RESEARCH

SAUDI ARABIA MARKET REVIEW & FORECAST 2019

THE ANNUAL REVIEW AND FORECAST OF THE SAUDI ARABIAN REAL ESTATE MARKET RESEARCH MARKET REVIEW & FORECAST 2019

Key findings Looking at the real estate market performance in 2018, the general trend for Saudi Arabia is that most sectors have remained subdued GDP growth is set to remain on a positive trajectory averaging 2.2% over as highlighted by lower activity levels, while occupancy rates have the next five years according to the IMF been under pressure across most asset classes leading to a gradual latest estimates. softening of rental and sale prices.

The REIT market continued expanding While we see this current situation in 2018 and now exceeds USD 3 billion prevailing in the short term, we remain Macroeconomic in market capitalization. The pace of optimistic for the longer term due to the listings is set to moderate in 2019 as Overview various government initiatives aimed at indicated by the current pipeline. stimulating the real estate market whilst 2018 overview encouraging the private sector to take Key prime office schemes continued Following a deceleration in 2017, a key role in this process, as part of the to outperform the market average in Saudi Arabia’s GDP growth began to recently introduced strategic reforms. 2018 as a result of a lack of high quality recover in the first quarter of 2018. It is stock. As new schemes are released The approval of regulations for the use estimated to have reached 2.2% in 2018 into the market this trend is unlikely to and listing of REITs in Saudi Arabia is a according to the IMF latest estimates persist over the long term. case in point, as it signals an important and is set to further accelerate, reaching step in the government’s drive to boost 2.3% in 2019. The return to growth has Downward pressures have continued to private sector participation in the sector been underpinned by a combination of weigh on the residential market in 2018, and increase transparency in real estate favourable factors including a rebound in impacting activity levels and prices. markets where visibility around asset oil prices, a gradual acceleration in the Government initiatives are a step in the performance, ownership and legislation growth of the non-oil economy and the right direction for a more active market are key to attracting capital to the sector. government’s shift away from a tight fiscal over the coming years. policy as announced in the 2018 and Moreover, the implementation of various 2019 budgets. The Purchasing Manager urban regeneration initiatives including Despite pressures on the performance Index (PMI), a non-oil economy tracker, mixed-use communities and large- of many hospitality markets within the stood at 55.2 in November 2018, which is scale infrastructure projects is expected Kingdom in recent years, we expect well above the neutral 50 level indicating to act as a catalyst for the real estate to see a recovery in the short to an expansion in the non-oil sector and a market. The Metro is one of medium term, as diversification efforts, significant recovery of the index from its infrastructure projects and tourism the key infrastructure projects that is lowest level on record registered in April initiatives come online. being implemented and which is set to 2018 (51.4). Nevertheless, the indicator dramatically alter the dynamics of both remains low by historical standards residential and commercial real estate despite the rebound in oil prices this year. markets when delivered.

FIGURE 1 Key macroeconomic indicators

4% 120

3% 100 RAYA MAJDALANI 2% 80 Research Manager 1% 0% 60

“Despite the ongoing slowdown -1% 40 in the real estate market, -2% 20 we remain optimistic for the -3%

longer term due to the various -4% 0 government initiatives aimed at 2017 2017 2018 6/2018 7/2018 8/2018 9/2018 2018 (F) 2019 (F) 2018 (F) 2019 (F) 2019 (F) 2020 (F) stimulating the market.” 11/2014 11/2015 11/2016 11/2017 11/2018 10/2018 11/2018

GDP NON-OIL GDP EMPLOYMENT OIL PRICES, KSA PURCHASING Y-o-Y % Y-o-Y % Y-o-Y % IN USD MANAGER’S INDEX CHANGE CHANGE CHANGE (RHS) (RHS)

Please refer to the important notice at the end of this report. Source: Knight Frank Research, IMF, Macrobond, Oxford Economics SAUDI ARABIA MARKET REVIEW & FORECAST 2019

Outlook Looking at the asset allocation of existing FIGURE 2 REITs, the vast majority of REITS have Saudi REITs classified by investment GDP growth is expected to remain on their investments spread across multiple approach, Q4 2018 a positive trajectory over the coming real estate asset classes, which is in part years, averaging 2.2% over the next five due to a lack of maturity in the market years according to the IMF estimates. and a constrained pipeline of institutional Diversified Thematic Generally, the outlook and sentiment for grade assets. Looking at market Saudi Arabia’s economy remain cautiously performance, we noted in our previous positive and the recovery in economic Q1 18 review the fact that most REITs growth that occurred in 2018 is yet to had already pared back early gains and 81% 19% translate into a substantial improvement in were trading below listing price. During economic conditions. 2018*, price moderation continued as Employment growth is forecast to remain highlighted by the REIT index dropping Source: Knight Frank Research, supported by the various initiatives aimed by approximately 30% in the context at boosting youth, women and Saudi of a weakening real estate backdrop translating into a drop in the real estate nationals’ participation in the workforce. FIGURE 3 index on the Tadawul by just over 20%. In the short term, this will be balanced 2018 yearly performance: On a positive note, the Tadawul all share by rising pressures on the expat labour REITs index vs. real estate index vs. index was up by almost 10% pointing market resulting from the impact of Tadawul all share index* government fees and Saudization plans to healthy gains for the full year 2018, on non-Saudi employment figures. supported by a buoy investor sentiment driven by the expected inclusion in the Tadawul In line with the Vision 2030 and the MSCI and FTSE Russel EM indices National Transformation Plan (NTP), and by the overall improvement in the restructuring of the economy to macroeconomic conditions in 2018. Real estate index decrease the Kingdom’s reliance on the hydrocarbon sector and to support stronger non-oil growth looks set to Outlook REITs index remain a central element of economic In 2019, we expect the pace of REITs policy over the coming years, yet this listings to moderate as indicated by 0% 5% -5% is likely to be a gradual process, which 10% 15% fewer numbers of approved REITs in -35% -30% -25% -20% -15% -10% requires some time to come into effect. the pipeline. Going forward, the greater *Note: 2018 variation calculated as at 09/12/2018 choice of available REITs is likely to drive Source: Knight Frank Research, Tadawul prices towards fundamental valuations, REITs in Focus as investors increase their focus on 2018 overview fundamentals including income generation Since our last review in May 2018, and dividend yields as more performance the REIT market in Saudi Arabia has information becomes available. This will continued to expand and now surpasses be particularly important for investors USD 3 billion in terms of market looking to adopt a longer term investment “In 2018, the REIT market capitalization, compared to just over approach. With an increase in the number in Saudi Arabia has USD 2 billion in Q1 2018. Four additional of listed REITs, we expect the level of competition to increase in the market, continued to expand and REITs were listed on the market, taking now surpasses USD 3 up the total number of listed REITs on which would translate into a greater billion in terms of market the Tadawul to 16 at the date of writing focus on the adoption of best-in-class compared to 12 at the end of Q1 18. practices in terms of quality of the capitalization.” From a regulatory perspective, the underlying portfolio, asset management Saudi Arabian Capital Market Authority and corporate governance. Moreover, (CMA) has recently approved a number it is likely that we will start seeing the of amendments to initial regulations emergence of more thematic REITs as governing REITs, including the increase in the market gains in maturity enabling the minimum capital requirement for new investors to gain exposure to specific real funds from SAR 100 million to SAR 500 estate sectors. million. A strong and evolving regulatory framework, which has proven to be favourable in more mature jurisdictions, will remain a key objective in the development of the REIT market in Saudi Arabia.

*Note: 2018 variation calculated as at 09/12/2018 SAUDI ARABIA MARKET REVIEW & FORECAST 2019

FIGURE 4 landlords to continue offering incentives Grade A - Q4 2018 performance Office Market in order to maintain occupancy levels indicators and 12-month outlook 2018 overview amid an increasingly competitive market. Longer term, we see demand for office

2,000 Whilst there have been a number of space picking up from current levels as notable commercial office transactions economic reforms under the National RIYADH 1,500 throughout 2018, as key occupiers both Transformation Plan (NTP) and Vision from the public and private sector look to 2030 start feeding through the wider 1,000 expand or move to upgraded premises, economy, translating into an acceleration

DAMMAM the market continues to be dominated by of growth in the non-oil private sector. 500 a lack of Grade A stock and a large supply Moreover, the implementation of various Rental rates (SAR/ sq m) pipeline. In terms of performance, market urban regeneration initiatives including 0 wide rents and occupancy levels have mixed-use communities and large-scale

0% 5% been under pressure since 2016, with the infrastructure projects, is expected to act 10% 15% 20% 25% 30% trend continuing into 2018 amid increasing as a catalyst for the real estate market. Vacancy rates levels of supply and subdued occupier Furthermore, it is expected that the demand. Key prime schemes continued planned wave of privatisation will boost 12-month outlook Stable to perform better than the market average investment and foster growth in the as a result of a lack of high quality stock. business environment creating favourable Source: Knight Frank Research However as new schemes are released conditions for the office sector. into the market this trend is unlikely to persist over the long term. Against FIGURE 5 the backdrop of a highly elastic supply Residential Market Grade B - Q4 2018 performance dynamic, we see rents for Grade B 2018 overview indicators and 12-month outlook assets softening further in the short term The residential market has for some time where buildings that suffer from poor been softening as highlighted by lower 2,000 accessibility and parking arrangements levels of transactions and a correction in will struggle for occupancy. 1,500 sales prices across major cities in Saudi Arabia. This trend was mainly triggered RIYADH 1,000 Outlook by the deceleration in economic activity JEDDAH that started in 2016 and is exacerbated Although we have seen an improvement 500 by a combination of more inherent factors

Rental rates (SAR/ sq m) & in business sentiment in 2018, we believe namely the lack of affordability, a supply KHOBAR 0 that any increase in demand for office shortage in the mid-to-low end of the space will remain subdued in the short market as well as the lack of suitability of 0% 10% 20% 30% 40% term, with rents and occupancy likely the existing stock. The slowdown in the Vacancy rates to remain under pressure as increased residential market continued in 2018 as demand will be met with new supply. highlighted by lower transaction volumes Vacancy rates can therefore be expected 12-month outlook Falling and prices. to rise, placing downward pressure on rents. In this context, we expect Source: Knight Frank Research

FIGURE 6 FIGURE 7 Supply of office space, sq m GLA Policy impacts on the office market

3,517,172 288,181 124,363 Short-term Long-term Riyadh 11%

1,164,386 171,832 142,500 Levies on Urban Jeddah 10% 2018 supply estimate expatriates regeneration

1,085,921 107,389 75,000 2019 addition estimate Eastern Province 6% 2020 addition estimate Looser fiscal Economic historic growth in supply policy reforms 5-year CAGR

Source: Knight Frank Research Source: Knight Frank Research SAUDI ARABIA MARKET REVIEW & FORECAST 2019

Outlook FIGURE 8 Residential price indices in Saudi Arabia and key regions While we see this current market conditions prevailing in the short term, we remain broadly positive as a result of 105 Saudi Arabia Riyadh Region government initiatives looking to address key challenges restraining the residential 100 Makkah Province Eastern Province sector in Saudi Arabia including high land 95 prices, supply/demand imbalances and affordability among others. Regulatory 90 efforts such as the white land tax, the large housing schemes and the 85 mortgage law, display clear intent from the government to engage with the 80 issues facing the residential market in the kingdom. While efforts are slowly filtering Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 through, we see these initiatives as a step in the right direction for a more active real *Note: base year = 2014 estate market over the coming years. Source: Knight Frank Research, GASTAT Hospitality Market FIGURE 9 2018 overview Supply of residential units In line with the wider region, the performance of the hospitality sector in 1,215,274 30,921 18,740 Riyadh and the Dammam Metropolitan Riyadh 6% area (DMA) within the Kingdom of Saudi 2018 supply estimate Arabia continued to soften in 2018. A 829,404 7,098 9,125 2019 addition estimate fall in corporate demand was widely Jeddah 2% cited as the primary issue in both Riyadh 2020 addition estimate and the DMA, although in the latter of 322,164 7,054 5,628 historic growth in supply 5-year CAGR the two markets, leisure demand also Eastern 4% Province became more price sensitive. In DMA, the vast majority of corporate demand is inexorably linked to the hydrocarbon Source: Knight Frank Research sector (which has faced its own challenges in recent years), which, against the backdrop of recent hotel supply FIGURE 10 deliveries, has created a challenging Existing and upcoming quality hotel establishment supply operating environment. Over the last year, the Fraser Suites and Fairmont Business Gate came to market in Riyadh, while RIYADH CITY the Hilton Garden Inn and Park Inn by 14,042 existing quality hotel rooms establishment supply Radisson Industrial City opened in DMA. (number of rooms) % increase in By contrast, Jeddah’s hotel market supply until 2021 saw a return to form in 2018, after two years of weak performance correlated to significant supply deliveries in 2016. Strong performance during the summer DMA* months saw this situation reversed, 53% 7,258 with the city once again exhibiting YTD rooms RevPAR growth as of November. Hotels 54% that came to market during this period JEDDAH included the Centro Salama, Radisson 94% 10,167 Blu Corniche, Galleria Hotel by Elaf, and rooms Mövenpick Hotel and Hotel Apartments Al Tahlia.

*Note: Dammam Metropolitan Area Source: Knight Frank Research, STR KINGDOM OF SAUDI ARABIA Outlook Stefan Burch, MRICS Partner Despite the recent downward pressure in RevPAR levels in many markets within the +966 53 0893 297 Kingdom in recent years, we expect the hospitality sector to recover in the short to [email protected] medium term, as various diversification efforts, infrastructure projects and tourism Saud Sulaymani initiatives come online. As always, there is the spectre of a significant supply pipeline; Partner, Saudi Arabia +966 55 883 8883 however, historical precedent indicates that there is typically a low materialisation rate [email protected] within the Kingdom, which will smooth out this impact. DEVELOPMENT CONSULTANCY From the perspective of creating a viable destination, the development of megaprojects & RESEARCH Neill Nagib such as the Red Sea Project, Amaala and Al Qiddiyah will be a great barometer of how Associate Partner, Saudi Arabia successfully the government can create a viable leisure-based destination capable of +966 50 055 6308 [email protected] attracting inbound visitation. From a legislative perspective, the introduction of the tourist visa, but more specifically the implementation of the ‘Sharek visa’ is a positive step Raya Majdalani Research Manager toward having the correct legislative framework with which to make this happen. +971 56 4206 735 [email protected]

HOSPITALITY & LEISURE FIGURE 11 Ali Manzoor Partner KPI’s YoY performance in key hospitality markets +971 56 4202 314 [email protected]

11% VALUATION & ADVISORY Stephen Flanagan, MRICS 8% Partner +971 50 8133 402 [email protected] 1% 1% 0% 0% OCCUPIER SERVICES & COMMERCIAL AGENCY -1% Matthew Dadd, MRICS -3% Partner +971 56 6146 087 -7% -7% -8% -8% -8% [email protected] -9% -9% -10% -11% CAPITAL MARKETS / INVESTMENT Joseph Morris, MRICS Partner -15% +971 50 5036 351 [email protected] Riyadh Jeddah DMA Riyadh Jeddah DMA 2017 2017 2017 11M 2018 11M 2018 11M 2018 MEDIA & MARKETING Nicola Milton Head of Marketing +971 56 6116 368 [email protected] *Note: percentage point OCC % (*) ADR RevPAR Source: Knight Frank Research, STR

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