performance
the REIT market in Saudi Arabia has information becomes available. This will
continued to expand and now surpasses be particularly important for investors
looking to adopt a longer term investment
USD 3 billion in terms of market “In 2018, the REIT market
approach. With an increase in the number
capitalization, compared to just over
of listed REITs, we expect the level of
in Saudi Arabia has
USD 2 billion in Q1 2018. Four additional
competition to increase in the market, continued to expand and
REITs were listed on the market, taking
up the total number of listed REITs on which would translate into a greater now surpasses USD 3
the Tadawul to 16 at the date of writing focus on the adoption of best-in-class billion in terms of market
compared to 12 at the end of Q1 18. practices in terms of quality of the capitalization.”
From a regulatory perspective, the underlying portfolio, asset management
Saudi Arabian Capital Market Authority and corporate governance. Moreover,
(CMA) has recently approved a number it is likely that we will start seeing the
of amendments to initial regulations emergence of more thematic REITs as
governing REITs, including the increase in the market gains in maturity enabling
the minimum capital requirement for new investors to gain exposure to specific real
funds from SAR 100 million to SAR 500 estate sectors.
million. A strong and evolving regulatory
framework, which has proven to be
favourable in more mature jurisdictions,
will remain a key objective in the
development of the REIT market in Saudi
Arabia.
*Note: 2018 variation calculated as at 09/12/2018SAUDI ARABIA MARKET REVIEW & FORECAST 2019
FIGURE 4
Grade A - Q4 2018 performance
Office Market landlords to continue offering incentives
in order to maintain occupancy levels
amid an increasingly competitive market.
indicators and 12-month outlook 2018 overview Longer term, we see demand for office
2,000
Whilst there have been a number of space picking up from current levels as
notable commercial office transactions economic reforms under the National
Rental rates (SAR/ sq m)
RIYADH
1,500 throughout 2018, as key occupiers both Transformation Plan (NTP) and Vision
JEDDAH
from the public and private sector look to 2030 start feeding through the wider
KHOBAR
1,000 expand or move to upgraded premises, economy, translating into an acceleration
DAMMAM
the market continues to be dominated by of growth in the non-oil private sector.
500 a lack of Grade A stock and a large supply Moreover, the implementation of various
pipeline. In terms of performance, market urban regeneration initiatives including
0 wide rents and occupancy levels have mixed-use communities and large-scale
been under pressure since 2016, with the infrastructure projects, is expected to act
0%
5%
10%
15%
20%
25%
30%
trend continuing into 2018 amid increasing as a catalyst for the real estate market.
Vacancy rates
levels of supply and subdued occupier Furthermore, it is expected that the
demand. Key prime schemes continued planned wave of privatisation will boost
12-month outlook Stable
to perform better than the market average investment and foster growth in the
as a result of a lack of high quality stock. business environment creating favourable
Source: Knight Frank Research However as new schemes are released conditions for the office sector.
into the market this trend is unlikely
FIGURE 5
to persist over the long term. Against
the backdrop of a highly elastic supply
Residential Market
Grade B - Q4 2018 performance dynamic, we see rents for Grade B 2018 overview
indicators and 12-month outlook assets softening further in the short term
The residential market has for some time
where buildings that suffer from poor
been softening as highlighted by lower
2,000 accessibility and parking arrangements
levels of transactions and a correction in
will struggle for occupancy.
Rental rates (SAR/ sq m)
1,500
sales prices across major cities in Saudi
Arabia. This trend was mainly triggered
1,000
RIYADH
Outlook by the deceleration in economic activity
JEDDAH that started in 2016 and is exacerbated
Although we have seen an improvement by a combination of more inherent factors
500
DAMMAM & in business sentiment in 2018, we believe namely the lack of affordability, a supply
KHOBAR that any increase in demand for office
0 shortage in the mid-to-low end of the
space will remain subdued in the short market as well as the lack of suitability of
0%
10%
20%
30%
40%
term, with rents and occupancy likely the existing stock. The slowdown in the
Vacancy rates to remain under pressure as increased residential market continued in 2018 as
demand will be met with new supply. highlighted by lower transaction volumes
12-month outlook Falling
Vacancy rates can therefore be expected and prices.
to rise, placing downward pressure
on rents. In this context, we expect
Source: Knight Frank Research
FIGURE 6 FIGURE 7
Supply of office space, sq m GLA Policy impacts on the office market
3,517,172 288,181 124,363 Short-term Long-term
Riyadh 11%
1,164,386 171,832 142,500
Levies on Urban
Jeddah 10% 2018 supply estimate expatriates regeneration
1,085,921 107,389 75,000 2019 addition estimate
Eastern
Province 6% 2020 addition estimate
Looser fiscal Economic
historic growth in supply policy reforms
5-year CAGR
Source: Knight Frank Research Source: Knight Frank ResearchSAUDI ARABIA MARKET REVIEW & FORECAST 2019
Outlook FIGURE 8
Residential price indices in Saudi Arabia and key regions
While we see this current market
conditions prevailing in the short term,
we remain broadly positive as a result of 105 Saudi Arabia Riyadh Region
government initiatives looking to address
key challenges restraining the residential 100 Makkah Province Eastern Province
sector in Saudi Arabia including high land
95
prices, supply/demand imbalances and
affordability among others. Regulatory
90
efforts such as the white land tax,
the large housing schemes and the 85
mortgage law, display clear intent from
the government to engage with the 80
issues facing the residential market in the
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
kingdom. While efforts are slowly filtering
through, we see these initiatives as a step
in the right direction for a more active real
*Note: base year = 2014
estate market over the coming years.
Source: Knight Frank Research, GASTAT
Hospitality Market
FIGURE 9
2018 overview Supply of residential units
In line with the wider region, the
performance of the hospitality sector in
1,215,274 30,921 18,740
Riyadh and the Dammam Metropolitan
Riyadh 6%
area (DMA) within the Kingdom of Saudi 2018 supply estimate
Arabia continued to soften in 2018. A
829,404 7,098 9,125 2019 addition estimate
fall in corporate demand was widely
Jeddah 2%
cited as the primary issue in both Riyadh 2020 addition estimate
and the DMA, although in the latter of historic growth in supply
322,164 7,054 5,628
the two markets, leisure demand also Eastern 4%
5-year CAGR
became more price sensitive. In DMA, Province
the vast majority of corporate demand
is inexorably linked to the hydrocarbon Source: Knight Frank Research
sector (which has faced its own
challenges in recent years), which, against
the backdrop of recent hotel supply FIGURE 10
deliveries, has created a challenging Existing and upcoming quality hotel establishment supply
operating environment. Over the last year,
the Fraser Suites and Fairmont Business
Gate came to market in Riyadh, while RIYADH CITY
the Hilton Garden Inn and Park Inn by 14,042 existing quality hotel
establishment supply
rooms
Radisson Industrial City opened in DMA. (number of rooms)
% increase in
By contrast, Jeddah’s hotel market supply until 2021
saw a return to form in 2018, after two
years of weak performance correlated
to significant supply deliveries in 2016.
Strong performance during the summer
DMA*
months saw this situation reversed,
with the city once again exhibiting YTD
53%
7,258
rooms
RevPAR growth as of November. Hotels 54%
that came to market during this period JEDDAH
included the Centro Salama, Radisson 94%
10,167
Blu Corniche, Galleria Hotel by Elaf, and rooms
Mövenpick Hotel and Hotel Apartments
Al Tahlia.
*Note: Dammam Metropolitan Area
Source: Knight Frank Research, STROutlook KINGDOM OF SAUDI ARABIA
Stefan Burch, MRICS
Partner
Despite the recent downward pressure in RevPAR levels in many markets within the +966 53 0893 297
Kingdom in recent years, we expect the hospitality sector to recover in the short to stefan.burch@me.knightfrank.com
medium term, as various diversification efforts, infrastructure projects and tourism Saud Sulaymani
initiatives come online. As always, there is the spectre of a significant supply pipeline; Partner, Saudi Arabia
+966 55 883 8883
however, historical precedent indicates that there is typically a low materialisation rate saud.sulaymani@me.knightfrank.com
within the Kingdom, which will smooth out this impact.
DEVELOPMENT CONSULTANCY
From the perspective of creating a viable destination, the development of megaprojects & RESEARCH
Neill Nagib
such as the Red Sea Project, Amaala and Al Qiddiyah will be a great barometer of how Associate Partner, Saudi Arabia
successfully the government can create a viable leisure-based destination capable of +966 50 055 6308
neill.nagib@me.knightfrank.com
attracting inbound visitation. From a legislative perspective, the introduction of the tourist
visa, but more specifically the implementation of the ‘Sharek visa’ is a positive step Raya Majdalani
Research Manager
toward having the correct legislative framework with which to make this happen. +971 56 4206 735
raya.majdalani@me.knightfrank.com
HOSPITALITY & LEISURE
Ali Manzoor
FIGURE 11
Partner
KPI’s YoY performance in key hospitality markets +971 56 4202 314
ali.manzoor@me.knightfrank.com
11% VALUATION & ADVISORY
Stephen Flanagan, MRICS
8% Partner
+971 50 8133 402
stephen.flanagan@me.knightfrank.com
1% 1%
0% 0% OCCUPIER SERVICES &
COMMERCIAL AGENCY
-1%
Matthew Dadd, MRICS
-3%
Partner
+971 56 6146 087
-7% -7% matthew.dadd@me.knightfrank.com
-8% -8% -8%
-9% -9%
-10%
-11% CAPITAL MARKETS / INVESTMENT
Joseph Morris, MRICS
Partner
-15% +971 50 5036 351
joseph.morris@me.knightfrank.com
Riyadh Jeddah DMA Riyadh Jeddah DMA
2017 2017 2017 11M 2018 11M 2018 11M 2018 MEDIA & MARKETING
Nicola Milton
Head of Middle East Marketing
+971 56 6116 368
nicola.milton@me.knightfrank.com
*Note: percentage point OCC % (*) ADR RevPAR
Source: Knight Frank Research, STR
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Important Notice
© Knight Frank 2019 - This report is published
for general information only and not to be relied
upon in any way. Although high standards have
been used in the preparation of the information,
analysis, views and projections presented in this
report, no responsibility or liability whatsoever
can be accepted by Knight Frank for any loss or
damage resultant from any use of, reliance on or
reference to the contents of this document. As a
Makkah Hospitality REITS Insights on The Riyadh Metro KSA Office Market general report, this material does not necessarily
2018 Saudi Arabia Q1 2018 Review 2018 represent the view of Knight Frank in relation to
particular properties or projects. Reproduction of
Knight Frank Research Reports are available at KnightFrank.com/Research this report in whole or in part is not allowed without
prior written approval of Knight Frank to the form
and content within which it appears.
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Arabia with registration number 1010432042. Our
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