SUMMARY OF RISK FACTORS
D- Risks Related to the Offer Shares
3. MARKET OVERVIEW
3.4 Real Estate Development sector in Riyadh .1 Overview
Table (3-30): Al Khobar / Dammam Hospitality Performance (Includes Luxury and Non-Luxury)
Occupancy ADR (USD) RevPAR (USD)
2018 2019 2020 YTD Mar 2020
YTD Mar
2021 2018 2019 2020 YTD Mar 2020
YTD
2021 2018 2019 2020 YTD Mar 2020
YTD Mar 2021
DMA 49% 56% 53% 55% 55% 132 113 114 113 119 64 63 61 62 65
Source: STR Global
Table (3-31): 5-Star Hotel Performance:
2017 2018 2019 2020
5-Star Comp set ADR ($USD) 231 234 204 199
5-Star Comp set RevPAR ($USD) 108 117 115 78
Occupancy (%) 47% 50% 57% 39%
Source: STR Global
Prior to the impact of COVID-19 in 2020, DMA experienced a y-o-y increase in occupancy of 7 percentage points, whilst ADR’s fell by 14 percent. As a result, RevPAR decreased from USD 64 (SAR 241) in 2018 to USD 63 (SAR 238) in 2019.
However, in 2020, occupancy declined y-o-y by 3 percentage points, while ADRs grew by 1 percent resulting in a RevPAR decline of 3 percent to USD 61 (SAR 230). This was attributable to the impact of COVID-19 on the hospitality and tourism sector.
Despite the Covid-19 outbreak, YTD March 2021 witnessed a y-o-y marginal decrease in occupancy by 0.2 percentage points and a 5 percent increase in ADR. As a result, RevPAR increased by 5 percent to USD 65 (SAR 243).
The 5-Star Hotels competitive set used in the analysis include: Le Meridien, InterContinental, Sofitel and Kempinski Al Othman. Despite RevPAR facing downward pressure as a result of softening oil prices over the last few years and more recently due to the Covid-19 outbreak, we expect the hospitality sector to recover over the midterm as DMA remains a focal point for future business and tourism growth, supported by governmental infrastructure and tourism investments in line with Vision 2030.
3.4 Real Estate Development sector in Riyadh
Table (3-32): RCRC’s Target Population in Riyadh
2020 2030
Population 7,500,000 15,000,000
Source: Royal Commission for Riyadh City (RCRC)
The Royal Commission for Riyadh City (RCRC) is planning on almost doubling the population in Riyadh from around 7.5 million in 2020 to 15 million in 2030. This significant increase in the population, coupled with incentives introduced by the government to boost homeownership rates among Saudi nationals from around 60% currently to 70%.will generate a lot of demand for housing in the city: with an average household size of 5.8, this equates to a demand of more than 2.6 million housing units by 2030.
Table (3-33): Riyadh Villa and Apartment Sales Price and YoY % Change as of Q1 2021
Villa Apartment
Sales Price (SAR/sqm) 3,753 3,453
YoY Change (%) -1.6% 4.4%
Source: Knight Frank
In Riyadh, villas are the most aspirational housing typology according to YouGov.
Young people are renting rather than buying because they feel they cannot afford a home. To mitigate this problem, the government placed initiatives to try and boost the mortgage market which will enable people to purchase homes.
The YoY % change in the volume of all residential transactions as of Q1 2021 (includes land and all other residential sub-assets) is 25%, while the YoY % change in the value of all residential transactions as of Q1 2021 (includes land and all other residential sub-assets) is 80%.
Riyadh’s residential market registered fragmented performances in the year to Q1 2021, with residential apartment sales prices increasing by 4.4% to an average of SAR 3,453 per sqm, whilst residential villa prices decreased by 1.6% to SAR 3,753 per sqm over the same period. However, villa prices can vary heavily, with prices ranging from a low of SAR 1,432 per sqm in Al Badiah, to highs of SAR 7,200 per sqm and beyond in areas such as An Nakhil. In addition, some projects can exceed SAR 10,000 per sqm depending on the developer brand, fit-out and design.
With respect to residential transactions, the total volume of residential transactions increased by 25% in the year to Q1 2021, whilst the total value of residential transactions increased by 80% in the year to Q1 2020. This relative outperformance can be explained by a marked increase in the take up of mortgages and the delivery of large scale housing schemes.
As of Q1 2020, Riyadh’s housing stock is estimated to total 1.28 million units and is expected to increase to 1.37 million units by the end of 2023.
The Royal Commission for Riyadh City (RCRC) is planning on almost doubling the population in Riyadh from around 7.5 million in 2020 to 15 million in 2030. This large increase in the population will generate a lot of demand for housing in the city: with an average household size of 5.8, this equates to a demand of more than 1.2 million additional housing units by 2030.
The biggest residential projects currently in execution occupy the high-end mixed use market, with little room to compete. The low end / Single use market is occupied by MOMRAH, providing affordable housing.
According to Knight Frank’s YouGov survey, it is evident that In Riyadh, villas are the most aspirational housing typology, however, according to the YouGov survey, it is evident that apartments are rising in popularity as well. In addition, the influx of young professionals into Riyadh only helps in boosting apartment demand.
In order for people to take up apartments rather than the more popular villa, the property needs to come with its advantages. The most important factors that come into play for deciding on an apartment in Riyadh are the presence of modern fittings, as well as community development in the area.
Young people tend to rent apartments because they believe they cannot afford to purchase a residence (either apartment or villa), however the government has put in place initiatives to try and boost the mortgage market, which will help mitigate that problem. As a result, there is opportunity to serve the mid-end market.
In addition, there is an opportunity in the affordable and mid-market given that margins are reasonable due to scaling effect: MOMRAH projects usually include 500 to 2,000 units. Also, MOMRAH projects are usually self-financed, which implies that the capital outlay by developers are limited, which makes the yield very attractive.
3.4.2 Disposable income
41.6% of households were in the lower income bands - below USD 35,000. This proportion of household income band is expected to witness a decrease between 2020 and 2030 reaching 39.3%. This is a positive trend for demand for real estate in the city.
Table (3-34): Riyadh Average Household Disposable Income – SAR (Thousands)
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Disposable
Income 245 247 275 299 283 289 296 301 308 316
Source: Macrobond, Oxford Economics
Household income is a key determinant of affordability and consumer spending patterns.
Average household personal disposable income in Riyadh stood at c. SAR 283,230 in 2020. Between 2010 and 2020, the average household personal disposable income increased at a CAGR of 0.7%. It is expected that this growth momentum will slow down to 0.3% between 2020 and 2030.
The number of households in Riyadh currently (2020) stands at approximately 1.31 million and is expected to grow to 1.62 million by 2030. In 2020, 58.4% of households in Riyadh were within income bands above USD 35,000, and this share is expected to increase going forward, reaching 60.7% in 2030.
3.4.3 Housing supply
According to official statistics, the population of Riyadh have reached 7.4 million in 2019, representing c. 85% of the total population of the Riyadh Region.
Large average household sizes – over five people – is a trend that is observed across much of the Middle East and Africa region.
The average household size in Saudi Arabia stood at 5.52 individuals in 2020, although the figure is higher for Riyadh at an average of 5.8 people per household.
Usually, changes within average household sizes tend to be gradual, therefore the average household size for Jeddah combing Saudi and non-Saudi households is expected to reach to 5.7 individuals by 2030.
Table (3-35): Riyadh Total Number of Households (Thousands)
2016 2017 2018 2019 2020 2021 2022 2023 2024
Number of
Households 1,194 1,302 1,168 1,274 1,310 1,314 1,357 1,393 1,430
2025 2026 2027 2028 2029 2030
1,464 1,498 1,531 1,562 1,592 1,621
Source: Macrobond, Oxford Economics
Total number of households in Riyadh stood at c. 1.31 million in 2020. Between 2010 and 2020, the number of households increased at a CAGR of 3.3%. This growth momentum is expected to slow to 2.1% between 2020 and 2030, driving the total number of households to reach an estimated 1.62 million by 2030.
Based on these forecasts, it is estimated that 310,000 additional households will be formed in Riyadh between 2020 and 2030.
Note that the number of households decreased between 2018 and 2020 as a result of the departure of around 800,000 expatriates from the workforce during this period. This was triggered by a challenging macroeconomic environment, the introduction of levies on expats in the form of fees on dependants (set to increase every year on an incremental basis until 2020) and the implementation of a plan restricting employment in certain sectors to allow only Saudi nationals in order to promote and increase Saudization.
3.4.4 Housing demand
The pandemic caused a decline in residential sales activity in Riyadh in 2020. However, the second phase of the White Land tax has been implemented in Q1 2021, which will increase the growth rate.
Table (3-36): Riyadh Number of Residential Transactions
2013 2014 2015 2016 2017 2018 2019 2020
Number of residential
transactions 60,850 56,294 50,282 38,334 42,742 40,972 61,312 49,007
YoY Change % -7% -11% -24% 11% -4% 50% -20%
Source: Ministry of Justice
Table (3-37): Riyadh Value of Residential Transactions
2013 2014 2015 2016 2017 2018 2019 2020
Value of residential
transactions (in Million) 69,285 67,749 53,273 44,912 42,192 29,098 46,297 38,348
YoY Change % -1% -21% -16% -6% -31% 59% -17%
Source: Ministry of Justice
We have seen a significant recovery in the number of transactions during 2019, where the number of residential transactions increased by 50% YoY, while the value of transactions saw a 59% increase YoY.
However, in 2020, the volume of residential transactions in Riyadh dropped by 20% YoY, whilst the value of residential transaction declined by 17% over the same period. A trend underpinned by lockdown measures enacted to halt the spread of the COVID-19 pandemic, which effectively caused a decline in residential sales activity.
The implementation of the second phase of the White Land Tax in Q1 2021 will help in increasing sale transactions across the Kingdom. The second phase consists of imposing taxes on developed lands owned by proprietors and where the plot is in a residential area exceeding 10,000 sqm. This will encourage developers to speed up the development of their lands to avoid paying taxes.
Residential transaction volumes have been under pressure in Riyadh for the past few years. Following several years of consecutive decline, the trend reversed in 2017, as highlighted by an 11% increase in transactions volume. In 2018, the number of residential transactions decreased by 4%. The yearly value of residential transactions in Riyadh has been falling for several consecutive years, with 2018 seeing a 31% decline in transaction values. This downward trend in transaction values has been driven by lower transactions volumes and a decline in sales prices.
The recent decision to exempt real estate transactions from 15% VAT and the introduction of a lower property tax will help to boost activity in the residential market. The introduction of a dedicated property tax will be beneficial to end-users and developers, and help the government achieve its aim of increased level of homeownership and private participation in the real estate sector.
3.4.5 Villa & apartment historical sales prices
Despite the decline in transaction volumes, residential sale prices have remained relatively resilient, increasing 2.2% in 2020 for villas, and 1.7% for apartments.
Table (3-38): Riyadh Apartment Historical Prices
2015 2016 2017 2018 2019 2020
SAR/sqm 3,709 4,069 3,934 3,345 3,194 3,272
YoY Change 9.7% -3.3% -15% -4.5% 2.4%
Source: Aqar, Knight Frank
Table (3-39): Riyadh Villa Historical Prices
2015 2016 2017 2018 2019 2020
SAR/sqm 3,871 4,058 3,942 3,639 3,647 3,727
YoY Change 5% -3% -8% 0% 2%
Source: Aqar, Knight Frank
In 2019, residential sale prices remained fragmented in Riyadh, where average sale prices for villas increased marginally by 0.2% YoY compared to a 7.7% decline in 2018. Apartment sale prices fell by 4.5% YoY over the same period following a 15% decline in 2018.
In 2020, we have seen a recovery in residential sale prices in Riyadh compared to the previous year. The average sale prices for villas in Riyadh increased by 2.2% YoY, while apartment sale prices increased by 1.7% YoY over the same period. This trend has been driven by various government initiatives such as the expansion of the mortgage market and increased private sector participation in the housing market.
Saudi Arabia’s residential market has been a key point of focus for government initiatives over recent years with a range of regulatory, finance and supply-side reforms enacted to underpin activity in this sector.
Pre-pandemic, we saw prices stabilise across many cities in Saudi Arabia and this trend appears to be continuing despite the economic headwinds that Saudi Arabia faces.