Saudi Arabia’s booming economy has piqued the interest of many expats looking for a lucrative investment opportunity, with some considering investments in real estate.
With new laws coming into force soon that will alter the requirements of foreign homeownership, a real estate expert believes now may not be the best time to invest despite the impending influx of rental-seeking expats into the country as companies rush to set up headquarters in the Kingdom before the year’s end.
This influx comes after the Kingdom announced in 2021 that failure to do so could result in losing out on lucrative Saudi government clients.
But with quality of housing in question and restrictions on where single individuals can live, some may also be looking to buy to save themselves the hassle of house hunting.
Uncertain legal landscape
Although the impending influx of expats into the country may make real estate seem like an attractive investment opportunity, Knight Frank’s head of research, Faisal Durrani, told Arabian Business that now might not be the best time to do so.
“For expats, my answer is no because legislation is still in the works,” he said.
At the moment, foreigners are allowed to own real estate or property for construction and investment, but are subject to prior approval from licencing authorities. And foreign ownership is forbidden in Mecca and Medina.
Last month, reports emerged citing the CEO of Saudi Arabia’s Real Estate General Authority (REGA) Abdullah Alhammad stating that it was planning new laws which will allow foreigners to buy property anywhere in the Kingdom, even in Mecca and Medina.
The new law will enable non-Saudi residents to own real estate of all kinds, including commercial, residential, and agricultural – under certain regulations which have not been made clear yet.
“For international buyers and investors, there’s no legislation yet that permits that but clearly, with the developments that are planned, especially the giga projects, our expectation is that a lot of those will be priced above $1 million for every unit,” said Durrani.
Affordability barrier dampens investor enthusiasm
The average Saudi budget does not come “anywhere near” the pricing of these new giga project units, said Durrani.
The surge in property prices is due to the gap between supply and demand in the Saudi real estate market, which has negatively impact investors, as land prices increased significantly as well.
“We cannot ignore the fact that house prices have increased so much, which is making it tougher for people to transition from renting to owning,” said Durrani.
The last time house prices peaked in the Kingdom was in 2016. Durrani suggests that although prices have surpassed 2016 levels, they have not peaked yet.
In 2016, an affordable ratio for buying properties was four to six times the annual household income, but the current prices for villas in Riyadh and apartments in Jeddah exceed that ratio, making them unaffordable.
The rising prices have caused a decline in the number of Saudis interested in buying a home from 84 percent in 2021 to just 40 percent in 2022.
However, with the government’s target of achieving a 70 percent homeownership rate by the end of the decade, the demand for properties is not expected to diminish anytime soon. The government may need to consider strategies to make housing more affordable, such as developing more affordable housing units or creating legislation that permits expats to own property.
“The likes of Riyadh is attracting quite a significant number of individuals moving into the city, many of whom will be renters. It offers quite a significant opportunity,” CBRE’s Head of Research, Taimur Khan, told Arabian Business.
“The Saudi government wants to go to 70 percent homeownership among nationals, the remaining 30 percent across the country will be renting. And that number will be a lot higher in the non-national population so I think, from that perspective, looking at income-producing or buy-to-let portfolios that people could be looking to build up is certainly a strategy which has the fundamentals behind it.”
The number of non-Saudi workers in the Kingdom, according to Khan, has gone up from 9.6 million in the fourth quarter of 2021 to almost 11 million.
“Nothing’s official yet, so I’m better off not speculating with regards to [new incoming law changes],” said Khan.
“There’s definitely a significant cohort of individuals that they could target who want to reside in Saudi Arabia for the long terms and so, opening up the marketing is something which is probably very much on the agenda.”
Although prices have continued to grow across the vast majority of the Kingdom, they may need to slow down slightly to encourage people to buy.
“Obviously, we’ve seen a lot of the higher end projects and that can sort of be the leading edge for some of these projects but there are others which are offering affordable stock to the Saudi population, like the Sakani programme [which] is there to address affordability and homeownership and get Saudi nationals on the ladder.”
Lucrative opportunity ahead?
The World Bank projects that Saudi Arabia’s economy is expected to grow by 2.9 percent. Although this is down from 8.7 percent growth in 2022, it is still outperforming other nations, especially with energy and cost-of-living crises being felt across the world after being brought on by Russia’s war in Ukraine and the COVID-19 pandemic.
This slowdown in growth highlights the fact that the Saudi economy is still quite reactive to oil prices but it is working to diversify its economy away from oil, and working hard to do it which will eventually pay off.
“Very positively, we did find that 83 percent of GCC high net worths want to invest in Saudi, so that’s very encouraging. But what was really interesting is that 95 percent said it would be even more attractive if local financing options were available to them via banks or developers so they don’t have to secure the financing in their own country,” Durrani said, referring to Knight Frank’s latest report on Saudi real estate.
He also found that their number one reason to invest in Saudi Arabia was “purely for capital gains, because they’re aware of the strong house price growth that has taken place in the last couple of years.”
“I think there’s definitely some opportunities out there and I think the opportunity set will actually just continue to get bigger, particularly in the next couple of years when these new developments start to come on to the market,” said Khan.
“For a lot of buyers the onus will be on looking at these new developments within the market… because in large part, they offer something which is very different to what the existing opportunities are.”
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