Saudi Arabia is undergoing a rapid and exciting transformation: Why investors should take notice.
By: Ali Sajwani
The Kingdom of Saudi Arabia is undergoing a phenomenal social and economic transformation under the wise leadership of King Salman and Crown Prince Mohammad Bin Salman. In a bid to diversify its non-oil economy and attract FDI, the government has launched a series of initiatives, amongst which, the Saudi Vision 2030 stands as a blueprint for the future.
The all-encompassing strategic vision, which is designed to usher in long-term social and economic prosperity for the country, is already showing great results. During the recent G20 Summit, Saudi Arabia’s Minister of Investment Khalid al-Falih said that foreign direct investment to Saudi Arabia had risen 12% in the first half of 2020, compared with the same period last year. This is a great indicator of the confidence that foreign investors have in the Saudi market.
Saudi Arabia’s tourism industry is also growing, on the back of visa and policy reforms. As part of the first phase of its National Tourism Strategy, the Saudi government has launched a SAR 15 billion tourism fund, which aims to develop 38 sites across seven destinations by 2022. As part of Vision 2030, the Saudi government wants the industry to contribute to at least 10% of its total GDP, up from 3% currently. According to government projections, tourism is expected to generate SAR 138 billion for the country by 2023, with an annual 5.6% increase in the number of visitors by 2023. The government is also focusing on investing in domestic tourism, which is expected to hit 70.5 million visits by 2023, almost double the current estimate, according to Colliers International Group, a leading diversified professional services and investment Management Company.
By far, the country’s main source of tourism will continue to be religious tourism. Saudi Arabia, is home to the two holiest cities in the world’s fastest growing religion: Makkah and Madinah. According to the Pew Research Centre, the global Muslim population is expected to increase by 70% – from 1.8 billion in 2015 to nearly 3 billion in 2060. As performing a pilgrimage is a main pillar of the Muslim faith, religious tourism to the country has enormous potential.
To capitalise on these projections, the inaugural Makkah Economic Forum highlighted eight investment initiatives in the Hajj and Umrah sector worth over SAR 1 billion. For one project alone—the Makkah and Madinah historical sites development project—the government has set aside SAR 425 million in investment to renovate four historical sites in the two cities.
The Ministry of Hajj and Umrah has also launched several initiatives to encourage small to medium-sized businesses to invest in companies offering Umrah services and improve the private sector’s performance.
Tourism demand is expected to grow with the government working to increase its capacity to accommodate 30 million pilgrims annually by 2030. The government has put considerable effort and resources into ensuring that the required infrastructure is in place to support the influx of worshippers. This includes the Rou’a Al Haram Al Makki project, a 854,000 sq m, mixed-use development, as well as the Al Haramain High-Speed Railway, connecting Makkah and Madinah. These projects, along with the soft opening of the new King Abdulaziz International Airport in Jeddah, will help accommodate the growing number of tourists, as well as attract more investors in the future.
These investment and development plans have helped shape several hospitality projects in and around both these cities over the past few years. While the purchase of real estate property is restricted for foreign investors in the holy cities, the current pipeline of projects suggests that the real estate sector is poised for growth in the country, fuelled by demand in Makkah. The influx of religious tourists has also helped boost the performance of the retail sector with a multitude of retail stores and F&B shops opening up across the cities. This has, in turn, allowed the real estate sector to expand across a variety of segments. The long leasehold format, from a regulatory point of view, will prove to be key to the demand for real estate developers in the country.
Growing real estate sector
As economic activity picks up pace, Saudi Arabia’s real estate market is expected to follow suit, with the country’s capital and largest city, Riyadh, steadily growing. According to a Knight Frank report, residential real estate transactions rose 1.8% year-on-year in Riyadh during Q2 2020. Despite current economic challenges that Saudi Arabia is facing due to the global Covid-19 pandemic and the regional dip in oil prices, developers are expected to continue carrying out projects. In an effort to boost demand and recover costs, we will see the implementation of more attractive end-user incentives as well.
Considering the heightened economic activity in the country, demand for affordable housing is also on the rise. Another stated goal of Vision 2030 is to increase homeownership among Saudi nationals to 70 per cent over the next decade. The multiple and interconnected aspects of Saudi Arabia’s transformation makes for an ideal environment for investment in the country’s real estate and hospitality markets.
With initiatives such as the Sakani affordable housing programme, which is aimed at providing affordable homes for Saudi citizens via subsidised land plots and access to cheaper finance, transactions in Riyadh, and the country’s second largest city Jeddah, are expected to grow in the coming years.
Even the Saudi Real Estate Refinance Company (SRC), owned by the Public Investment Fund in Saudi Arabia, which was established to develop the housing finance market in the country, has purchased a portfolio of mortgages worth over SAR 3 billion in July 2020. The move aims to provide additional liquidity to the market, allowing for additional loans to be issued, to increase the home ownership rate across the Kingdom.
A promising future
Between 2019 and 2021, analysts expect 70,000 units to be added in Riyadh and 25,000 units in Jeddah. Prices are also beginning to stabilise in the two cities. Experts believe that a pickup in economic activity will cushion the price decline in these two cities, and we could see recovery in the medium and long-term. For those who invest in the real estate market now, the future promises long-term gains.
For investors, both individual and institutional, it is only natural to look to the Middle East’s largest economy for opportunities. DAMAC has already picked up on Saudi Arabia’s tremendous potential and has two projects under its belt in Saudi Arabia: Al Jawharah Tower in Jeddah and DAMAC Towers in Riyadh. We are looking to expand our presence in the country and are honoured to participate in its phenomenal and awe-inspiring transformation.
-Ali Sajwani is General Manager of DAMAC Properties