19/06/2020 11:07 AST

After softening over the past few years, residential property prices in Saudi Arabia have started to show signs of recovery. In the first three months, real estate prices increased by 1.2% on average compared to last year, largely driven by 2.1% growth in residential property prices, according to leading property consultancy Cavendish Maxwell.

However, restrictions imposed towards the end of March have impacted economic activity and the recovery is likely to face headwinds until clarity emerges on the trajectory of the pandemic, stated Cavendish Maxwell in its recently released Saudi Arabia Property Market Report.

In Q1 2020 and when compared to residential real estate, the commercial sector recorded declines, falling 0.5 per cent from the same quarter a year ago. The government has recently eased investment laws and encouraged private industries to ramp up operations in the kingdom, it stated.

However, many local and international companies are now reviewing their real estate requirements and expansion plans in the region in light of the impact of the pandemic, especially on the office sector and working preferences, the report added.

Commenting on the report, Aditi Gouri, associate partner, strategic consulting and research at Cavendish Maxwell, said: "In H1, Saudi Arabia has had to reckon with the twin challenges of the Covid-19 pandemic and weak crude oil prices."

"The restrictions and travel bans have naturally affected sectors such as tourism, hospitality, retail and entertainment which are crucial to the kingdom’s diversification strategy. Whilst other sectors including real estate are also bracing for an impact, the government has announced a slew of stimulus measures to cushion the economy," she noted.

“However, the full effect of the various developments is yet to be fully ascertained, as is the effect of policy updates including the increase in VAT and suspension of the cost of living allowance, among others,” she added.

A mere six months after Saudi Arabia began offering e-visas and visas on arrival to citizens of 49 countries, inbound and outbound travel in the country stands suspended. Uncertainty surrounds the annual Haj pilgrimage in July/August, which typically attracts over 2.5 million pilgrims.

According to Saudi Arabia’s tourism minister, the sector could witness a decline of up to 45 per cent this year alone. The government has transformed hotels into quarantine centers to curb the spread of the virus, raising hope of some revenue generation for the hospitality industry.

Entertainment and retail are the other sectors that have been hardest hit by the restrictions from the pandemic. Since mid-March, Saudi Arabia has suspended events and concerts and closed cinema halls.

Saudi Arabia’s Gross Domestic Product (GDP) at current prices in 2019 was SR2.97 billion, slightly higher by 0.8 per cent from 2018. According to the International Monetary Fund, Saudi Arabia’s economy is forecast to contract 2.3 per cent in 2020 but bounce back in 2021, growing 2.9 per cent.

In recent years, foreign direct investment (FDI) flows to Saudi Arabia followed a downward trend due to lower oil prices. However, inflows have steadily recovered owing to economic diversification efforts, which have seen new projects launched outside the oil and gas sector, said the global property expert.

In 2019, FDI stood at SR17.1 million, rising 7.4 per cent from SR15.9 million in the same period the previous year. Cavendish Maxwell pointed out that whilst physical retail was struggling more than ever due to people staying home, some online businesses in the kingdom had reported exponential growth in order volumes and values.

The trend is concerning for brick-and-mortar establishments but bodes well for the kingdom’s broader goal to increase the proportion of online payments to 70 per cent by 2030, from the 2020 target of 28 per cent, it added.

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