After witnessing a marginal growth in 2014, the Saudi Arabia's real estate prices have fallen to new lows for the past eight consecutive quarters due to weakness in the residential sector, mainly plots and apartments, said a report.

In the case of commercial sector, prices dropped at the aggregate level due to sharp decline in prices of plots, whereas prices of building and commercial centres inched up during the past two years indicating continued demand for income generating commercial assets, according to Saudi General Authority for Statistics.

On a regional basis, Al Baha, Riyadh and Makkah regions saw the sharpest fall in real estate prices since 2014, stated the Authority after releasing a comprehensive price index for the kingdom’s real estate sector calculated based on the data provided by the Ministry of Justice.

Launching such a real estate price index will provide investors with one of the key inputs required while making investment decisions in the sector, it added.

The decision also supports the government’s stated objectives in Vision 2030 and NTP documents to increase the contribution of real estate sector to the overall GDP of the kingdom going forward by attracting more private sector investments, said the Authority.

The index is launched with the base year as 2014 and further classified in to three main sectors namely residential, commercial and agriculture with 65 per cent, 31 per cent and 4 per cent weights respectively at the aggregate level.
Each of the sub-sectors are further split it into various relevant categories such as plot, building etc, it added.

The real estate sector is one of the key sectors in the kingdom’s transformative vision 2030 and NTP plans. The government targets to increase the real estate sector’s contribution to the kingdom’s GDP to 10 per cent by 2020 from the current 5 per cent.

To achieve this, the sector’s growth rate is also targeted to be increased to 7 per cent p.a. from current 4 per cent, suggesting that the government is keen on attracting more investments into the sector and take steps to improve the sector’s efficiency, according to the Authority.

For example, the average time taken to approve and licence new residential real estate development projects is planned to be reduced from 730 days to just 60 days.

In order to increase the availability of capital, the government targets to increase the percentage of real estate financing to non-oil GDP from current 8 per cent to 15 per cent by 2020, it stated.

To achieve its target of boosting the real estate sector’s growth, the government has announced a number of reforms. These include:

*100 per cent FDI in retail sector: The government allowed 100 per cent foreign ownership in the retail sector in 2015. The move will allow foreign companies to directly set up a retail business in the kingdom without the need for a local partner, which was required earlier.

*Creation of real estate price index: To improve the transparency of the real estate sector, it was announced that the General Authority for Statistics would calculate and publish a real estate price index based on the data provided by the Ministry of Justice. This initiative provides much needed data for the institutional investors in the real estate market and enhances transparency.

*Introduction of REITs: The listing of real estate investment trusts (REITs) by the CMA is another reform, which opened a new asset class for retail investors by providing easier access and also provided real estate developers and managers with an alternate funding option. With this move, REITs will allow retail investors to acquire a share in a diversified portfolio of properties, which was only accessible to qualified investors earlier.

*Higher LTV: Saudi Arabian Monetary Agency (Sama) increased the maximum loan-to-value ratio (LTV) from 70 per cent to 85 per cent in March 2016 for residential real estate finance provided by real estate financing companies. Early this year, Sama made this applicable to all home financing (including banks) provided for citizen’s first homes.

*Contract banks to manage both the existing and new real estate development fund (REDF) portfolio: The Ministry of Housing and REDF are working closely with Saudi Banks and Real Estate Finance Companies to develop and
explore various funding schemes.

*Complement mortgage reform by establishing a housing market observatory: Sama is co-ordinating with related government entities to facilitate collection and publication of housing market data.

Sama has also issued the consumer protection principles for banking and insurance, emphasizing fair treatment, honesty, and financial inclusiveness. A draft Consumer Protection Principles for finance companies is also under public consultation.

*Prepare long-term funding solution for mortgage finance, starting with a refinance facility: Public Investment Fund (PIF) is in the process of establishing the Saudi Real Estate Refinance Company (fully owned by PIF and supervised by Sama), which is expected to provide long-term funding solutions for mortgage finance.

According to the Authority, the approval of the white land tax further will encourage landowners to develop their idle lands, while the launch of Real Estate Investment Traded funds will boost funding for the sector and increase institutionalisation of the real estate market in Saudi Arabia.

The proposed land tax is also expected to increase the availability of land for developments while putting further pressure on land prices, which in turn will increase the affordability of social housing, which is also a key target for the government, it stated in the index.

The budget 2017 has allocated a significant portion of the spending on education, healthcare and social development sectors, which will continue to have a secondary impact on the real estate sector, it added.-TradeArabia News Service