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October 26, 2016

The Saudi real estate market is going through a transformation – shaking off decades of inertia to become vastly more liquid and of far greater interest to foreign investors.

The main stimulus for the reawakening of the urban real estate sector is the government’s ‘White Land Tax’ – a precursor to the ‘National Transformation Program’ which aims to treble non-oil income by 2030. Encouraging landowners to build on or sell unused urban sites by taxing inactive plots is part of the new strategy to diversify the Kingdom of Saudi Arabia (KSA) away from its 80-year dependence on petroleum.

The 2.5 percent tax will start to be collected in early 2017. But, already, Jamil Ghaznawi, JLL’s national director in the KSA, is seeing significant change: “Landowners are becoming more open and flexible in terms of negotiating prices, and they are now willing to enter joint ventures with developers.”

Until this year there was a strong tendency to hold on to these assets, especially in the main cities, in the hope that prices would rise long-term. This has created a housing shortage for the 28 million KSA population, 60 percent of whom are under 30.

Global hub to connect east and west

The early success of the tax augurs well for the National Transformation Program, the ambitious scheme unveiled by the 31-year old Deputy Crown Prince, Mohammad bin Salman, in April this year. Recognising the dangers of over-dependence on oil exports in an increasingly volatile world, the government and royal family are using the Program to turn the KSA into a “global investment powerhouse”, a “global hub connecting…Asia, Europe and Africa”, a new centre for tourism, mining and other sectors as well as an efficient location to do business.

Transforming the country will require the help of outside investors to create a wide array of modern developments and services from basic areas, including education and healthcare, to the most sophisticated services in logistics.

As with all modernisation projects, there will be major challenges along the way. For instance, the kingdom’s stock market, the Tadawul, which was opened to foreigners in 2015, has experienced its own share of volatility this year. And plans to reduce the bonuses paid to public sector workers, which equates to two-thirds of all employees, will reduce local spending power and lead to a rise in personal debt.

Ghaznawi says: “Land prices have started to drop in Jeddah and Riyadh, by up to 30 to 50 percent.” JLL, which recently published a report on the Jeddah market, was expecting this to happen in anticipation of the White Lands Tax.

Tourism targeted through foreign investors

However, Prince Mohammad and his advisers believe that the country’s resources will make the transient pains worthwhile within the next 15 years. A mining industry is waiting to be born around the local deposits of gold, phosphate and other minerals. A tourism sector is already being created around the heritage sites of the kingdom, also known as the Land of the Two Holy Mosques. As well as visiting the religious centres of Mecca and Medina, many visitors will also be drawn to the beaches on the Red Sea. “Talks have already started with foreign developers,” says Ghaznawi, pointing to discussions with theme park operator Six Flags and the arrival of Korean and Turkish businesses.

Real estate specialists from the hotel to the logistics sectors are in immediate demand, says Ghaznawi. “We are changing at a much faster pace now,” he says. “International investors need to be quick, to come up with smart, new ideas and to be willing to invest long term.” Smart cities and ways of enhancing health and well-being top the Kingdom’s agenda.

Saudi Arabia is learning from its neighbour, the UAE city of Dubai, which has already commissioned a Six Flags theme park and, more significantly, has rapidly become a global transport hub through the development of Dubai International, the world’s largest airport. Saudi is already the world’s 13th largest exporter of containerised cargo, and is ideally located, between the Red Sea and Persian Gulf, to raise its profile in maritime logistics.

The KSA is also increasing its activities abroad, becoming a global investor and player in financial markets. Its main oil producer, Aramco, is due to float in 2018 with the aim of becoming a “global industrial conglomerate” after opening its secret financial statements to the world’s scrutiny. And Saudi’s Public Investment Fund is being revamped as a sovereign wealth fund. With assets of over US$2 trillion it will be the world’s largest. Its portfolio will “definitely” include real estate, says Ghaznawi – probably in premium locations in “the U.S. UK, Germany and other strong markets”. The fact that the fund took a 5 per cent stake in Uber this summer shows that it is prepared to embrace new, disruptive and imaginative businesses.

The only Arab country among the G20, Ghaznawi says of Saudi’s global ambitions: “We are determined to open our borders to the rest of the globe.”

Jamil Ghaznawi
JLL’s national director in the KSA

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