Amid calls for King Salman to be deposed, Saudi Arabia’s property market is weakening
Last Updated: October 29, 2015
Add to this, bitter internal feuding has broken out within the royal family since King Salman, now 79, ascended the throne after the death of former King Abdullah on January 23 2015. A senior member of the royal family has called for King Salman to be deposed.
Will Saudi Arabia see a replay of the early eighties, when falling oil prices saw Saudi Arabia's GDP per capita plunge to 1/3 of its former level? That outcome could be catastrophic, given current tensions, internal and external.
Nobody thinks that will happen soon, because this year Saudi's economy is expected to expand by 3.4%, according to the International Monetary Fund (IMF), despite reduced oil revenues, due to massive stimulus spending. Yet how long can this continue? Because of the government’s current enormous fiscal deficit, Saudi Arabia is projected to run out of financial assets needed to support spending within the next five years, according to the IMF.
And already, house prices and property transactions have begun to fall.
In Riyadh, the capital city, apartment prices dropped by 1% during the year to end-Q3 2015, according to Jones Lang LaSalle (JLL), and 2% on a quarterly basis in Q3 2015. Villa prices fell by 5% from a year earlier, and 3% from the previous quarter.
Likewise in Jeddah, apartment prices fell by 4% y-o-y in Q3 2015, and 5% from the previous quarter, according to JLL. Villa prices fell by 5% y-o-y in Q3 2015 and 1% from the previous quarter.
The median sales prices of villas in Riyadh ranged from SAR3,333 (US$889) to SAR5,200 (US$1,386) per square metre (sq. m.) in 2014, according to KPMG.
Residential transactions in Riyadh fell by 10% in Q3 2015 from the same period last year, while in Jeddah transactions dropped 8%, according to the Ministry of Justice.
Demand has also been hit by mortgage regulations issued in November 2014, raising banks' loan-to-value ceiling to 70%, compelling buyers to pay 30% of property's appraised value upfront.
A 2000 Real Estate Law allowed legally-resident non-Saudis to own real estate for their private residence, provided they get a license from the Ministry of Interior. The law also allows real estate ownership by foreign investors in order to conduct their business activities, and for the accommodation of their employees, with permission from the Ministry of Interior. To prevent speculation, five years must elapse before property can be sold.
However, real property ownership by foreigners is forbidden in the holy cities of Mecca and Medina. Non-Saudi Muslims can only obtain leases of up to two years in these cities. Leases are renewable for the same period.
Rental yields still high in Saudi Arabia
The rental market in Saudi Arabia is attractive to investors because of high rental yields. Rising demand for rental units and the lack of adequate supply have led to massive rent increases.
- the average monthly rent for villas and duplexes soared by 17% to SAR270 (US$72) in Q4 2011 from the same period last year, according to Colliers International
- the average monthly rent for apartments rose by 14% to SAR222 (US$59) per sq. m.
- the average monthly rent for villas and duplexes rose by 11% to SAR350 (US$93) in Q4 2011 from a year earlier
- for apartments, rents rose by 7% to an average of SAR264 (US$70) per month.
In Q4 2011, the rental yields in Riyadh is high at a range of 7.8% for apartments and 8.6% for villas and duplexes, according to Colliers International.
On the other hand, in Jeddah, yields for villas and duplexes fell to 8.8% in Q4 2011 from 9.1% in the previous year. Likewise, yields for apartments fell to 10.8% in Q4 2011 from 11.5% in the previous year.
Income tax is low in Saudi Arabia
Rental Income: Rental income is taxed at a flat rate of 5%.
Capital Gains: No tax is levied on capital gains realized by individuals from selling property.
Inheritance: There are no inheritance taxes in Saudi Arabia. As in most countries in the Arab world, Shariah law applies to inheritance.
Residents: Individuals are only taxed on their business income in Saudi Arabia. Non-Saudi and non-GCC nationals are liable to income tax. Saudi and GCC national are liable to zakat, which is an Islamic direct tax on property and income.
Total transaction costs in Saudi Arabia
Foreigners are allowed to own real estate, subject to approval of the licensing authority.
Research is ongoing.
Modest economic growth, deteriorating fiscal balanceThe Kingdom of Saudi Arabia with a population of more than 30 million was formally established in 1932 by Abdul Aziz ibn Saud. He unified the dual kingdom of Hejaz and Najd, administered since 1927 as two separate units. It has the biggest economy and one of the highest GDP per capita (US$24,252 in 2014) in the Middle East. The Kingdom has the world’s second largest oil reserves which represents more than 25% of the world’s known oil reserves.
Saudi’s government is in the form of an absolute monarchy. The King is the Head of State and Head of Government. In January 2015, King Salman succeeded King Abdullah Bin-Abd-al-Aziz Al Saud to become the effective ruler of the Kingdom. However, King Salman is widely believed to be in bad health. In addition, there is considerable opposition to the Salman succession, and it is beginning to look as if the King may be deposed. An unprecedented call for the king to be removed was made by a senior Saudi prince.
Saudi’s economic performance over the past 25 years has been very poor, largely due to mistakes. In addition, the Kingdom’s economic growth has been largely erratic as it mainly depends on oil windfalls. The economy expanded by 3.5% last year, after real GDP growth rates of 2.7% in 2014, 5.4% in 2013, 10% in 2012, and 4.8% in 2011, according to the International Monetary Fund (IMF).
Saudi Arabia’s economy is projected at 3.4% in 2015, amidst moderate growths in both the oil and non-oil sectors, according to the National Commercial Bank.
In September 2015, the kingdom’s annual inflation rose to 2.3%, up from 2.1% in the previous month and the highest level this year, mainly driven by higher housing and utility costs, according to the Central Department of Statistics and Information. Nationwide inflation stood at 2.7% in 2014, the lowest level in eight years, based on figures from the IMF. Overall inflation is expected to remain subdued in the next few years.
The kingdom’s unemployment rate stood at 5.5% in 2014, almost unchanged from an average of 5.6% from 2001 to 2013, according to the IMF.
Saudi Arabia’s fiscal balance has been deteriorating recently due to falling oil revenues. In 2015, the kingdom is expected to post a budget deficit equivalent to more than 20% of GDP, in sharp contrast with the budget surpluses of about 13% of GDP from 2003 to 2013.
The sharp increase in Saudi Arabia’s budget deficit can be attributed to the following:
- Crude oil prices plunged more than 40% in the past 12 months. Petroleum revenues account for about 90% of the kingdom’s total revenues.
- Following King Salman’s recent accession to the throne in January 2015, he immediately spent substantial amount of money on subsidies and public job bonuses, including extra months of additional salary to all government employees, in an effort to increase his popularity.
- Significant military expenditures directed on the conflicts in Yemen, Syria, and Egypt.
In 2014, the kingdom’s public debt stood at just less than 2% of GDP in 2014, the lowest in the world. However, public debt is now expected to rise to about 33% of GDP by 2020.
In July 2015, Saudi Arabia issued its first sovereign bonds since 2007 to shore up public finances.
The kingdom’s foreign reserves have also been dropping recently. Saudi Arabia’s net foreign assets tumbled to US$646.9 billion in September 2015, its eight consecutive month of decline and the lowest level since November 2012, according to the Saudi Arabian Monetary Agency, the country’s central bank. Given the government’s current policies, Saudi Arabia is projected to run out of financial assets needed to support spending within the next five years, according to the IMF.
In October 2015, ratings agency S&P downgraded Saudi Arabia's sovereign credit ratings to A+/A-1 from AA-/A-1+. S&P's outlook for the kingdom remains negative, amidst worsening fiscal balance due to falling oil prices.
To control the country’s public finances, the government is planning to introduce several austerity measures, including the freezing of government hiring and promotions, stop contracting new projects, and suspending the purchase of furniture and vehicles.
In July 2015, the government decided to continue the construction of only two football stadiums, out of the eleven stadiums planned to be built.
The 2005 municipal elections were a first limited exercise of democracy. The second municipal elections were held last September 2011. Women were not allowed to participate in the elections.
Political parties remain banned - the opposition is organised from outside the country - and activists who demand reform risk being jailed. Saudi Arabia has a tightly-controlled media and criticism of the government and royal family are not tolerated.