Over the past few years Saudi Arabia has been gaining international attention for the measures it has taken to move the kingdom away from its dependency on oil and lay the foundations for a diversified economy. Considering the recent plummet in oil prices as a result of the devastating economic consequences caused by Covid-19, these initiatives could not have been more timely. One of the sectors that the government has focused on for its potential to drive new job opportunities, attract foreign investment and boost the quality of life for Saudis is real estate.
The potential for real estate growth in Saudi Arabia is vast. Its growing population and rapidly shifting demographics, boasting one of the highest youth populations in the world, has created a huge market of people with disposable income for new properties. The primarily young population is increasingly moving towards urbanisation in search of a better quality of life. What is more, as women increasingly gain financial independence and enter the labour market through government initiatives, real estate will benefit from higher household spending power.
Unfortunately, the rise of Covid-19 has largely put a strain on foreign investment in Saudi Arabian real estate as global economies struggle to deal with the financial stress caused by the pandemic. With foreign investment likely to remain relatively low until global economic conditions considerably improve, the Saudi government must in the meantime boost real estate growth internally.
The real task for the Saudi government will be financially juggling the historically low oil prices with the need to provide stimulus to the real estate sector. The economic setback caused by plummeting oil prices induced the government in July to introduce a 15% value added tax (VAT) on the cost of real estate transactions. The move proved problematic, as young people who constitute the main demographic in Saudi Arabia are struggling to find affordable housing in the kingdom. Most Saudis are unable to finance the large villas that abound across Saudi Arabia, and despite on-going cultural reforms, smaller household sizes and the growing demographic of young people, not much has changed in terms of housing supply. According to Knight Frank Middle East, over the past 50 years the Saudi population has grown by over 520% and the rate of urbanisation has increased from 49% to 84%. Moreover, 58% of Saudi citizens are below the age of 30.
In order to support the growing rate of urbanisation to boost economic growth across the kingdom, real estate needs to shift its priorities to meet this growing demand. Fortunately, the government recently decided to replace the 15% VAT on real estate transactions with its original rate of 5% VAT. The move will be pivotal to allowing the commercial and residential property sector to develop and revitalise the economy, putting affordable, quality housing within the reach of Saudi Arabia’s growing population. According to the housing minister, the new measure will help achieve the target of increasing home ownership among Saudis to 70% by 2030. In conjunction with the Ministry of Housing, the Kingdom of Saudi Arabia has also agreed to bear the cost of VAT for Saudi citizens purchasing their first house, up to a maximum value of SAR 850,000, which will further spur demand in the residential real estate sector.
Certainly, the benefits of supporting real estate growth stems far beyond simply providing affordable housing for the Saudi population. The pandemic has led unemployment levels in the kingdom to reach a record high of 15.4%, placing great strain on the government to introduce economic measures to fight this surge. Boosting the real estate market and the private sector more broadly will be instrumental to creating more job opportunities for the Saudi population, ultimately allowing for a streamlined recovery from the Covid-19 economic crisis.
Despite the economic challenges Saudi Arabia is facing with the pandemic, Saudi Vision 2030 must not be put on hold. Working towards the Saudi Vision 2030 target of diversifying the economy to stimulate growth and create new employment opportunities must exist hand in hand with the government’s economic measures to fight the pandemic. The more focus the kingdom places on boosting real estate growth internally, the more likely it is that Saudi Arabia will see an increase in foreign investment in the near future, allowing Saudi Arabia to continue to be a key global economic player in the aftermath of the pandemic.
