VAT hike in Saudi prompts housing market to move towards rentals

The residential sector in Saudi Arabia is expected to see a shift towards the rental market, thanks to the tripling of VAT from July 1 to help the coronavirus-hit economy.

According to real estate advisory firm JLL, expected high levels of unemployment and a reprioritisation of household spending as a result of raising the VAT will make the rental market in the kingdom gain momentum.

“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,” Salbak said.

A quarterly report by JLL revealed that the residential market in Riyadh saw average sales prices in Q2 2020 rise 3.5 percent year-on-year (y-o-y), while average rental rates dropped 1 percent y-o-y.

In Jeddah, average sales prices for the residential market dropped 6 percent in Q2, while average rental rates fell 5 percent during the same period.

Short-to-mid-term delays in handover of projects currently under construction, as the higher VAT imposed is expected to increase the cost of residential developments and sale prices, which is likely to result in reduced demand and slower absorption according to the real estate advisory firm.

“To counter the impact, the Ministry of Housing has agreed to absorb the increased VAT for first time buyers of unit’s worth SAR 850K or less, in efforts to promote demand and the affordable housing segment of the market,” the report said.

Office market

In Riyadh, headline rents across office spaces (grade A and B) dropped 1 percent yoy in Q2 2020, while rents fell by 4 percent and 3 percent in Jeddah (grade A and B), the report revealed.

Retail market

Average rental rates across super regional malls and regional malls in Riyadh fell 1 percent and 5 percent respectively in Q2 2020. In Jeddah, average rental rates across super regional malls and regional malls dropped 9 percent and 16 percent respectively.

Hospitality market

Occupancy rates in Riyadh decreased to 57 percent in the year to May 2020, from 58 percent for the same period last year.

In Jeddah, occupancy levels dropped to 40 percent in the year to May 2020, compared to 53 percent for the same period last year.




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