Savills Report: Real estate sector in Saudi Arabia will see a temporarily dip before growth in the long-term

By Esahaque Eswaramangalam, Chief Editor
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Saudi Arabia. Representational Image

In its latest report assessing the impact of COVID-19 on the Saudi market, Savills; the global real estate consultancy anticipates a strong improvement in demand, especially across the office and retail sector during the second half of 2020 under the assumption that the current situation regarding COVID-19 is contained and business activity resumes soon.

Savills ascertains that a combination of a SAR 70 billion stimulus package, monetary policies aimed at stimulating business sentiment, and previous experience with coronavirus are all positives when it comes to the anticipated recovery in Saudi Arabia.

According to the consultancy, Saudi Arabia faces a dangerous condition due to the declining global oil demand, sinking oil prices, and the looming threat of the COVID-19 pandemic spreading globally and within the region.

However, severe measures can prove effective in both preventing the spread of COVID-19 and supporting the private sector, especially SMEs and economic activities most affected by the virus.

Saudi’s previous experience with the Middle East respiratory syndrome (MERS) – a variety of coronavirus that emerged in the country means that the country is well equipped to address the crisis quickly, said David O’Hara, head of Savills in Saudi Arabia.

“The country’s experience in dealing with MERS in 2012 has led to these quick and effective measures from the government. Its social and medical infrastructure is also well-positioned to address the logistical challenges posed by the pandemic. These measures and support factors have so far been effective.”

The Saudi government has stepped in to support the economy with monetary policies aimed at stimulating business sentiments and ensuring adequate liquidity in the market. In the past few weeks, the SAMA (Saudi Arabian Monetary Authority) has announced a SAR 50 billion program to support the private sector, aimed at boosting economic growth through a package of measures.

In addition to the measures announced by SAMA, the Ministry of Finance has announced urgent initiatives to support the private sector, especially SMEs and economic activities most affected by the virus.

The financial stimulus package of these initiatives is worth more than SAR 70 billion, which consists of exceptions and pause of some government dues to provide liquidity to the private sector.

Though the positive impact of these new policy measures will seep down to the economy and the real estate sector in the long-term, short-term economic growth is likely to remain muted, said O’Hara.

As per the latest estimates by Oxford Economics, non-oil growth is forecast to grow at 0.7 percent (from 2.8 percent previously) in 2020. This may have a negative impact on real estate activity in the country in the immediate future as expansion plans and market-entry strategies may be postponed.

“The existing travel restrictions have already led to key policy decisions being delayed on a few of the ongoing mandates where our company is involved.”

Savills also reported that site inspections for new office leases have been postponed while the lease start date on a few contracts has been pushed back.

Close to 80 percent of the active inquiries represented by Savills are ongoing but at a slow pace as companies struggle to start off the fit-outwork on the new premises and key decision-makers across multinational companies to revisit their business strategy.

“Most of the above-mentioned delays are purely because of the current challenges posed by COVID-19. Fundamentally, there is a strong demand for investment-grade real estate across Saudi Arabia,” said O’Hara.

“A few of the ongoing deals have been finalized in the last few weeks, indicating a long-term optimistic view most companies are adopting while considering their real estate requirement in the kingdom. Over the last 12-18 months, the kingdom has liberalized investment guidelines and opened up its economy to new business sectors. This has led to a surge in inquiry levels from regional and global companies keen to set-up / expand their operations in the country. We anticipate a strong recovery in demand especially across the office and retail sector during the second half of 2020, provided the current situation is contained and business activity resumes at the earliest.”

Content Courtesy: Savills Report on Saudi Arabia.

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