Introduction
Saudi Arabia real estate market was performing poorly in the last quota of 2018. For
instance, poor performance was attributed to high inflation rates in the country and a significant
increase in the circulation of money in an economy. The Saudi Arabian real estate index declined
by 6.1 percent, and in the last quarter of 2018, it dropped further by 2.6 percent. When the level
of inflation is high, the commodity price tends to escalate. The other factor that could have been
attributed to such higher inflation is higher borrowing due to low-interest rates on real estate
loans. However, in 2019 the real estate market started showing some significant improvement
after the government had laid in place some monetary and fiscal monetary measures that helped
to control the level of inflation in the country. The new policies helped to increase the real estate
transaction volume across different cities within the Saudi Arabian Kingdom. The government of
Saudi Arabia vision 2030 was aiming at ensuring that the real estate sector expands the growth of
the economy by contributing 10 percent to the economy GDP. The other factor that may be
attributed to the higher sales volume of real estate in Saudi Arabia in 2019 was due to its
population demographics. Based on the country's census data, it is evident that 32 percent are
young people and potential home buyers. The majority of young people are middle class and
first-time buyers of real property. Forty-five percent are young below the age of 20 years. The
data indicates that the demand for housing will continue to increase due to the growing number
of young population (Gou, Liao, Wang, Xu, & Herrera, 2020). The Saudi Arabian government
made announcements in 2019 that it will endeavor to meet the alarming demand for housing by
constructing over nineteen thousand residential houses. Therefore, the paper focus on advising
Abdulla, who is looking forward to buying or rent an apartment for seven years before going for
his Ph.D. in the U.S. The real estate market, investment opportunities, and recent economic
policies in KSA have also been discussed.
REAL ESTATE MARKET IN SAUDI ARABIA 3
Advising Abdullah
Based on the case provided, it can be scrutinized that Abdullah is already working for the
government with his master's degree. He was looking forward to making a decision on whether
to rent a house for seven years or purchase it. Considering the case and additional information
provided, it was evident that the total expenses for buying the house after adjustments amounted
to 103761 Qatar Riyal. The maintenance cost per month was QR 600, and after adjusting, it
amounts to QR 7200 per year. The insurance and maintenance expense were charge using 2.23
% Saudi Arabian inflation rate. However, the individual income tax and was zero as the country
tends to tax its residents zero capital and personal income tax following that the country is based
on strong Islamic values. The selling cost charged was 3%, a commission for selling agents.
a). Based on the calculations in excel, it is evident that to earn an IRR of 8.5%, Abdullah
should focus on buying the house. Based on the loan amortization schedule and the net present
value of purchasing the house, it would be highly advisable for Abdullah to purchase the home
as it had a positive NPV of QR+3,348,435 within seven years. On the contrary, renting the home
would cost him QR 420,000 per year, which is comparatively higher as it leads to a negative
NPV of -387143.16. Therefore, I would recommend Abdullah to buy the house because
purchasing the home will not only earn him an IRR of 8.5% but will also help him make positive
NPV. Secondly, buying a house will be an added advantage because, during the study, he can
lease the home, and after returning back, he can occupy the house. The result of this calculation
is evident in excel file attached and in Appendix 1.0 and 1.2
b). If he changes the plan of going to California to year 10 of his wedding, I would still
recommend him to purchase the house instead of renting. It would be better for Abdullah to buy
the house to earn an IRR of 10% and, at the same time, get a positive NPV of 3147156 while
renting will only generate him losses as indicated by a negative NPV of -382844.52 by the end of
ten years. However, as the number of years and IRR increases the amount of profits realized
through buying the house decreased with higher IRR as evident in appendix 1.2 and 1.3
REAL ESTATE MARKET IN SAUDI ARABIA 4
The present real estate market and industry of the Kingdom of Saudi Arabia (KSA)
Over recent times, the real estate market and industry in the Saudi Arabian Kingdom has
been showing a significant rise. However, in the last quoter of 2018, the real estate market
recorded a substantial fall due to a higher inflation rate (britannica.com, 2020). The 2018 Global
House Price Index indicated that the house prices in Saudi Arabia performed worse than most of
the countries in the world (King Abdullah Economic City, 2020). Moreover, the general
statistical body in Saudi Arabia indicated that the real estate market index declined by 6%. For
example, the prices of the residential plots reduced by 6.3% while the apartment prices decreased
by 3.5%. In April 2017, the real estate index indicator by GAS showed that the general costs of
apartments in Jeddah reduced by 7 percent. However, Saudi Arabia govern has been advocating
for residential investments to cater for the future market demand.
The investment opportunities and financing available for investors in KSA
There is a wide range of investment opportunities in Saudi Arabia. Among them includes
real estate, investments in stocks, and bonds. Other investment opportunities include trade,
infrastructure, ICT technology, and agriculture. Saudi Arabia is the largest economy in the
Middle East & Northern Africa. Investments have been rising slowly in the country due to
government subsidies and tax holidays. Saudi Arabia is the fifth country with the highest
investment freedom in the world and the third nation with the most taxing system for its
investors. The country has managed to attract numerous foreign direct investments. It is one of
the fastest-growing countries in the world with the largest free-market platform (Abdulrahim,
2015).
In the Kingdom of Saudi Arabia, there are several financing options available to both
individuals and cooperate with investors who are looking forward to owning real property.
Among the available financing options available include; sales of stock in the capital market as
well as personal savings. Other financing options available include angel investors, capital
ventures
REAL ESTATE MARKET IN SAUDI ARABIA 5
Real estate, financing options in the country attracts more investors. Other investors attracted to
these financing bodies consist of the bankers, legislators, and even the financers themselves.
With all these stakeholders coming together, they form a group of experts to find and look at the
opportunities and gaps that are available for investment. The vision of the country to reach
homeownership to 60% by the end of 2020 through various approaches. Some of these
approaches include; an increasing number of constructions, coming up with home loans as well
as mortgage market. Investing and financing in real estate in this country makes its demand
increase, thus making it most suitable for investors and developers.
In 1990 in the Kingdom of Saudi Arabia, some laws to govern foreign investments were passed
to balance the economy. A new law on real estate was formed that allowed people who are not
Saudi Arabians to own private residences in the country with a legal license from the ministry of
interior. From 2002 to 2005, the price of the houses increased by 13.7% while average land
prices increased by 16.5% per year.
Recent changes in the Kingdom of Saudi Arabia
In the recent past, there are changes in the Kingdom of Saudi Arabia's rules and laws.
These are to push for the growth of the economy of Saudi Arabia. Policies make sure that
development is carried out in a proper way without altering other developments either directly or
indirectly. Inland ownership policies, the companies that have significant stakeholders are
subjected to some rights to land ownership. Gulf Cooperation Council governs the issue of land
ownership rights. Saudi Arabia, Foreigners who own companies and businesses, members of the
Gulf Cooperation Council are subjected to specific rights to ownership. Those developments that
are from the non-GCC seek legalization of their businesses through the application of licenses
(AlOtaibi et al., 2020). In real estate, construction is subjected to the policies, and this is done by
Saudi Arabia licensed contractors. However, foreigners are restricted from acquiring the right to
property ownership inside the cities of Mecca. Another rule, any foreigner is entitled to land
ownership in Saudi Arabia if only one owns a legal residency status and has a permit from the
REAL ESTATE MARKET IN SAUDI ARABIA 6
Ministry of Interior. Saudi Arabia is one of those countries that have strict rules and laws that
govern its economic growth. These works towards the Saudi Vision 2030 (AlOtaibi et al., 2020).
There are many industrial cities in the Kingdom of Saudi Arabia. Many of these cities are in the
development state. These cities are; the Jazan Economic City, the Knowledge Economic City,
the King Abdullah Economic City, and the Prince Abdulaziz bin Mousaed Economic City. The
Economic Cities Authority enforces rules and regulations that govern all companies owned by
foreigners situated in the Saudi Arabian cities. The economic cities register land title deeds for
foreigners with licenses and other legal documents that support their legal ownership (AlOtaibi
et al., 2020). Passed in 2016 September sixth, the resolution number 56 that expounds on Off
Plan Real Property sales was established to offer protection to the consumer.
IRR for Abdullah housing buying case
The IRR for Abdullah's buying case shows that it would be much profitable if she earns
an IRR of 8.50% within seven years instead of an IRR of 10% for 10%. It can be scrutinized
from appendix 1.1 and computation in the excel that at an IRR of 8.5%, Abdullah was able to
make higher positive NPV of +3,348,435 than a positive NPV of 3147156 when the IRR is 10%.
The results show that as the IRR increases, the net present value realized through buying the
house decreases, and hence, it would be better for Abdullah to consider an IRR of 8.5%.
REAL ESTATE MARKET IN SAUDI ARABIA 7
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