BMI View: With governmental policies facilitating market access for international investors, the relatively high sector returns are increasingly attracting foreign investors. While the commercial real estate sector in the office and retail segments is characterised by oversupply, growing demand will help close this gap and help enable room for new projects.
The increasing opening of the Saudi Arabian market is likely to lead to growing investment flows into the country. While one of the largest markets in the region, it has remained largely undeveloped due to regulatory restrictions. Thus, the market provides ample business opportunities which are likely to be taken especially as the government is eager to move away from the high oil-dependence of the economy. This trend is likely to accelerate as oil prices continue to fall and foreign investors are granted increasing rights of ownership and financial incentives.
Weaning the country off its dependence on hydrocarbons exports should ultimately prove beneficial in terms of growth of new industries such as financial services and petrochemicals production. Indeed, forecast long-term demand for commercial and industrial space has started to attract increased interest from foreign developers and investors. 2014 saw several international firms, including the China-based Shenhua Group and China Communications Construction Company as well as India-based Kalliyath Steel agree to collaborate with Gammon Group to build a new industrial city in Jazan. The outlook for commercial rental rates and net yields over 2015 is therefore generally favourable across much of the market. However, heavy oversupply in some areas of the country, such as the capital, Riyadh, will remain a key concern for landlords, particularly with a strong pipeline of development activity anticipated over the coming months.
In September 2014, a permanent committee in Saudi Arabia started investigating land deals regarding alleged money laundering. Sixteen government entities such as the Ministry of Social Affairs, the Bureau of Investigation and Public Prosecution and the Ministry of Foreign Affairs are subject to the investigation.
In August 2014, the Capital Market Authority proposed rules that would allow foreign investors to hold as much as 10% of the value of the USD548bn stock exchange. These rules are expected to come into force in H115.
In the same month, the Ministry of Housing made it compulsory for all real estate firms to join its electronic Ijar system. The system seeks to regulate the rental market with measures to protect the rights of owners and tenants and control prices. Few companies have signed up to the system since its introduction in January 2014, which has led the ministry to make the system mandatory, according to reports. The ministry wants to make sure that it can monitor the number and services of operators in the market, especially the firms renting out houses and apartments to consumers. The Ijar system reportedly defines the rights of tenants and property owners by having both parties sign a rental agreement through its electronic network.
Key BMI forecasts
Rental rates and net yields are expected to remain stable in all sub-sectors in 2015 in both Riyadh and Jaddah.
Growing investment flows in 2015 are likely to have a positive medium-term effect on the market as new projects, especially in the office and retail segment are being initiated.