Growth but challenges ahead for Saudi real estate sector

The King Abdullah Financial District in Riyadh. (Getty)
Updated 04 May 2018
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Growth but challenges ahead for Saudi real estate sector

  • Signs that market is bottoming out after two years of falling prices
  • Riyadh commercial property sector to feel the impact of King Abdullah Financial District

RIYADH: The Saudi Arabian property market has been through two years of change and adjustment, and now looks set for growth — but there are significant challenges in both commercial and residential real estate in the Kingdom.

That was the verdict of property professionals at the Euromoney conference in Riyadh, where experts discussed the sector and its finances at a gathering that could best be described as “mixed” in its outlook.
“The opportunities are humongous,” said Abdulrahman Bajunaid, chief executive of RAFAL Real Estate, referring to the boost the sector is set to get from a mixture of government stimulus, economic growth and demographic pressure.
Not everyone agreed, especially on commercial property. “Maybe the real solution is to change all the office space in central and south Riyadh to residential,” said Ziad El-Chaar, chief executive of Dar Al-Arkan, Saudi Arabia’s biggest listed developer, about the capital’s variable conditions.
But there was general agreement that overall the market was on the up. Imad Damrah, managing director of the KSA branch of Colliers International, said that after a period of volatile real estate prices in the economic slow-down caused by falling oil prices, “people have adjusted to the new realities.” He was hopeful that growth would resume.
It has been an unpredictable few years for developers, financiers, investors and buyers. In residential, consultant Knight Frank said that some apartment prices in the best parts of Riyadh leapt by 36 percent last year, but villa prices were 5 percent down. In Jeddah and the Eastern Province overall price falls were well into double digits.
“A common trend witnessed in sales prices across key cities is that apartment prices have been less affected than villa prices as a result of a shift in demand from villas to apartments due to affordability constraints,” said Raya Majdalani, research manager at Knight Frank, in a recent report.
But data from the General Authority of Statistics suggests that residential real estate prices have flattened in recent quarters, perhaps an indication that the market has bottomed out and may be close to stabilizing.
Colliers believes that the evolution of the market was also being seen in commercial and office property. “This is evidenced by the recent entrance of themed office parks and the announcement of a forthcoming supply of integrated mixed-use developments across major cities,” its latest review said.
The capital’s commercial sector is also facing another major challenge, with the new space that will come on the market as a result of the accelerated development of the King Abdullah Financial District, just outside the center of Riyadh. Some estimate that it will double the amount of commercial and office space on offer to big banks and other financial institutions.
The other factor influencing real estate trends in the Kingdom is the growth in the real estate investment trust (REIT) sector. REITs are booming, with several listing on the Tadawul recently, with more on the way.
“REITs are a big factor, allowing developers and investors access to funds in the money markets,” said
El-Chaar. Bajunaid, of RAFAL, was even more positive. “I love REITs. They make me feel alive,” he said.
But others warned about the long-term prospects for the REITs boom. “It all depends on the underlying quality of the transactions beneath the REIT,” said Abdullah Al-Sudairy, chief executive of property finance company Amlak International.
There were particular challenges attached to residential property, according to El-Chaar. He calculated that the amount of new-build by corporate developers over the past 10 years amounted to no more than 5 percent of the total, with the unregulated self-build market by far the biggest force in new housing.
“We have got to have restrictions on self-build. It is impossible to compete with such an unregulated market,” El-Chaar said.
The drive toward entertainment and leisure as part of the Vision 2030 strategy is also a trend affecting property developers and architects. “All malls are being transformed into entertainment hubs. People will not be shopping at malls in such large numbers in the future with the growth of online retailing, so malls will have to become like the town center or the village square,” said El-Chaar.
Al-Sudairy thought there were more fundamental factors at work. “The main problem is demand, through the pressures of jobs and income. We cannot build houses if people cannot afford them, and we cannot build malls if people cannot afford to shop.”
Not everyone agreed, especially on commercial property. “Maybe the real solution is to change all the office space in central and south Riyadh to residential,” said Ziad El-Chaar, chief executive of Dar Al Arkan, Saudi Arabia’s biggest listed developer, about the capital’s variable conditions.
But there was general agreement that overall the market was on the up. Imad Damrah, managing director of the KSA branch of Colliers International, said that, after a period of volatile real estate prices in the economic slow-down caused by falling oil prices: “People have adjusted to the new realities.” He was hopeful that growth would be resumed.
It has been an unpredictable time for developers, financiers, investors and buyers. In residential, consultant Knight Frank said that some apartment prices in the best parts of Riyadh leapt by 36 percent last year, but villa prices were 5 percent down. In Jeddah and the Eastern Province overall price falls were well into double digits.
“A common trend witnessed in sales prices across key cities is that apartment prices have been less affected than villa prices as a result of a shift in demand from villas to apartments due to affordability constraints,” said Raya Majdalani, research manager at Knight Frank, said in a recent report.
But data from the General Authority of Statistics suggests that residential real estate prices have flattened in recent quarters, perhaps an indication that the market has bottomed out and may be close to stabilising.
Colliers believes that the evolution of the market was also being seen in commercial and office property. “This is evidenced by the recent entrance of themed office parks and the announcement of a forthcoming supply of integrated mixed-use developments across major cities,” its latest review said.
The capital’s commercial sector is also facing another major challenge, with the new space that will come on the market as a result of the accelerated development of the King Abdullah Financial District, just outside the the center of Riyadh. Some estimate that it will double the amount of commercial and office space on offer to big banks and other financial institutions.
The other factor influencing real estate trends in the Kingdom is the growth in the real estate investment trust (REIT) sector. REITs are booming, with several listing on the Tadawul recently, and more planned.
“REITs are a big factor, allowing developers and investors access to funds in the money markets,” said El-Chaar. Bajunaid of RAFAL was even more positive. “I love REITs. They make me feel alive,” he said.
But others warned on the long term prospects for the REITs boom. “It all depends on the underlying quality of the transactions beneath the REIT,” said Abdullah-Al Sudairy, chief executive of property finance company Amlak International.
There were particular challenges attached to residential property, according to El-Chaar. He calculated that the amount of new build by corporate developers over the past ten years amounted to no more than 5 percent of the total, with the unregulated self-build market by far the biggest force in new housing.
“We have got to have restrictions on self-build. It is impossible to compete with such an unregulated market,” El-Chaar said.
The drive toward entertainment and leisure as part of the Vision 2030 strategy is also a trend affecting property developers and architects. “All malls are being transformed into entertainment hubs. People will not be shopping at malls in such large numbers in the future with the growth of online retailing, so malls will have to become like the town center or the village square,” said El-Chaar.
Al-Sudairy thought there were more fundamental factors at work. “The main problem is demand, through the pressures of jobs and income. We cannot build houses if people cannot afford them, and we cannot build malls if people cannot afford to shop.”


US says conserving oil is no longer an economic imperative

Updated 19 August 2018
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US says conserving oil is no longer an economic imperative

  • Fears of oil scarcity no longer driver of US energy policy
  • Surging shale production brings energy abundance

WASHINGTON: Conserving oil is no longer an economic imperative for the US, the Trump administration declares in a major new policy statement that threatens to undermine decades of government campaigns for gas-thrifty cars and other conservation programs.
The position was outlined in a memo released last month in support of the administration’s proposal to relax fuel mileage standards. The government released the memo online this month without fanfare.
Growth of natural gas and other alternatives to petroleum has reduced the need for imported oil, which “in turn affects the need of the nation to conserve energy,” the Energy Department said. It also cites the now decade-old fracking revolution that has unlocked US shale oil reserves, giving “the United States more flexibility than in the past to use our oil resources with less concern.”
With the memo, the administration is formally challenging old justifications for conservation — even congressionally prescribed ones, as with the mileage standards. The memo made no mention of climate change. Transportation is the single largest source of climate-changing emissions.
President Donald Trump has questioned the existence of climate change, embraced the notion of “energy dominance” as a national goal, and called for easing what he calls burdensome regulation of oil, gas and coal, including repealing the Obama Clean Power Plan.
Despite the increased oil supplies, the administration continues to believe in the need to “use energy wisely,” the Energy Department said, without elaboration. Department spokesmen did not respond Friday to questions about that statement.
Reaction was quick.
“It’s like saying, ‘I’m a big old fat guy, and food prices have dropped — it’s time to start eating again,’” said Tom Kloza, longtime oil analyst with the Maryland-based Oil Price Information Service.
“If you look at it from the other end, if you do believe that fossil fuels do some sort of damage to the atmosphere ... you come up with a different viewpoint,” Kloza said. “There’s a downside to living large.”
Climate change is a “clear and present and increasing danger,” said Sean Donahue, a lawyer for the Environmental Defense Fund.
In a big way, the Energy Department statement just acknowledges the world’s vastly changed reality when it comes to oil.
Just 10 years ago, in summer 2008, oil prices were peaking at $147 a barrel and pummeling the global economy. OPEC was enjoying a massive transfer of wealth, from countries dependent on imported oil. Prices now are about $65.
Today, the US is vying with Russia for the title of top world oil producer. US oil production hit an all-time high this summer, aided by the technological leaps of horizontal drilling and hydraulic fracturing.
How much the US economy is hooked up to the gas pump, and vice versa, plays into any number of policy considerations, not just economic or environmental ones, but military and geopolitical ones, said John Graham, a former official in the George W. Bush administration, now dean of the School of Public and Environmental Affairs at Indiana University.
“Our ability to play that role as a leader in the world is stronger when we are the strongest producer of oil and gas,” Graham said. “But there are still reasons to want to reduce the amount we consume.”
Current administration proposals include one that would freeze mileage standards for cars and light trucks after 2020, instead of continuing to make them tougher.
The proposal eventually would increase US oil consumption by 500,000 barrels a day, the administration says. While Trump officials say the freeze would improve highway safety, documents released this month showed senior Environmental Protection Agency staffers calculate the administration’s move would actually increase highway deaths.
“American businesses, consumers and our environment are all the losers under his plan,” said Sen. Tom Carper, a Delaware Democrat. “The only clear winner is the oil industry. It’s not hard to see whose side President Trump is on.”
Administration support has been tepid to null on some other long-running government programs for alternatives to gas-powered cars.
Bill Wehrum, assistant administration of the EPA’s Office of Air and Radiation, spoke dismissively of electric cars — a young industry supported financially by the federal government and many states — this month in a call with reporters announcing the mileage freeze proposal.
“People just don’t want to buy them,” the EPA official said.
Oil and gas interests are campaigning for changes in government conservation efforts on mileage standards, biofuels and electric cars.
In June, for instance, the American Petroleum Institute and other industries wrote eight governors, promoting the dominance of the internal-combustion engine and questioning their states’ incentives to consumers for electric cars.
Surging US and gas production has brought on “energy security and abundance,” Frank Macchiarola, a group director of the American Petroleum Institute trade association, told reporters this week, in a telephone call dedicated to urging scrapping or overhauling of one US program for biofuels.
Fears of oil scarcity used to be a driver of US energy policy, Macchiarola said.
Thanks partly to increased production, “that pillar has really been rendered essentially moot,” he said.