The Impact of 2030 Vision on Commercial Real Estate Sector in Saudi Arabia - Literature Review Draft
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This literature review draft focuses on the impact of Saudi Vision 2030 on the real estate industry of Saudi Arabia. It discusses the challenges, revival, and future of the real estate market in the country.
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1 THE IMPACT OF 2030 VISION ON COMMERCIAL REAL ESTATE SECTOR IN SAUDI ARABIA Literature Review Draft
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2 Table of Contents Literature Review............................................................................................................................3 Challenges of the real estate market............................................................................................3 Revival of the real estate market.................................................................................................4 Impact of Saudi Vision................................................................................................................5 Future of the real estate market...................................................................................................6 Research Gap...................................................................................................................................7 Reference List..................................................................................................................................8
3 Literature Review Nurunnabi (2017) says that, Saudi Arabia, for gaining sustainability it has developed a vision of diversifying its economy. Although oil and gas are the economy’s pillars, the country has also started with expansion in its investment for the other sectors as well. In order to overcome the issues which might arise in the path of Saudi towards achievement of sustainability, it has established certain long-term plans. In the past 25 years, the country has seen an annual growth of more than 4 per cent, according toArab News (2018). Saudi possesses several state-owned assets which include aspects such as the properties, other assets and the leading companies of the country. These state-owned assets are rapidly getting privatized. Due to such privatization, the revenues of the country would be benefitted with greater levels of diversification. It would also assist in stabilizing its financial resources as well as the economy itself. These financial resources are utilized by re-investing them in the long run. Nurunnabi (2017), in his work talks about the future plans of Saudi Arabia. The country aims at increasing its overall returns on investment and the efficiency of its funds management, which would subsequently enable the diversification of its government resources and the economy. Instead of competing with the private sector, the public sector’s private fund would rather help in opening the sectors that demands huge amount of capital. As such, National corporations would be developed and new sectors of the economy would be established. This assessment has been carried out particularly for focusing upon the real estate sector of the country, Saudi Arabia, and affect of Saudi Vision 2030 on the real estate industry of the country. The challenges and issues that the country has been facing throughout its journey of moving towards being sustainable, have also been discussed. Challenges of the real estate market Saudi Arabia planned for occupier expansion in 2017, which continued to get weighed upon due toeconomicuncertainties.ThisespeciallyhappenedinRiyadhwheretheGovernment organizations remained to be the primary occupier of office spaces. The tight market liquidity which was triggered by the decrease in the oil prices attributes the flat and dull performances (Arab News, 2018). This was further inflamed by the combination of further intrinsic factors such as limited access to funds and deficiency of affordability. The factors also included a
4 suitability shortage of the old stocks of residential units and a downfall in the mid or low end market supply. Despite the flat lining and cuts of the real estate market, the Government of Saudi Arabia has been pushing certain new initiatives under its Vision 2030. The state-owned housing funds of the Saudi Government were converted into a domestic lender, in order to assist in increasing the house ownership and complement the new funding. The domestic lender, known as the Real Estate Development Fund (REDF) was assigned with the task to offer financial solutions for mortgage issues that are cost-competitive for the resident who were in concurrence with the private sector. Ramady (2010) suggests that despite the flat lining and cuts of the real estate market, the Government of Saudi Arabia has been pushing certain new initiatives under its Vision 2030. The reform of sector that is penetrating with uncertainties would be difficult. The average amount of time needed for approving and licensing the new projects of residential real estate is approximately 730 days, at the moment, as according to the authors, Assaf, Bubshaitr and Al- Muwasheer (2010). This average is far away from most of the standards. The Government’s plans of hitting its target of 60 days by the end of the year 2020 and simplifying the procedural and legal structures that surround the process of approval still remains to be a huge mystery. Even if such efficiencies are achieved miraculously, coping up with the occupancy acceleration resulting from them would not be easy at all.According to Al Buloushi, it would be very challenging to rent the built-up areas at significant prices and achieve reasonable rates of occupancy (Bonds & Loans, 2018).Most of the real estate projects of Saudi Arabia are funded and financially assisted by the local and regional banks. Susilawati and Al Surf (2011) suggest that the Public Investment Fund of the country supports all of these projects; however, in order to bring them to fulfillment, international liquidity will be required on an unparalleled scale. According to bankers, this in itself is a big issue due to several reasons, in spite of the refrain of banks securing licenses of investment banking in the economy. Revival of the real estate market Even though several drastic changes have been seen by the world in the year 2017, the changes taking place in Saudi Arabia, are one of the most shocking and unbelievable changes ever seen. These shifts became necessary after there was a huge downfall in the markets of both, real estate
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5 as well the petroleum. Being the second largest owner of oil reserves of the world, the Kingdom of Saudi Arabia (KSA) has been frugally dependent on the petroleum industry for a long period of time (Alshehry and Belloumi, 2015). This industry and that of the real estate have been the sole backbone of the economy of the country’s kingdom. The Saudi Arabian GDP is contributed by 30-40% by the oil industry which includes the other industries as well which are dependent upon the former (Callen, Cherif, Hasanov, Hegazy and Khandelwal, 2014). The primary for this was its society’s conservative nature as well as the kingdom’s prosperity and bounty of fossil fuels and natural resources. In comparison with its competitive neighbor countries, it was more difficult for Saudi Arabia to lure investors from various industries such as entertainment and tourism. The economy the country was hit hardest by the ruination of the oil prices that took place in the past two years. The primary cause for such a crisis was the discovery of huge reserves of oil and fossil fuels in other countries such as North Carolina of the USA. On the other hand, the slow and consistent shift of the world towards sources of clean and environmental friendly energy also contributed in such downfall of the oil prices. Saudi Arabia has plans to enter into long-term partnerships with the competitive neighbor nations. Such an action would help in enhancing the transfer of trade and knowledge as well (Alshuwaikhat and Mohammed, 2017). The country’s participation in leading companies and up to date technologies from around the world enabled it to seek maximization of its investment capabilities. Such actions and plans of the country would help it being a global leader of funds, investment and assets management and a market maker of several industries as well. Impact of Saudi Vision In the recent years, Saudi Arabia has faced numerous changes concerning their laws and social norms. Positive changes have been seen by the country out of lifting the driving ban on Saudi Arabian women is one of them. The biggest change has been witnessed due to the launch of Saudi Arabia Vision 2030 in 2017 by the Crown Prince Muhammad bin Salman (Kane, 2018). In the vision he mentioned about the launch of his mega project Neom City. This mega project is expected to be the first transnational city in Saudi Arabia (Alkhalisi, 2018). It was also mentioned during the launch that the Saudi Arabia Vision 2030 would help the Kingdom of Saudi Arabia to overcome the negative effects of the prevailing economic crisis (Vision 2030, 2018). The crisis was due to sudden shift of focus to developing the public services sector and
6 non-oil economic sector. The Saudi Arabian real market has been going through troubled waters of various changes and adjustments in the past two years but aiming to improve the conditions with the help of the Vision 2030. These changes have impacted the up and down of real estate market and people have now adjusted with these changes. However, growth in the cards as suggested by Kingdom of Saudi Arabia. The Vision 2030 has planned to drive its focus on the entertainment and leisure part. This strategy is affecting the architects and the property developers. The strategy would be to promote online retailing marketing rather than shopping at malls. The malls would be used to build the cities and areas for other purposes. This strategy was criticized as this would lead to losing of jobs and decrease in the purchasing power of the people in Saudi Arabia. The National Transformational Program 2020 was also launched by the Saudi Arabian Government which is a part of the Saudi Arabia Vision 2030. This will help meeting the target of uplifting the real estate sector before the year 2020 through various initiatives that are to be strategized. According the budget set by National Transformational Program 2020, a budget of 59 billion SAR has been finalized (Reardon, 2016). The fundamental plan is to increase the real estate sector contribution towards Gross Domestic Product from 5% to 10%. Saudi Arabia Vision 2030 also will establish fair partnership with the private sector developers in order to develop Government lands for prospective housing projects. The Vision 2030 also aims at establishing special packages for finance and fast-track licenses to encourage investment of private sectors in housing projects. The prime focus of the Vision 2030 is to uplift the housing sector whose expenses are on the higher side under the NTP. The housing development will be done in the Eastern Province. Other areas will also be considered for housing developments and developing their public facilities and community areas (Reardon, 2016). Future of the real estate market The real estate market in Saudi Arabia has undergone numerous troubles in the past two years. Despite that, Saudi Arabia has maintained a positive outlook due its conviction and multiple reforms currently planned for the country’s development and plans that are already executed by the Saudi Arabian government. The Saudi Vision 2030 and the National Transformational Program have coined these reforms which aim at tackling the issues in the residential sector market (Brinded, 2017). There is an imbalance between the demand and supply and rise in the
7 land prices which are potential issues. There are several other issues that affect the real estate market. The Value Added Tax (VAT) of 5% was introduced by Kingdom of Saudi Arabia in order to boost the economic status of the country. VAT is an important tax levied by the government of many countries which made Saudi Arabia to adopt the same even when the taxation rates were concerning potential investors. The government has assured that public services and rent for residential properties will be exempted from VAT. Properties that are being sold to relatives will be exempted from taxation. Therefore, there will be no significant negative effect on real estate market due to VAT. In the year 2017, 2.5% White Land tax was levied by the government by which the idle residential lands and commercial lands located in Jeddah and Riyadh can be used for good. 2.5% of the value of the land will be paid as tax for more than 10,000 square meters of land. This new reform will ensure fair competition with no monopoly. The land prices are also expected to reduce. The Saudi Arabian Real Estate Reliance Company has aimed to increase ownership of homes by more than 50% by 2020 (The Investor, 2018). This joint venture provided facilitated loans, developed residential lands and numerous residential units. The residents of Saudi Arabia have started purchasing affordable apartments rather than lavish villas. This has led to increase in the demand for more affordable apartments which is expected to rise in the coming years. This is duetoweakeningpurchasingpowersofcustomersanddecreaseintherevenueofthe government. The price per square meter has increased in case of apartments and decreased in case of lavish villas. In the coming years, the real estate market is expected to surge up due urban developments, expansion of the cities and various housing programs implemented by the Ministry of Housing. Research Gap All the previous and current researches, scholarly articles, journals, peer reviews, etc. that have initiated research on the economy, kingdom of Saudi Arabia and the Saudi Vision 2030, have only emphasized upon the economy as a whole, meaning have considered all the industries together. This research assessment, particularly focus upon the real estate sector of the country, and the primary highlight of the assessment is the affect of Saudi Vision 2030 on the real estate industry.
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9 Reference List Alkhalisi, Z., 2018.Top tech execs will help Saudi Arabia build its mega city of the future. [online] Available at: <https://edition.cnn.com/2018/10/10/tech/neom-city-investors/index.html> Accessed on: 7thDec, 2018. Alshehry, A.S. and Belloumi, M., 2015. Energy consumption, carbon dioxide emissions and economic growth: The case of Saudi Arabia.renewable and Sustainable energy reviews,41, pp.237-247. Alshuwaikhat, H.M. and Mohammed, I., 2017. Sustainability matters in national development visions—Evidence from Saudi Arabia’s Vision for 2030.Sustainability,9(3), p.408. Arab News, 2018. Business and Economy.Growth but challenges ahead for Saudi real estate sector.[online]Availableat:<http://www.arabnews.com/node/1296676/business-economy> Accessed on: 7thDec, 2018. Assaf, S.A., Bubshaitr, A.A. and Al-Muwasheer, F., 2010. Factors affecting affordable housing cost in Saudi Arabia.International Journal of Housing Markets and Analysis,3(4), pp.290-307. Bonds & Loans, 2018. Reforms Amplify Uncertainty in Saudi Arabia’s Real Estate Sector. [online]Availableat:<http://www.bondsloans.com/news/article/1881/reforms-amplify- uncertainty-in-saudi-arabias> Accessed on: 7thDec, 2018. Brinded, L., 2017.Saudi Arabia is learning that preparing for life after oil is easier said than done.[online]Availableat:<https://qz.com/1071503/saudi-arabias-national-transformation- program-2020-preparing-for-life-after-oil-is-easier-said-than-done/> Accessed on: 7thDec, 2018. Callen, M.T., Cherif, R., Hasanov, F., Hegazy, M.A. and Khandelwal, P., 2014.Economic diversification in the GCC: Past, present, and future. International Monetary Fund. Kane, F., 2018.Growth but challenges ahead for Saudi real estate sector.[online] Available at: <http://www.arabnews.com/node/1296676/business-economy> Accessed on: 7thDec, 2018.
10 Nurunnabi,M.,2017.Transformationfromanoil-basedeconomytoaknowledge-based economy in Saudi Arabia: the direction of Saudi vision 2030.Journal of the Knowledge Economy,8(2), pp.536-564. Ramady, M.A., 2010.The Saudi Arabian economy: Policies, achievements, and challenges. Springer Science & Business Media. Reardon, J., 2016.Saudi Vision 2030: What Does It Mean for Your Industry?[online] Available at:<https://www.tamimi.com/law-update-articles/saudi-vision-2030-what-does-it-mean-for- your-industry/> Accessed on: 7thDec, 2018. Susilawati, C. and Al Surf, M., 2011. Challenges facing sustainable housing in Saudi Arabia: a current study showing the level of public awareness. The Investor, 2018.Reforms make way for real estate investors in KSA.[online] Available at: <https://www.theinvestor.jll/news/saudi-arabia/others/reforms-make-way-real-estate-investors- ksa/> Accessed on: 7thDec, 2018. Vision 2030, 2018.Our Vision.[online] Available at: <https://vision2030.gov.sa/en> Accessed on: 7thDec, 2018.