Demand in Saudi Arabia's housing market to move towards rentals as incomes tighten due to VAT hike

Thousands of new units to be delivered across Saudi Arabia in the second half, JLL report says

This picture taken on December 18, 2018 shows a view of skyscrapers in King Abdullah financial district (KAFD) in the Saudi capital Riyadh. (Photo by FAYEZ NURELDINE / AFP)

The residential sector in Saudi Arabia is expected to see increased demand for rental units in the short to mid-term as households in the kingdom face higher costs due to the rise in value added tax, according to JLL.

In May, Saudi Arabia tripled VAT from 5 per cent to 15 per cent to shore up the country’s finances that have been hit by low oil prices and the coronavirus pandemic. The move affected a wide range of sectors in the kingdom including real estate.

“A reprioritisation of household spending will continue, and we expect to see a shift towards the rental market as it becomes comparatively more attractive and cost competitive," Dana Salbak, head of Research for JLL MENA, said. "This could see performance trends reverse, whereby sale prices begin to slowdown and rental rates will pick up in the longer-term."

In order to soften the impact of a hike in VAT on the property market, the country's minister of housing agreed to absorb the tax increase for first time buyers on units worth 850,000 Saudi riyals or less (Dh832,000), in an effort to stimulate demand for affordable homes in the country.

During the second quarter of this year, average sale prices in Riyadh rose 3.5 per cent year-on-year, while average rental rates slid 1 per cent. In Jeddah, average sale prices and rental rates both fell, by 6 per cent and 5 per cent respectively. In Dammam, the average sale price rose 1.5 per cent and in Makkah, sale prices and rental rates dropped  2 per cent and 11 per cent, respectively.

“The increased VAT could also potentially drive land prices down from their current inflated levels. If developers are unable to buy land at current rates, the market would balance itself at lower levels of land pricing. Ironically, an increased tax could therefore actually benefit developers by reducing their overall cost of development,” Ms Salbak said.

Thousands of new units are expected to be delivered in the second half of this year across Saudi Arabia, according to the report. In Riyadh, 15,000 units will be delivered while in Jeddah and Makkah, the numbers are expected to be 8,000 and 6,000 respectively.

The retail market across the kingdom will also remain pressured due to the VAT increase and the suspension of public sector allowances. The entertainment market, however, is expected to grow, with demand exceeding the available supply.

Saudi Arabia's office sector also saw rental rates slip during the second quarter.

"Looking ahead, many corporates will be focusing on alternative ways to optimise and streamline workspaces to include a shift into smaller, fitted-out units, allowing for a reduction on capital expenditure, particularly in light of VAT," the report said.